There are 1.4 million small to medium-sized businesses in Canada. The entrepreneurs who own them — with average annual earnings of $250,000 and average net worth of $6.5 million — are the fastest-growing segment of the high net-worth community.

Yet this is an often overlooked and underserved market. Advisors may be good at addressing clients’ personal financial needs but are lacking when it comes to serving the needs of clients as business owners, maintains Mark Brisley, regional vice president of retail markets at Standard Life Assurance Co. of Canada in Toronto. But if advisors are willing to hone their skills and develop the specialized knowledge needed to serve this market segment, it can be financially and emotionally rewarding.

It can be challenging, however. Attracting and retaining business owners as clients requires specific skills and strategies, say the advisors who make entrepreneurs their business. The people who own and operate small to medium-sized businesses have specific financial advisory needs and a perspective on their careers and investments that is different from that of most other clients.

As well, many business owners have a lot of their personal identity invested in their businesses; they have tremendous emotional attachment to them. You have to start by getting a feel for the individual client’s mindset.

“In winning business owners as clients, you have to think like a business owner,” says Kurt Rosentreter, an advisor with Berkshire Securities Inc. in Toronto who specializes in high net-worth business owners.

That means understanding what’s important to entrepreneurs — and managing the relationship in a way that reflects their priorities. Among the most important issues for business owners are protecting their wealth for future generations and minimizing taxes — both now and upon death — making succession and estate planning important. Investments may not be a priority to the client, but the advisor must not lose sight of their importance.

“Getting business owners to focus on these issues can be a challenge,” says David Lloyd, a managing director at Newport Partners, a Toronto-based wealth-management firm that specializes in high net-worth business owners. “They just don’t find it as interesting as running their businesses and making them grow.”

That means the advisor’s early fact-finding steps should focus on the client’s attitudes, plans and ambitions for their business.

“You shouldn’t lead with the numbers,” Brisley says. “The last thing you want to do with a business owner is walk in and say, ‘How much life insurance do you have? How much retained earnings do you have?’

“You’re dealing with a very emotional perspective because of the personal investment that has gone into the business,” he says.

Rosentreter recommends a business owner’s portfolio and financial plan should be reviewed at least as frequently as that of any other client to ensure it evolves with the client’s financial growth. But unlike some retired clients, who are more preoccupied with their investment portfolios and call weekly with questions, business owners generally prefer to be contacted less frequently. When meetings are necessary, it is important you keep them moving.

“Be as efficient as possible. Get to the point quickly,” says Mark Kinney, a managing director at Newport. “They want fast-paced meetings and don’t want to spend an hour talking about 10 minutes of work. Hit the highlights and the critical issues. They want you to go away and worry about the details and sort through it. They want you to report back that it’s done.”

Also, Rosentreter points out, business owners are cost-conscious: “The smaller the business, the cheaper the owner is. If you try to ignore costs or avoid explaining your fees, you’re in trouble.”

If the client doesn’t ask about fees, his or her accountant will.

“And business owners expect good service,” Rosentreter adds, “because they have clients, too.”

Once you, as the advisor, understand the client’s mindset and his or her approach to the business and its future, you can move on to more specific planning issues.



> Pinpointing The Market

Five years ago, Brisley and his team at Standard Life devised a training program called Business Markets to help advisors better serve clients who operate their own businesses.

Brisley and his team found that many advisors have clients who own businesses, yet the advisors don’t know it. As part of the Business Markets program, Brisley and his colleagues devised a process advisors can use to scrutinize their client rosters and note every client who either owns a business or is a key person in a business. He has found that most advisors have at least one business owner or key person on their books.

@page_break@“When you go through those files, the planning opportunities are immense,” Brisley says. “A lot of very experienced advisors with significant assets realize they haven’t been asking the right questions of their clients.”

Once the advisor has established that a client operates a business, the advisor can start asking questions about the business that will lead to those opportunities.

Standard Life’s Business Markets program includes a questionnaire that explores the nature of the client’s business and how the business fits into the client’s life plan. “We ask them what their expectations are if any of a series of events should happen,” Brisley says. “Have they planned for succession or transition? Have they expressed all the intentions they have for the business in writing or in a formal agreement?”

The answers to these questions give the advisor a feel for the client’s planning needs.



> Succession Planning

One of the most important questions on Brisley’s list is: “Have you done any planning with respect to succession or transition of the organization?”

The answer is usually “No.”

Succession planning is critical to the future of every business, but one that entrepreneurs are often reluctant to address. “A guy who has been running a business that is a going concern for 10 or 15 years probably isn’t spending a lot of time wondering what would happen if he became disabled tomorrow, or lost a key employee tomorrow,” Brisley says. “Any advisor that’s going to enter this market needs to make sure there’s a process and an organized format to ask these questions. No planning opportunities will present themselves until he or she gets those answers.”

That mean advisors have to understand and be ready to offer living benefits or key person insurance to address business continuity issues. More than that, the issue of succession can open the door to a host of other issues. Advisors can find themselves in the role of business strategists; they will need to have a firm grasp of the tax-related issues that stepping into this role will entail.

