How Financial Advisors Can Help Small Businesses

By Jeff Krohnfeldt

On Investopedia

Updated August 13, 2024

Reviewed by Pamela Rodriguez

Fact checked by 

Ariel Courage

Part of the Series

Financial Advisor Guide to Client Management

 

Running a small business is notoriously challenging, with owners often working long hours while taking on the central tasks of the business and much else. This is where financial advisors often play a crucial role in helping small businesses and the people behind them keep tabs on their financial health.

"Small business owners wear all the hats," Sean Lovison, founder of Purpose Built Financial Services in Moorestown, New Jersey, said. "They're the CEO, the marketing team, the HR department … It's exhausting, and financial planning often gets pushed to the back burner. That's where we come in."

Key Takeaways

Small business owners (SBOs) can build relationships with financial advisors to help them with critical tasks beyond just portfolio management.
Financial advisors can help navigate the types and levels of insurance each specific small business should have.
Financial advisors can also analyze, track, and make recommendations about the performance of the business.
When the business owner leaves the company, a financial advisor can assist with the transition.
A financial advisor can also help oversee, protect, and grow lump-sum distributions from the exit of an ownership position through traditional financial management.
However, Lovison said financial advisors face different challenges working with SBOs than with other clients. "Small businesses have cash flow concerns, payroll to manage, and maybe even equipment loans. We help them understand their profit margins, project future income, and create a plan that's both for their business and their personal financial goals." The upshot for advisors who can handle both the professional and business sides, he said, is that "it's like a two-for-one deal."

Financial advisors assist SBOs in various aspects of their finances, allowing them to better focus on their business's core elements. In the following sections, we detail, with examples and the help of standout professionals in the sector, how financial advisors support SBOs in managing risk, assets, exit strategies, employee benefits, and the owner's personal portfolio.

The Relationship Between Financial Advisors and Small Business Owners

SBOs face financial challenges that require specialized expertise to navigate effectively. Financial advisors know this well, noted David Haas, an advisor at Cereus Financial Advisors in Franklin Lakes, New Jersey: "I am in a unique place to help them because I am also running a small business. ”

Financial advisors typically provide a wide range of services for small businesses, going beyond the typical scope of investment management or personal financial planning. As they do, many develop a deep understanding of their clients' businesses and the challenges they face. Several advisors we talked with suggested that it's also hard not to become invested emotionally.

"The main difference of a small business owner is that their business is their source of income but also their main investment," Lora J. Hoff, a certified financial planner (CFP) in Dallas, Texas, told us. She noted this requires advisors to put in motion several strategies at once, each dealing with particular facets of the business and personal taxes and finances of the owner.

Hoff said a key area where financial advisors can make a significant impact is in helping SBOs clear up the space between their personal and business finances. "I've found most of my SBO clients with revenues less than $10 million have trouble separating their business finances from their personal finances," said Michael Carbone, a CFP at Raymond James Financial in Westford, Massachusetts.

Paul Monax, a financial advisor at Agile Wealth Management in Littleton, Colorado, said that once he knew a business was "not segregating business and personal finances," his first step was to establish separate business and personal credit lines and bank accounts. Only then can SBOs avoid the potential tax and legal issues that come from mixing accounts. They also gain a far clearer picture of their company's financial health, he said.
That said, the role of financial advisors is to keep SBOs mindful of their personal finances, separate from their businesses. "Typically, 80% of a small business owner's wealth is tied up in their company, but often only 20% to 30% actually sell their business. This can leave a huge financial gap," said Judith Brown, a CFP at SC&H Capital in Finksburg, Maryland. "Advisors need to connect the financials of the business with the individual's goals and help them with succession planning."

In addition, financial advisors often provide critical guidance in insurance, risk management, and succession planning. Ashley Folkes, a financial advisor based in Hoover, Alabama, stresses to SBOs the importance of "a sharp focus on risk management, succession planning, and the need for seamlessly integrating business assets into a comprehensive wealth strategy."

