25 June 2019

Poor Retirement Planners

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America's small-business owners are wealth builders, driving GDP and job growth. But when it comes to their personal finances, they get low marks in asset diversification and retirement planning. That's because the vast majority of their invested wealth is tied up in their businesses, a tactic that is shortchanging their personal financial futures. These findings were revealed in the first CNBC/FPA Small Business and Financial Planning Survey.

The survey, conducted in conjunction with the Financial Planning Association, sampled 178 financial advisors nationwide that service small-business clients ages 35 to 70. According to the survey, 70 percent of small-business owners' wealth is invested in their business, and only 30 percent outside their firms.

The most pressing financial challenge facing small-business clients today is developing a retirement plan and exit strategy (42 percent). That's followed by managing cash flow (23 percent), business tax issues (14 percent), health insurance (6 percent) and raising working capital (6 percent). Other issues cited include growing revenues and succession planning.

Despite these concerns, less than one-third of small-business clients worked with their advisor on a business plan, the CNBC/FPA survey revealed. Of those that do, only 25 percent met with their advisor to review their plan quarterly.  Among those that have retirement plans in place, the most popular vehicle among small-business clients polled is profit sharing 401(k)s (54 percent).

Work-life financial balance 

Neglecting a personal financial investment strategy and just plowing money into a business is fraught with risk.  The CNBC/FPA survey highlighted that most advisors servicing small-business owners had the same concern. Over half of the respondents, 54 percent, felt their small-business owner clients did not have enough protection against financial risks, and 19 percent were not sure. Twenty-eight percent felt their clients were well protected.

The immediate risks involve the owner's disability or premature death, which would leave the businesses subject to liquidation at fire-sale prices, or possibly dissolution, leaving the owner's family with little or nothing.

Crafting a grand exit 

To mitigate risk for small-business owners, financial advisors are using an array of insurance products, the survey showed. Disability insurance was employed by 81 percent of respondents, followed by liability insurance (73 percent), key man insurance (70 percent), health insurance (63 percent), and business-interruption insurance (37 percent). Despite this fact, 47 percent of FAs who took the survey noted that only up to 20 percent of their clients had any succession plan in place to ensure a smooth management transition. According to the survey, 31 percent of small-business owners say the biggest hurdle they must overcome when creating an exit strategy is finding a buyer.

Financial advisors who participated in the CNBC/FPA survey pointed to three key initiatives small-business owners and their financial planners should follow in order to secure their financial future.

1. Diversify. Work to reduce dependence on the eventual sale of the business to fund retirement. Instead, strike a balance between reinvesting all profits in business expansion and diverting some funds to other investment assets.

2. Prepare for the worst. Protect your family and your business assets by buying insurance that covers the business owner's disability or premature death.

3. Plan for succession. The time for a business owner to start developing a succession plan or exit strategy is from the first day the firm is launched. That's because a well-designed strategy—including grooming the right individuals for succession—may take years or decades to implement.

The good news is that there is usually a fallout benefit. Having a smart exit strategy boosts the odds of a small business's long-term success, since it guides the founder on how the business should be properly structured and managed on a day-to-day basis.

Click here to access the full article on CNBC.

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