Outside Economics

A small business owner typically has a relationship with a banker, a lawyer, insurance agents, and an accountant or tax adviser. But what about a wealth manager or what I call a Personal CFO? Further, what is a wealth manager and why would a small business owner want to have one working on his behalf?

In a business a CFO manages the finance side of the business; he will pull the banker, lawyer, accountant, insurance agents, and investment advisor, together on behalf of the business owners and make sure they are all working toward the same goals. A good wealth manager will save the business owner time as well as help him address issues that will create the most value. This is different than a typical investment manager who manages assets such as stocks, bonds, cash and mutual funds towards a specific future goal such as retirement or college funding.

Some areas of focus a wealth manager would address would be a privately-held business, personal residence, vacation property, insurance, loans, taxes, employee benefits, estate planning, investment advisory, cash flow, debt elimination, the needs of beneficiaries and so on; basically anything that impacts an individual's net worth.

A good wealth manager will pay attention to the estate planning, a critical part of a business owner’s conservation strategy; because he knows that the owner’s family is a part of the overall picture and they need to be provided for. If these crucial elements are avoided or ignored, the end results can be devastating to the business as well as the family members.

A case in point that hits home for me, happened with my oldest brother who was an architect. He along with his two business partners owned an architecture firm for over thirty years. When the business was initially set up they put a stipulation in place that would be activated upon the death of any of the partners. It was modified and updated about 35 years into it, however, the modifications were short-sighted and not set up well. Two years ago my brother passed away suddenly, activating the stipulations. Unfortunately, what they had thought was a wise plan ended up not providing for the business or the two remaining partners in a way that would enable the doors to remain open.

A personal CFO could have foreseen the fall-out of the short-sighted stipulations and made the proper provisions. He would have factored in the legal considerations, taxes, accounting and insurance considerations, and any other assets or special conditions that would be impacted with the death of a partner and ensured that the family heirs, business, and remaining partners would be provided for when faced with such a loss.

There are many details that come into play when one considers net worth and the best way to manage it. Business owners often do not have the time nor the expertise to handle all the details well. If a business owner is working 80-hour weeks, how much time can they really spend considering how assets are titled, or whether there are methods of shifting tax burdens to family members in lower tax brackets, or whether there's too much risk in an investment portfolio?

The needs of a business will vary significantly from one business to another. For example, a family farm can utilize a family limited partnership, where a publicly traded tech firm cannot. On the other hand, the shareholder of a publicly traded firm can sometimes gift stock options to an irrevocable trust. There are hundreds of income and estate tax strategies. The job of a wealth manager is to assist in the decision making process so the right approach may be selected for each individual situation.

Besides the varying needs of a business, business owners each have very different wants. Wants, such as what does the owner want to do with his business? What is important to them? Do they want it handed down within the family or do they want the business to go public? How do they create lasting value in the business, so it can be sold in the future? These answers are more about the individuals owning/running the business rather than the economics of the business.

A wealth management strategy cannot be implemented all at once. There are a number of gradual steps that must take place because it is a process, not an event. It takes years for a business owner to build a company, as the company gains wealth, strategies are implemented. By the same token, it may take years to properly enhance and protect that wealth. A good wealth manager will take the time to evaluate all the issues, then he will start with those things that are easy for the client to do. At the same time, a wealth manager should emphasize the strategies that are most critical for the client whether they are easy to accomplish or not.