By addressing these crucial aspects of business ownership, he said, advisors can help protect the company from potential pitfalls and ensure a smooth transition when the time comes for the owner to exit the business.

Collaboration with other professionals is another essential element of a financial advisor's role. "I work together as a team with other professionals to assist our business owner clients. These professionals include certified public accountants (CPAs), attorneys, business valuation experts, insurance professionals, business bankers, mergers and acquisition specialists, and business brokers," said Dana J. Menard, a CFP at Twin Cities Wealth Strategies in Maple Grove, Minnesota.

Advisors should cultivate relationships with other professionals that they'll want to call on later, and lean on their expertise when they do. That gives them the ability to offer comprehensive services to local businesses.

Managing the Financial Assets of the Business

It's not surprising that financial advisors often play a crucial role in helping SBOs manage their companies' financial assets. By guiding them and recommending particular strategies, advisors can help owners free up financial resources, plan for future growth, cut costs, and ensure the long-term financial stability of their businesses.

A major challenge SBOs face is determining how to distribute their financial assets. "The biggest areas I see center around cash flow and personal income," said Paul Monax, a financial advisor at Agile Wealth Management. Financial advisors can help owners navigate these challenges by developing comprehensive financial plans that take into account both the short-term and long-term needs of the business, he said.

Below are the main tasks facing advisors managing small business assets.

How Financial Advisors Manage Small Business Assets
Areas of Asset Management
Tasks
Optimizing Cash Flow:
Track income and expenses.
 
Forecast cash flow to anticipate shortfalls and surpluses.
 
Strategize over ways to improve cash flow, such as negotiating better payment terms with suppliers or offering discounts for early customer payments.
Investment Management:
Identify investment prospects aligned with the business's risk tolerance and goals.
 
Develop a diversified investment portfolio to mitigate risk, typically aligned to balance the small business sector.
 
Regularly review and adjust investments as needed.
Debt Management:
Evaluate debt financing options and choose the most suitable.
 
Develop a plan to manage debt effectively, including timely repayments and optimizing interest rates.
 
Monitor debt levels to ensure they remain sustainable and don't hinder growth.
Risk Management:
Identify and assess potential financial risks, such as market volatility, interest rate fluctuations, and credit risk.
 
Employ strategies when needed like hedging, insurance, and diversification of assets.
 
Regularly review and update risk management plans as the business environment changes.
Tax Planning:
Stay informed about tax laws and regulations relevant to the business.
 
Strategically plan tax payments and deductions to minimize taxes.
 
Work with qualified tax professionals when needed to ensure compliance and further strategize over taxes.
Handling Cash Flow

Cash management is another critical area where financial advisors can provide critical assistance. SBOs often struggle, Monax said, to "keep enough cash in reserve on both the business side as well as personally." He suggests having at least six months of reserves, perhaps more, depending on your business—typically, the advice is three to six months of reserves. "A reserve account becomes especially important the more seasonal or cyclical your business is. You want enough ... to handle all the predicted ups and downs plus extra for the unexpected."

Financial advisors can help clients manage cyclical operations to ensure they have enough cash flow year-round. For example, a small wedding planning business with busier operations in the summer than in the winter might need the help of an advisor to ensure that the company has enough money to survive the slower season.

Managing Investments

Financial advisors also provide guidance on what to do with business profits. Many small business owners, Haas told us, make the mistake of reinvesting all profit back into the business without considering the potential benefits of diversifying their financial assets.

"Small business owners tend to be completely focused on their businesses and often ignore their own personal financial lives," he said. He suggests at least some of the profits are put toward retirement. "Businesses often don't go up in a straight line, and business owners need to protect themselves by saving for retirement in a 401(k) or similar plan that protects their savings from bankruptcy."

Business Valuation

For many SBOs, their company represents the majority of their net worth. Folkes said, "It is common for business owners to have roughly 70 to 90% of their net worth tied up in their business." Given this concentration on one asset, it's crucial for SBOs to understand the true value of their business and work with a financial advisor to maximize its worth."

