A family business brings many complications and challenges to a client’s financial profile, including important portfolio construction implications. When working with business-owner clients, you should regard the client’s business as a key asset within the overall portfolio.
“A family business is one of numerous assets that a family has,” says Jean Brunel, managing principal of Florida-based Brunel Associates, which offers wealth management consulting services to ultra-affluent individuals.
But most clients see their businesses as much more than just an asset within their portfolios. For many families, the business represents their lifestyle, and is a legacy about which they are proud and passionate.
By helping clients manage this important part of their lives, you can build stronger relationships with them and develop a deeper understanding of the needs of this affluent segment of the market.
> Build a portfolio around the client’s business
“Help clients recognize that while [the business] may be a source of income, it’s a very important asset and it has some very specific risks associated with it,” says Elizabeth Miller, president of New Jersey-based Summit Place Financial Advisors LLC. “We need to build the rest of the portfolio around market risks and opportunistic risks that balance out the specific risks of the family business.”
A client’s investment portfolio should be constructed according to the nature of the family business, Miller says. For instance, if a client owns a highly cyclical business, the rest of the portfolio should be dominated by non-cyclical holdings to offset that risk.
> Assess the risks
Clients might not recognize all the risks associated with their businesses.
“Individuals who have grown up in a business, and who are experts at it, may not be able to appreciate the risks that they are incurring,” Brunel says.
Help them identify all of the market risks — as well as non-financial risks — that their company is exposed to. For example, acknowledge the possibility of a member of the family being suddenly unable to work, or the risk that the next generation may be unwilling to take over the business.
“You’re paid to give your best advice, and to try to enlighten where this risk is,” says Rick Pitcairn, chief investment officer with Pitcairn Multi-Family Office, a financial planning practice with offices in New York, Philadelphia and Washington, D.C.
By understanding all of these risks, you can help clients offset them through the management of their overall portfolios.
> Focus on succession planning
Many business owners intend to pass their businesses on to the next generation within their families, but have not yet crafted a formal succession plan. Remind clients that it’s important to have an honest discussion with their children about the future of the business, and then put a formal plan in place.
“It’s part of any good governance structure for a family to have a succession plan,” Pitcairn says.
Help clients realize that passing the business on to someone who’s not fully committed could put the future of the business at risk. If a client’s children have goals that are not consistent with running the business, suggest that selling the business might be their best option, from both a legacy and a portfolio standpoint.
Making that transition from the first to second generation successfully is difficult, particularly in a small business, Miller says. “We suggest that these owners think very carefully about monetizing the business,” she says. “Cashing out is a much easier way to avoid some of the different goals issues of the second generation.”
IE