Financial planning or life coaching: how to advise business owners
Being a business owner can take over a client’s life, blurring the distinctions between their work and personal life. And as our panel discussed, this is especially the case with their finances.
‘Separating their personal finances away from the business finances, that’s got to be your starting point,’ said Barwells Wealth CEO Lee Waters, ‘A lot of small-business owners struggle to manage their personal finances on a day-to-day basis.’
One challenge is determining how much money they can take out of the business for themselves. A balance has to be found, especially as decisions around employees’ remuneration can have direct consequences on staff retention and business viability.
‘A lot of self-employed directors, their focus is on how much they get out but they’ve got to balance this with how much they reward employees – that is often a conflict,’ reflected EA Financial Solutions director and chartered financial planner Minesh Patel. ‘We’re talking about growing their business as opposed to growing their own situation. That balance has to be struck and it’s often not an easy one to find.’
In drawing a line between personal and business finances, clients can be reluctant to withdraw assets from the business. Beaufort Financial Planning principal partner Brian Davies said business owners’ appreciation of tax mitigation can be useful here: ‘The issue I always have is convincing [business owners] to take money out of their business so they can invest it privately and all they’re worried about is tax.
‘I often sit with them and explain how low a tax environment we are in right now. Not taking the money out of the business can actually cost you more in tax if we have a change in government.’
Here, the use of pension contributions is a popular solution with the panel. Not only does this help the financial adviser talk to the business owner about separating their own money from the business, but it can also encourage conversations around tax planning.
Danielle Feltham, senior finance executive at Timothy James & Partners, explained: ‘Here we’re looking at making applicable pension contributions, which can be classed as a business expense and therefore offset against gross profit, reducing the company’s corporation tax bill.
‘Stepping aside from pensions, we could look at group life schemes. When it’s a smaller business, we could consider free cover limits. Premiums are not assessable as a benefit in kind and are therefore not subject to income tax.’
‘We’ve got to really take a responsible view on how much should they commit to things like EIS versus mainstream portfolios,’ added Johnston Campbell director of wealth management Kerry McCaughan. ‘That’s where we need to be giving good quality advice and make sure people don’t get too aggressive. If they do, they need to know what the consequences of those tax schemes could be.’
Retirement is a particularly complex stage in a business owner’s life as it may also involve selling their business. There are numerous tax and financial planning considerations at play here, but McCaughan explained how the client’s personality can be a big hurdle.
‘A lot of the time, they just don’t want to retire,’ she said. ‘No matter how many times they say, “I want to retire at 55”, when 55 comes, they still keep at it. It’s just in their nature to keep on going and doing what they’re doing.’
And even though business owners will be worldly enough to grow a business they may lack the understanding required to navigate this period. Waters said: ‘There’s a certain naivety amongst business owners about exit strategies. They know they need one and they want to exit the business, but they’ve no idea how that comes about.’
Exit Strategy
With misconceptions about the ease and process of selling a business, many business owners put faith in the role of entrepreneur relief. Davies explains, however, that it is risky to rely on this policy.
‘A lot of businesses assume entrepreneur relief will always be there, but it might get scrapped,’ said Davies. ‘Therefore, it’s about going back to what I was saying before, talking to business owners about getting money out of the business now and investing it, rather than just storing up this great supply of cash in the business for an event that might not happen.’
Brian Davies, Beaufort Financial
‘A lot of businesses assume entrepreneur relief will always be there, but it might get scrapped,’ said Davies. ‘Therefore, it’s about going back to what I was saying before, talking to business owners about getting money out of the business now and investing it, rather than just storing up this great supply of cash in the business for an event that might not happen.’
Navigating an exit is one thing, but helping clients adjust to a post-work life can be a significant task for financial advisers. Patel said: ‘You can only play so much golf. A lot of my clients who have sold are really bored, and psychologically they’ve gone backwards because that enthusiasm is gone.
‘Some will start to run out of money. If they’re used to withdrawing a considerable income from the business, it’s hard to replicate that without a substantial portfolio.’
Even if there has been a significant windfall from a sale, sustainable income is of vital importance. Feltham added they need to educate clients about this: ‘A lot of people don’t understand sustainable withdrawal rates are actually very low and they’re quite shocked when they hear what they should be withdrawing from a pension each year to maintain that fund throughout their retirement.’
With the decline in final salary pension popularity, and potentially a greater risk of clients spending their pots too quickly, the panel agreed an emphasis on cashflow modelling may be required.
‘When I talk about cashflow modelling with some clients, they are actually embarrassed about discussing income versus expenditure,’ revealed Patel. ‘They forget the one-offs. We have to accept that the cost of living is expensive. That conversation needs to happen sooner rather than later and not be dismissed as something negative.’
A big part of this post-work adjustment for business owners can be getting used to a considerably different income level. Williams said longer life expectancies (especially for clients retiring in their 50s who may live another 40 years) have reinforced the need for financial planning: ‘I’d say on 90% of the cases with my clients, they will have half their current income in retirement . To go from £100,000 a year income down to £30,000, it changes their entire life.’
Business owners can bring new challenges to advisers, with usually complex financial situations. These specialist requirements reinforce the need for financial advice, with awareness among business owners a priority for the industry.
‘It’s about engaging with the media to try to make sure that people are aware of what they need to get to a comfortable place in retirement, because there’s no doubt from the conversations we’ve had around the table here that advice needs to be tailored,’ said Invesco Perpetual regional sales manager Tristan Murphy. ‘The value of that, especially in the early stages of building a pot, is really quite obvious.’