Business valuation takes into account its assets, liabilities, revenue, and growth potential. Financial advisors can help SBOs navigate this complex process and identify prospects to increase their firm's value. "To maximize this value, [SBOs] need to understand its current worth and identify additional hidden value that may not be reflected on the balance sheet," Folkes said. An advisor can help uncover value in intangible assets such as intellectual property, customer relationships, and brand recognition.

Higher valuations can increase credit lines, the sale price, and other essential aspects of the business. But Folkes emphasized another important factor: "Their business will likely be their primary source for funding retirement, transitioning to the next stage of life, and establishing their legacy. Unlocking this value at the right time will significantly impact their financial future and overall success."

Managing Risk

Financial advisors also help SBOs identify and mitigate potential risks that could harm their company's financial health and hinder growth. Menard said risk management has to come before any money is put toward acquisitions or expansion. By conducting a thorough analysis of the business's financial performance and comparing it to industry benchmarks, she said, financial advisors can help small business owners "de-risk" by doing the following:

Cutting costs
Diversifying revenue streams
Adjusting pricing strategies
In addition to financial risk, SBOs must find ways to mitigate these other types:

Operational risk
Legal risk
Reputational risk
Insurance is a critical component of risk management for small businesses, and financial advisors typically connect clients with agents and brokers if they don't handle the insurance in-house. One of the most important types of insurance for small businesses is general liability coverage, which protects against a wide range of potential claims. It can cover the following:

Bodily injury
Property damage
Advertising injury
Libel and slander
In addition to general liability insurance, financial advisors can help SBOs assess their need for other types of coverage:

Property insurance
Workers' compensation
Professional liability insurance
Due to the nature of certain businesses, financial advisors can help assess whether error and omissions insurance is worth it. These policies protect against negligence lawsuits or damage caused by the company. You can also help your clients determine whether they need cyber liability coverage.

Financial advisors can also guide clients about their needs related to life and disability insurance for themselves and key employees. The death or long-term disability of an owner or key employee can have devastating consequences for a small business, including the loss of essential skills, contacts, and knowledge and the closure of a company.

By recommending appropriate life and disability insurance policies, financial advisors can help ensure business continuity.

Tax Planning

Managing a small business's financial assets requires understanding the tax implications of various financial decisions. Financial advisors can guide them on tax planning strategies that can help owners minimize their tax liabilities. Haas said not to forget the importance of lowering the potential capital gains should the business be sold.

Setting Up Company Benefits

Financial advisors also help SBOs design employee benefit programs that can attract and retain top talent, boost employee satisfaction, and support the business's long-term success.

Many companies offer their clients 401(k) or similar defined-contribution retirement plans for their employees. Establishing and installing a plan in a company often comes with many reporting and management requirements, though clients can outsource much of the administrative burden. Financial advisors can oversee the retirement plan and offer advice to company employees while receiving management fees.

Lovison said retirement plans "might seem like a luxury, but they can be a huge morale booster and help with employee retention." "We work together to find a plan that fits their budget, forecasting the potential tax benefits for the business and how it can make them more competitive as an employer." Far from seeing employee benefits as yet another cost, Lovison said they can be "a win-win situation for everyone involved."

Jeremy Finger, an advisor in Myrtle Beach, South Carolina, said retirement plans and other financial arrangements have to be adjusted as the business changes. "Many times, owners default to what they used to have, even though their business has grown dramatically," he said. "They can upgrade their plan to put more money away for themselves, and their employees would benefit, too."

Some small businesses offer subsidized insurance coverage to their employees or have specific levels of disability insurance for all staff. Financial advisors can also guide small business owners while considering additional employee benefits like flexible work arrangements, employee stock ownership plans, tuition reimbursement, and health and wellness programs.

Planning the Exit

All SBOs will eventually exit their businesses. Some eventually sell, while others transfer ownership to family members. Selling or transferring ownership is often a complex process requiring experience with business valuation while thinking ahead to the effects of the sale on employee benefits and taxes.