For example, a discussion of succession planning may force the client to think about options such as a son or daughter taking over the business and keeping the client on the payroll. Or selling the business.

“If the owner sells the business, he or she will have a lot of money — and will probably be unfamiliar with general investment advice, planning and structuring of assets in a more conventional sense,” says Warren Baldwin, regional vice president of T.E. Financial Consultants Ltd. in Toronto. “So, now you are in a position to take the proceeds of the business and put them to work.”

But getting monetary value out of a business is no simple task. Even if the client has decided to pass the reins of the business to a competent son or daughter upon retirement, the advisor will still need to design a process that winds the client out of the business, especially if the client wants to monetize some of the value of the enterprise.

That can present problems, Baldwin says. If it’s a small business, it probably won’t have deep resources and the next generation taking the business over may have to stretch to finance the monetization.

Sometimes a business owner will respond to a question about his or her retirement plan by simply saying there is $800,000 in retained earnings in the business.

“The advisor asks, ‘How do you plan on getting it out?’ That’s when the conversation comes to a screeching halt,” Brisley says. “Few business owners appreciate the tax implications of withdrawing capital from a business when proper planning hasn’t taken place.”



> Educating Children

Many wealthy business owners are concerned about whether their children will be responsible stewards of the family assets, says Lloyd. The advisors at Newport, which manages $1.3 billion in investible assets for 500 families, address this issue by working with the children to educate them in investing and general financial management.

Beginning when the children are about age 16, Newport’s advisors set up accounts in the children’s names, invest on their behalf and enter into an client/advisor relationship with the teens. “We’re educating them on all issues of personal finance, including taxes and financial planning, estate planning and investment strategies,” Lloyd says. “We’re taking them on as full-fledged clients and educating them directly.”

At this stage, it’s a small amount of money, adds Kinney. But the parents are always pleased to see their children learning about investing. And when they become adults, chances are they’ll remain clients of Newport.



> Other Financial Needs

Dealing with business owners offers many opportunities for an advisor, Rosentreter says. First, there are the personal financial needs such as RRSPs, RESPs and non-registered investments, as well as life and disability insurance. And advisors can also offer services on the corporate side, which can include a pension plan, a group RRSP, a health and dental benefits program and financial management of the wealth that’s accumulating within the company.

If it’s a medium-sized or large business, this can lead to referrals within the company.

“There’s the personal wealth side and the business wealth side, and that’s just for the president alone,” Rosentreter says. “The next thing you hear, the head of marketing or the CFO wants to talk to you about financial services. It just blossoms, which is why business owners are so attractive as clients.”



> Investing

“A financial advisor marketing to a business owner should be preaching financial security a lot more than great returns,” Rosentreter says.

It is a popular misconception that entrepreneurs are born risk-takers. They will take a business risk when necessary, but only when there is no other option, and even then with a certain amount of reluctance, Rosentreter says: “If they could start a business with zero risk, they would do it.”

Because business owners are so focused on their businesses, they often don’t give much thought to other aspects of their financial lives, such as investments, retirement or what will happen to their businesses when they retire.

“We try to complement the risks that they’re taking in their underlying business,” says Lloyd. “Most business owners typically spend 100% of their time tending to their businesses and not on the rest of their balance sheets, so we have to put the investment part of the equation into the proper context of the overall business, because that is where the lion’s share of the risk is being taken.”

Usually, the value of the business is significantly higher than the entrepreneur’s investment portfolio. That, combined with the entrepreneur’s unyielding obsession with the business, can make it a challenge for the advisor to shift the entrepreneur’s attention to his investments, says Kinney.

“They just don’t find it as interesting as running their business,” he says. “It’s important to get them to understand that eventually their business will get monetized and their whole net worth will be their investment portfolio, so they need to have a clear understanding of how to manage it.”



> Prospecting

Prospecting for business-owner clients is a matter of networking with the professional service providers who advise the business owners.

Rosentreter calls these people “gatekeepers” — they may be internal, such as the company’s CFO, or external, such as an accountant. “Getting to know them and building a relationship with them often opens the door to the business owner,” he says.

Often an advisor will deal with the company’s delegated financial decision-maker for a significant time before ever meeting the business owner, Rosentreter says.

Apart from the occasional occurrence of the company president delegating a CFO to shop around for a financial advisor, referrals are practically the only way to get an entrepreneur’s business.

“Connect with the accountants or bookkeepers who do the essential nuts-and-bolts side of the business but not the planning side,” Baldwin advises.

These professionals are also good for cross-referrals, he adds. He also recommends joining small-business networking groups and possibly making a presentation at one of these meetings as a prospecting strategy.

Brisley recommends connecting with other advisors who specialize in financial services for companies, such as group life and health products, pensions or group RRSPs: “If an advisor can take advantage of some of the synergies out there, and align him- or herself with advisors who have expertise in this market, it’s a great chance for advisors to work together and a great source of leads.” IE