U.S. Small Business Owners: Product Use And Interest

Their complex needs and family situations require unique solutions.

(This is the third article in a series based on a survey of 603 small business owners with a total personal net worth of more than $7 billion that has examined their financial lives, their business and personal concerns, and, in this installment, the products and services they use or want to learn more about.)

For financial advisors sizing them up as clients or prospects, America's small business owners are excellent candidates because of their wealth and their broad scope of financial needs. In a number of important ways, they're unlike other wealthy clients, chiefly because of the complex interplay of their personal and professional concerns and, in many instances, because of their family ties. Yet we've found that there's one trait they have very much in common with their fellow affluent Americans: There is a striking difference between the financial products and services they currently use and those they are interested in adding to their investment portfolio.

Our Research

To recap, we conducted a survey of 603 small business owners, 387 of whom ran family businesses while the other 216 were in charge of corporate businesses. A family business was defined as one where there was one or more family member in an executive position, where one or more generations of the same family had been involved in the business, and where that family had majority ownership.

In our study, we used the U.S. Small Business Administration's (SBA) criteria for defining a small business: one with no more than 500 employees for most manufacturing and mining industries and with a maximum of $6 million in annual receipts for nonmanufacturing industries (although there are caveats and exceptions). According to the SBA, there are almost 23 million such businesses in America today and, as noted in our earlier articles, they are a powerful economic force.

The small business owners in our survey were, on average, 54.8 years old, and two-thirds of them were male. They had an average of 166 employees and $31.8 million in annual sales. The small business owners had an average net worth of $11.7 million and average investable assets of $1.5 million. Family business owners were far wealthier than their corporate counterparts, with an average net worth of $17 million and average investable assets of $2.1 million compared to $4.5 million and $780,000, respectively.

Control And Autonomy

In our first article we examined their motivations and learned that they were driven by the desire to control their own lives, cited by 98.2% of the respondents, and the need to be their own boss, cited by 92.0%. No other motivation (including the desire to become wealthier or work with family members) was mentioned by more than two-thirds of the respondents.

Personal And Professional Concerns

Last month, we looked at their professional and personal concerns. Though there were a number of key differences between family small business owners and corporate small business owners, their driving business concerns were managing growth (cited by 87.4%), managing costs (86.2%), and business taxes (83.4%). On the personal side were taking care of heirs (78.9%), estate taxes (71.0%), being sued (66.7%) and taking care of parents (62.2%).

This time, we'll take a close look at the financial products and services they currently use and, more importantly from the standpoint of advisors who want to work with them, the products and services they're interested in.

Financial Products Small Business Owners Use

When we asked small business owners which financial products they used, only three were cited by more than half of the respondents: life insurance, mutual funds and stocks (Exhibit 1). And it should be noted that, if they're anything like the other affluent Americans we've surveyed over the past decade, those life insurance plans are almost certainly outdated and possibly inadequate. About one in five had an annuity or private money manager, and one in ten had a managed account. After that, no product accounted for more than a blip on their radar screen. And while corporate business owners were more likely to have a managed account, there were very few other dramatic differences between the two groups.

Financial Products Small Business Owners Want To Use

While the list of current products used can offer openings for financial advisors-life insurance policies need to be reviewed, and appreciated stocks and mutual funds need to be sold without incurring major capital gains-there are far more opportunities among the products that small business owners are interested in using or learning more about (Exhibit 2). And, as is usually the case with affluent investors, the products on the list were all but flip-flopped. Life insurance, stocks and mutual funds, for example, all fell from the top five to the bottom five. Hedge funds-of-funds and hedge funds, in contrast, went from the bottom straight to the top. And while private money managers and managed accounts were near the top on both lists, the level of interest far eclipsed the degree to which they were already being used.

Of the top four products they were interested in, none were among the top four they used and each was cited by better than 60% of the respondents. Private equity opportunities and 529s were also well up on the list. It was only in the case of private equity that there was a noticeable difference between the interest of family owners and corporate owners, with the latter being more than twice as interested.

In any case, the good news is that small business owners of every stripe are open to learning more about a range of high-end products from their financial advisors-and shrewd advisors will use this as an opportunity to broach both clients and prospects with ideas and solutions.