Before and during a sale or transfer, a financial advisor can distill advice from experts on each facet of the transaction to help guide their clients toward their exit. "Most [owners] don't have a true understanding on how to maximize the value of their business to their family" when transferring it, Finger said. A financial advisor can "step in and help create an 'advisory board' to assist business owner clients." This could include CPAs, tax attorneys, and investment bankers when selling the business.

Planning the Exit Clients Don't Want

Some companies, of course, won't make enough money to survive. If an owner is too emotionally tied up with their small business, it's up to the owner's financial advisor to map out the financial situation and deliver hard-to-hear information. A company may have enough funds today, but financial advisors with an eye on their cash flow analysis and financial and local economic trends might see trouble long before an owner does.

David W. Demming, the founder and president of Demming Financial Services in Aurora, Ohio, has helped guide the business finances of many in an over 40-year career. He recalled one particularly tense meeting with a client, an accountant, and the client's attorney. Despite the unanimity of the others that the client should "declare bankruptcy and walk away," the client refused.

As such, it fell to Demming to support the client as he attempted to beat the apparently bad odds his business faced. Demming helped him refinance his home, and that money was then plowed into the business. "Last year, his gross sales were above $2 million with excellent improving profitability and now no debt," Demming said, skipping ahead, no doubt, past many moments of stress and hard work on both their parts.

Given the failure rate among small businesses, of course, many times, things don't work out as well. "Sadly, I've had to tell some owners that their business model just isn't sustainable. It's heartbreaking, but we work on creating an exit strategy," Lovison said. "Sometimes, it's selling the business; other times, it's winding down operations responsibly. The key is being honest, empathetic, and focusing on what's best for their financial health."

Managing Post-Business Portfolio

Much like a climber scaling a cliff face, small business owners often become so preoccupied with finding their next foothold in sometimes rugged terrain that they forget to pause to look where they're headed. Finger said he often has to remind clients to "think through what life is like after" and plan accordingly.

Once an SBO exits the business, a post-business portfolio—hopefully infused by profits from the business, though sometimes weighed down by remaining debts—has to be set up. The first step is to assess the owner's new finances and develop a comprehensive plan that aligns with their long-term goals and risk tolerance.

At this point, an advisor is likely to assume the more traditional role of managing investments and work on a plan for replacing the income previously generated by the business. This may involve developing a retirement income plan with various sources, such as Social Security, pensions, and investment income. They also help identify investment prospects, diversify their portfolio across different asset classes and sectors, and strategize how to minimize their tax bill.

Lastly, a financial advisor can help former business owners develop an estate plan to transfer their wealth to their desired beneficiaries. This may involve working with legal and tax professionals to create a customized plan that could include trusts, gifts, and charitable giving.

Should My Small Business Offer Retirement Benefits?

Whether your small business offers your employees retirement benefits depends on several factors. First, you will likely have to pay to have the plan put in place and monitored. Second, you must decide whether you want to match contributions and whether your company can afford to do so. Third, you must weigh the cost of managing retirement benefits with the level of interest among your employees.

What Are the Qualities of a Good Financial Advisor?

Experienced financial advisors know how to cultivate a client base that aligns with their specific skills and knowledge. Some excel at guiding young professionals in building wealth, while others specialize in helping older couples plan for retirement or managing the complex finances of affluent individuals. Identifying your ideal client niche early on—whether working with women, military veterans, high-net-worth individuals, or teachers—can set the stage for a fulfilling and impactful career.

The Bottom Line

Starting and managing a small business involves a lot. Many financial advisors know this firsthand since they run small businesses themselves. SBOs can turn to their financial advisors to help manage business assets, implement insurance or companywide benefits, and plan for life after the owner leaves the company.

A financial advisor can ensure that business owners don't have to go it alone—they can help them manage much of the finances so they can focus on the day-to-day operations and other, more pressing matters.

"The type of recommendations and insights a financial advisor can give are invaluable," Cassick said. "While many individuals can benefit from a financial advisor, it is essential for small business owners to seek their expertise.”

