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Always Mix Business with Personal (Finances)

February 24, 2017

This time we hear from Chad Hamilton, vice president of practice management at Denver, Colo.-based Mariner Wealth Advisors. He recalls how a meeting with a prospective client helped him realize a plan that didn’t include a client’s small business was of little to no use to anyone.

About seven years ago I had the opportunity to meet with the CEO and owner of a closely-held industrial construction firm to discuss working together. When we sat down in his office I asked if he had ever had a financial plan created for him. He told me that around 10 years ago another advisor had put together a plan for him, but I could tell from his tone of voice that it hadn’t worked out. When I asked if the plan had been helpful he explained he hadn’t done much with it; it just sat on a shelf gathering dust.

Curious about what went wrong, I asked how his expectations for the plan differed from what he ended up with. He told me that most of his wealth was in his business, but the plan didn’t address the business at all. Instead, it focused on his liquid assets.

On the one hand, I wasn’t surprised. When advisors approach the components of a financial plan we typically focus on a client’s liquid assets. But sitting right in front of me was a perfect example of how that approach potentially fails clients that own businesses. In this case, not including the business created a big hole in the previous advisor’s planning. What I realized in that moment was that if a plan is a puzzle of interconnected pieces that need to fit together, any plan for a small business owner has to include the business.

This client’s business had about $50 million in annual revenues. He was one of three owners and had the biggest stake at about 40%. While he was worth a lot of money, he didn’t think of himself as wealthy, as his wealth had always been tied up in his business.

Chad Hamilton

When we met, he was considering retirement and knew it was finally time to get serious about his personal finances. He needed to transform the wealth built over several decades of business ownership into a portfolio that could support him for several more decades. The need to include his business as a part of his personal financial plan would be critical to providing quality financial advice no matter what the timing of the eventual liquidation of his interest in the business.

So, we created a plan together — one that included his business and didn’t end up sitting on a shelf gathering dust. I introduced him to an estate attorney and philanthropic advisor. He set up a foundation and transitioned some of his business shares to the foundation, which saved him quite a bit on taxes. Over time we helped him retire. Today he is actively involved in his philanthropic activities.

But it’s not enough to just include the business. I’ve also realized when working with such clients that it’s not enough to ask informational questions, such as how much the business is worth. You need to ask diagnostic questions to address the ultimate value and place of the business in a financial plan — for example, What does the business need to be worth to meet your financial goals? Even when the client doesn’t have an answer, the question will get them thinking.

Most of the planning and advising I’ve done since meeting that client has been with business owners. The bulk of this work revolves around their businesses. When I work with someone on the cusp of retirement, I have to take a largely illiquid asset base and create a plan for sustainable income that is going to last several decades. It’s a very different challenge that advisors need to understand when working with business owners.