Small business owners, as we've seen in the last few columns, have a lot of traits and tendencies that differentiate them from other affluent clients, whether it's a question of their motivations or of the financial products and services they use. When it comes to their financial advisors, however, they fall more in line with their fellow affluent, particularly in the way that they're most likely to have found their primary advisor-through a referral from an accountant or an attorney.
A Small Business Defined. A small business, as defined by the U.S. Small Business Administration, is one that has no more than 500 employees for most manufacturing and mining industries and no more than $6 million in annual sales for nonmanufacturing industries. The nearly 23 million small businesses are a driving force in the U.S. economy, accounting for 40% of the nation's private sales and 99.7% of all employers.
Family Vs. Corporate Businesses. The 603 small business owners in our study were divided into two groups; 387 of them owned family businesses and the other 216 ran corporate businesses. (A family business is one where there are one or more family members in an executive position, where one or more generations of the same family are or were involved in the business, and where the family had majority ownership.) They had a combined average of 166 employees and average annual sales of $31.8 million.
Small Business Owner Demographics. The 603 respondents in our study were predominantly male (412) and on average 54.8 years old. They had an average of $1.5 million in discretionary investable assets (not including retirement plans or deferred compensation) and an average net worth of $11.7 million. In both cases, family business owners were far more affluent, with $2.1 million in assets and a net worth of $17 million compared with $780,000 and $4.5 million, respectively, for corporate business owners.
Concerns And Product Use. Their key business concerns were managing growth, costs and taxes, and their main personal financial concerns were making sure their heirs were taken care of, taxes and being sued. Their primary motivation, as is the case with most affluent business people, was control, cited by 98.2% of the respondents.
Further, and in keeping with our other studies of affluent investors, there was a big difference between the financial products and services small business owners used and those they were interested in. The top four products they used, for example, were life insurance, mutual funds, individual stocks and annuities; the top three they were interested in were hedge funds-of-funds, hedge funds and managed accounts.
We also noted that small business owners have some very different financial needs, including business succession plans, key-person insurance and buy/sell arrangements. Our research showed that many of their needs were not addressed: Less than half had buy/sell agreements, and those who did had not updated them in more than eight years; one-third did not have key-person insurance; almost half lacked a succession plan; less than one-fifth had an asset protection plan; and their estate plans hadn't been updated in more than a decade.
Clearly, based on our research, there's plenty of opportunity for the financial advisors who can connect with small business owners. Now the only questions are where do small business owners find their financial advisors, and what criteria do they use in screening and selecting them?
Finding Financial Advisors. First, we found that while brokers were often the primary financial advisor, it was a tight race, with no one group claiming much more than one-third of the action and independent financial planners, bankers/trust officers and money managers all in the running (Exhibit 1).
For the record, their primary business advisor was most likely to be an accountant (61.9%), followed by a lawyer (17.2%), bank/trust officer (14.1%) and broker (2.7%).
The Best Source For Referrals. When we asked them how they'd found their primary financial advisor, their answer was in line with what we've learned from other affluent individuals over the past few years, including wealthy women and people who had inherited millions: They asked their accountants or attorneys (Exhibit 2).
As taxes and estate planning become increasingly complex, the affluent have developed stronger working relationships with their accountants and attorneys. As a result, when it comes time to find or replace their financial advisor, that's where they turn first and most often. And that's why, as we have argued before, it's vital for financial advisors who want to land more affluent clients to cultivate high-end attorneys and accountants.
Unbiased Advice. When we then asked the small business owners what they looked for in their financial advisors, one answer rung out above the rest: unbiased investment advice, which was cited by 98.5% of the respondents (Exhibit 3). Investors don't want to feel as though they're having a product pushed on them so their broker can meet his or her sales figures. They're also on alert given some of the scandals that have rocked the financial services world over the past few years, particularly the mutual fund industry. While they're not averse to the broker offering products or services from his or her own firm, they want to feel as though they're being offered the product or service that's best and right for them, not the broker, wherever it may come from.
Trustworthiness And More. The list of interpersonal criteria for choosing a primary advisor was topped by a response with similar implications: trustworthiness (Exhibit 4). For both the family and corporate owners, this was far and away the leading criterion.
There was less agreement between the family and corporate owners about the other criteria on the list. Indeed, for each of the other criteria cited, the family business owners were at least ten percentage points more emphatic, which makes sense given their business situation and family ties. The corporate business owners are less likely to have a long-term sense of loyalty. They have had other jobs and were likely to move on to a new one sooner or later. It was business, not personal.
Understandably, family owners had a greater emotional (and financial) stake, including the welfare of other family members who were involved in the business as employees, investors or beneficiaries. For that reason, they also had a greater desire to establish a long-term working relationship with their advisor. Similarly, discretion was more important to family business owners; they wanted their advisor to know them, understand them and keep mum, a trait that could prove particularly important if there was a power struggle between family members on the ins and on the outs. They were more concerned about their advisor's ability to identify their needs and-again-to know them better as a person. Lastly, family owners were more interested in a broader range of services, which hearkens back to such special business needs as a succession plan and key-person insurance.
The Opportunity. Based on our extensive research on small business owners, we can identify a number of opportunities and advisories for financial advisors. First, keep in mind that the small business owner's driving need for autonomy and control has to be respected throughout. Next, while small business owners have some needs unique to their world, such as a business succession plan, they either haven't gotten around to it or they have a plan or product that's out-of-date. In addition, while they usually have a full slate of financial products and services, they're interested in a very different list, mostly at the higher end of the spectrum. Furthermore, the best way to reach small business owners is through their accountants or attorneys, relationships that can lead to other referrals. Advisors should also understand that when products or services are being promoted, small business owners are wary of what's being offered-each product or service needs to be positioned and distinguished. Along the same lines, trustworthiness is the leading criteria when small business owners are looking for and advisor. And finally, particularly with family owners, it's important to remember that they want a highly personal and consultative relationship that will stand the test of time.
Hannah Shaw Grove is managing director and chief marketing officer of Merrill Lynch Investment Managers. Russ Alan Prince is president of the consulting firm Prince & Associates.