 

 

What is a trust?

(Bankrate)

By James Royal and Ph.D.

Updated: Jul. 17, 2024 at 3:14 PM CDT

 

A trust is a legal vehicle that allows a third party, a trustee, to hold and direct assets in a trust fund on behalf of a beneficiary. A trust greatly expands your options when it comes to managing your assets, whether you’re trying to shield your wealth from taxes or pass it on to your children.

When you hear the words “trust” or “trust fund,” the first image that may come to mind is a wealthy family in a mansion with inherited wealth passed down from generation to generation. However, you don’t have to be a member of the Rockefeller or Walton families to set up and benefit from a trust.

“Trusts are the 700-pound gorilla of estate planning and a very important part of many estate plans,” said Leon LaBrecque, consultant and former chief growth officer at Sequoia Financial Group, who is also an attorney and a certified financial planner. “They are a cornerstone of many of the plans I do.”

So, far from being the preserve of the monied elite, trusts are increasingly used by families from a range of economic backgrounds. Here’s how a trust might benefit you.

How trusts work

Many people create trusts to minimize hassles and fees for their loved ones or to create a legacy of charitable giving. Trusts can be used in addition to a will to direct your assets after you die, but trusts offer a number of important planning benefits not included in a will, such as allowing your heirs to effect a relatively speedy conclusion to settling your estate.

Working with an attorney or a financial advisor, you can create a trust to minimize taxes, protect assets and spare your children or other beneficiaries from having to go through the often lengthy process of probate court in order to divide up your assets after you die. So in the event of a sudden and untimely death, an individual’s last wishes can be carried out.

A trust can also enable you to control not only to whom your assets will be disbursed, but also how the money will be paid out — a crucial point if the beneficiary is a child or a family member who may need help managing money.

You can choose trustees to carry out your wishes as directed in the trust fund.

“This may be an appealing feature to an individual who wants to leave assets to a beneficiary whom the grantor is worried may blow through the money or wants the assets to be directed for specific purposes or last for a specific time,” says Aaron Graham, CFP, a tax planner with Holistiplan in the Columbia, South Carolina area.

Benefits of a trust

By creating a trust, you can:

Determine where your assets go and when your beneficiaries have access to them.
Save your beneficiaries (your children, for example) from paying estate taxes and court fees.
Protect your assets from creditors that your beneficiaries may have or from loss through divorce settlements.
Direct where remaining assets should go in the event of a beneficiary’s death. This can be helpful in a family that includes second marriages and stepchildren.
Avoid a lengthy probate court process.
This last point is a crucial one, as trusts also allow you to pass on assets quickly and privately. In contrast, settling an estate through a traditional will may trigger the probate court process — in which a judge, not your children or other beneficiaries, has final say on who gets what. Not only that, the probate process can drag on for months or even years and may even become a public spectacle as well.

With a trust, much of that delay can be avoided, and the entire process is private, saving your beneficiaries from unwanted scrutiny or solicitation.

How much money do you need to set up a trust?

There isn’t a clear cut rule on how much money you need to set up a trust, but if you have $100,000 or more and own real estate, you might benefit from a trust. There are online options that allow you to set up a trust on your own for a few hundred dollars or you can go through an attorney, which will likely cost you a couple thousand dollars depending on the complexity of the trust and your financial situation.

But you definitely don’t need to be fantastically wealthy for a trust to make sense, despite their typical association with millionaires and billionaires.

Revocable vs. irrevocable trusts

One of the most common trusts is called a living or revocable trust. It allows you to place assets in a trust while you are alive, with control of the trust transferred after you die to beneficiaries that you have designated.

You might consider creating a living trust for one of several reasons:

If you would like someone else to accept management responsibility for some or all of your property.
If you have a business and want to ensure it operates smoothly with no interruption of income flow in the event of your death or disability.
If you want to protect your assets from the incompetence or incapacity of yourself or your beneficiaries.
If you wish to minimize the chance that your will may be contested.
A living trust can be a useful option for individuals with even relatively modest estates.

