Business owners and entrepreneurial individuals can be very rewarding clients to work with. However, these clients often resist traditional financial planning because they perceive the process as diverting money that could have been invested in their own businesses. Thus, the financial advisor may find himself in competition with his own client.
Instead of fighting this resistance, let’s take an alternative approach, showing these strong-willed clients how we can help them do more of what they love by implementing the “Personal Economy” strategy.
In many ways, a business owner (or entrepreneur) operates a micro economy. The life blood of any economy is cash flow, and when opportunities arise, money needs to move. If cash isn’t available for new opportunities, growth slows, and economies begin to shrink.
Business owners are keenly aware of this dynamic, so they often have several financial pieces producing cash flow, fueling new opportunities in their own micro economy.
The first step of the “Personal Economy” strategy is to ask, “What produces (and consumes) cash flow in your personal economy?” It’s helpful to know if the client’s cash flow goes through cycles, similar to cash flow cycles within macro economies. If the client’s personal economy is cyclical, ask, “Are you looking for ways to buffer cash flow cycles?” This could offer an opportunity to diversify the investments in their personal economy.
Next, ask, “When you have excess cash flow, where does it go?” At this point in the conversation, it’s common to receive a blank look. This is likely the first time they have thought of creating an organized cash flow structure for their micro economy. This is when I introduce the idea of opening an “opportunity fund” to receive excess cash flow. For this fund, I often recommend an advised account with Portfolio Waterfall Strategy. *
By calling it an opportunity fund, I’m speaking their language. In my experience, business-owner clients engage with this idea because the purpose is not simply to divert money but to deploy it for future opportunities in their personal economy. If I simply presented this new account as an investment account, trying to prove it offers potentially higher rates of return than their business, they will likely become disinterested. Instead, I show them how this account stimulates their personal economy.
The opportunity fund is the starting point of a plan to harvest excess cash flow. It serves as the treasury fund of their micro economy. Then I begin to show them how the advised account investment strategy can generate additional cash flow to fuel new opportunities.
Cash Value Life Insurance, funded by the opportunity fund, is another financial product that fits into the personal economy of many business owners. Permanent life insurance provides certainty that the client’s personal economy will not run out of cash flow if the business owner dies unexpectedly.
The ability to leverage the cash value for new growth opportunities offer another benefit of adding cash value life insurance to the client’s personal economy. For example, if the opportunity fund doesn’t have enough cash at the time of a new opportunity, the client may consider a loan on their cash value life insurance policy to buy a new piece of equipment or a real estate investment property. When cash value life insurance is used for a new opportunity, I advise the business owner to pay off the cash value loan with the cash flow from their new investment as soon as possible. This ensures the capital can be redeployed when the next opportunity arises. This cash flow structure helps the business owner filter new opportunities based on the time frame required for the new investment to return the capital.
Traditional financial planning often suggests that a business owner should invest money into products that will only be used for one purpose in the distant future. This approach doesn’t inspire business owners, because they want to build their businesses sooner rather than later. The opportunity is to show them how they can move money through financial products to potentially reach their goals more effectively.
The business-owner client’s view of traditional investment products can be shifted when we give them a structure for excess cash flow and show them how to efficiently deploy capital for new opportunities. They will likely become excited to engage with us, excited to see how we can help them accelerate their personal economy. Instead of trying to compete with their passion, let’s help them implement the missing pieces of their personal economy and potentially help them build the businesses they always dreamed of creating.
If you would like help implementing the “Personal Economy” strategy for your business-owner clients, please contact me using the information below.
Josh Curtis, Managing Member,
Gestalt Financial Group
(402) 436-2596
josh@gestaltfinancialgroup.com
*You will want to make sure to document the rationale for using an income model in this scenario.
