To know the answer to the question in the title, you only need to look at one stat provided by American Express Open Forum: 30% of small business owners haven’t calculated how much money they will need in retirement.
You might be thinking: If 70% of small business owners have calculated how much money they will need for retirement, then the demand for financial advisors shouldn’t be too high. However, consider another stat provided by American Express Open Forum: Less than 25% have a formal plan for transferring their business to a new owner when approaching retirement.
Only 40% of small business owners have consulted with a financial advisor. Given the stats above, this is a low percentage. Even if a small business owner has made necessary plans for the future, it would be difficult for that small business owner to invest strategically for the near future when he or she has to deal with personnel decisions, capital allocation, how to grow sales, how to cut costs, and constantly putting out fires. (For more, see: 401(k) Plans for the Small Business Owner.)
Most small business owners want their business, their future and their children’s future to be in their control. This is understandable, but if all that time and energy is being put into the business, then who’s going to keep a sharp eye on personal finances? A small business owner isn’t going to have time to see if the US Dollar is appreciating or depreciating and how it might impact his Apple Inc. (AAPL) investment for the current quarter. He also doesn’t have time to dig into 10-Qs and 10-Ks, follow interest rate moves, read Federal Reserve statements, and track foreign exchange movements. (For more, see: Small Business: It's All About Relationships.)
In short, a savvy small business owner knows that delegation to the right party saves time and is fiscally rewarding. Therefore, that small business owner will strongly consider hiring a financial advisor. However, that’s just the first step. Now that small business owner needs to figure out which financial advisor to hire.
The Most Important Factor
Securian Financial Group conducted a study on what people felt were the most important factors when selecting a financial advisor. In a word, the most important factor was Relationship. To break that down, considering the following stats in regards to importance:
- Knows My Needs: 27%
- Respect/Know Brand/Company They Work For: 26%
- Easy To Talk With: 26%
- Colleague Recommendation: 23%
- Friend/Family Recommendation: 23%
- Existing Personal Relationship: 22%
Now take a look at the rest of the list and notice that none of these factors relate to relationship:
- Cost Of Services: 21%
- Bank Or Accountant Recommendation: 14%
- Expertise In Specific Industry: 12%
- Could Identify With SBO: 12%
- Specific Product Offering: 9%
- Convenient Location: 7%
Questions To Ask
Knowing that a good relationship is the most important factor for long-term success is important, but it doesn’t simplify the process of hiring a financial advisor. In order to do that, ask the following questions:
1. Are you commission-based of fee-based? (For more, see: Paying Your Investment Advisor — Fees or Commissions?)
You’re looking for fee-based, which means a financial advisor will charge for your time and advice based on a fixed amount or a percentage of assets under management on a quarterly basis. The reason fee-based is often a better option is full transparency. A commission-based financial advisor will make money on financial products sold to you, which leads to a more impersonal relationship.
2. Do you specialize in working with small business owners?
3. Are you a CFP?
A CFP must meet education, examination, experience and ethics requirements.
4. How can you save me time?
5. What types of advanced technology do you use to keep up with the rest of the industry?
6. How will you offer personalized service?
7. Can you help formulate a business succession plan, including tax, legal, and insurance planning?
8. Do you have any referrals?
After you have all the answers, make sure the candidate is in good standing by checking the CFP Board.
The Bottom Line
Yes, a small business owner needs a financial advisor. By following the tips above, you should increase your odds of finding a financial advisor that’s a good fit for you. (For more, see: Why Hedge Fund Managers Make Good Advisory Clients.)