The downside is that while a revocable trust will usually keep your assets out of probate if you were to die, you probably won’t escape estate taxes.

“Revocable trusts are among the most common estate planning vehicles, particularly when there is a desire to avoid the costs and delays that can accompany probate in certain states,” says Bruce Colin, a certified financial planner with his own firm in Rancho Palos Verdes, California.

By contrast, an irrevocable trust cannot be altered once it has been created and you give up control of your assets that you put into it.

But an irrevocable trust has a key advantage in that it can protect beneficiaries from probate and estate taxes. Those setting up an irrevocable trust must also consider other issues regarding how it is managed.

What is the difference between a will and a trust?

While wills and trusts are both legal documents that help determine how your assets will be distributed to any beneficiaries, they aren’t exactly the same.

The main difference between a will and a trust is that a will typically goes through a court process called probate after the property owner’s death. The specifics can vary from state to state depending on the size of the estate and type of property held. During probate, a court administrator examines the will and people have the opportunity to contest it. This can be a lengthy (and public) process.

Trusts on the other hand remain private and don’t require court approval. Trusts can be created and go into effect before your death, whereas wills only become active after death.

Special types of trusts

There are also several types of specialty trusts you can establish, and each is structured to accomplish different goals.

Here are a few examples of commonly used trusts:

Marital or “A” trusts

This trust is designed to provide benefits to a surviving spouse, according to Fidelity Investments, and is generally included in the taxable estate of the surviving spouse. It places assets into a trust when one spouse dies. All income generated by those assets goes to the surviving spouse, and the principal often goes to the couple’s heirs when the surviving spouse dies.

Credit shelter trusts

These trusts allow both spouses to take full advantage of their estate tax exemptions, which in 2024 is a whopping $13.61 million per person, or $27.22 million per married couple. Assets above this amount are generally subject to a 40 percent estate tax at the federal level once the second spouse dies.

When dollar amounts up to the threshold are held in a credit shelter trust, the surviving spouse can receive income from the trust’s assets until death, at which point the trust’s beneficiaries receive the trust’s assets free of estate taxes.

Charitable remainder trust

This type of trust allots a given amount of income for beneficiaries for a defined period of time and the remainder goes to specified charities.

How to set up a trust

It can be relatively easy to create a trust, but you’ll still want to call in an expert, such as a lawyer with experience in trusts, to do so.

Here are the steps to create a trust:

Figure out why you want the trust. Determine why you want a trust and which kind might be useful. Do you need a living trust or one that provides tax benefits? Do you need one that protects your assets from an incompetent beneficiary? Some trusts are more tricky to create than others, so your needs will inform who you hire.
Interview prospective lawyers. When you know what you want from a trust, it’s time to contact lawyers and see what they can offer. Not all trusts are the same, so be sure your potential future lawyer has the specific expertise you need. You should also see what the lawyer charges for the service. You might expect to pay at least a couple thousand dollars for a basic revocable trust.
Establish the trust. Once you’ve selected a lawyer, you’ll have to work with the expert to craft a trust that meets your needs. Make sure you understand clearly what your trust can and cannot do, so that you’re getting what you pay for.
There’s also another budget-friendly route to creating a trust where you can sidestep costly attorney fees while still creating an effective trust using a site called FreeWill. FreeWill offers a completely free way to draft the necessary documents, and as its name suggests, you can also set up a will at no cost, too.

Regardless of how you proceed, you need to understand how the trust serves your needs and helps carry out your wishes.

Bottom line

When considering a trust, it’s useful to seek professional advice to make sure you’re making the right decision for yourself and your loved ones. An estate planning attorney or financial advisor can provide you with expert advice about whether a trust could be a useful component in your long-term financial plan.

“You just have to remember that a trust is an entity, just like a person, and sometimes it makes sense for that entity to own something for the benefit of someone else,” according to Lora Hoff, a CFP in the Dallas area whose practice focuses on business owners.