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The Top Prize for Personal Wealth? Business Owners Own It

By Ted Knutson

(Article appeared May 21 in Financial Advisor Magazine)

Want customers who can give you a standard of living you can “cheers” about? Brew a client base with the likes of Justin Ross, owner of the baseball bar Justin’s Café. Are you seeking the serenity that comes with a cadre of well heeled patrons? Peddling to Zen Spot proprietor Kelli Harrington and other entrepreneurs can hit the spot. For personal wealth is concentrated in the hands of American business owners to a high degree few financial advisors can imagine.

According to an analysis of the Federal Reserve’s 2013 Survey of Consumer Finances:

23.8 percent of business owning households in America had annual incomes of at least $200,000.

5.9 percent of non-business owners did.

Raise the threshold to $500,000 and the disparity looms larger: 9.2 percent for business-owning households versus 1.6 for non.

Despite being outnumbered more than 10 times by non-owners in America, business owners accounted for one out of every three families with at least $200,000 in annual income. For $500,000, the number exceeds two out of every five.

Wealth is also skewed heavily toward entrepreneurs:

38.8 percent of business owning households had total personal assets of at least $1 million.

11.3 percent for non-business owners.

Almost three out of 10 millionaire American families are business owners. Go to an upscale neighborhood and chances are good the biggest home of the block with the biggest big screen TVs are occupied by the shopkeepers, the factory owners, the service vendors and their families.

In addition to being wealthier on average than nurses, truck drivers and others who work for others, business owners tend to be have a greater appetite risks with their money and more certain of positive outcomes.

“Business owners by their very nature are extremely optimistic. They always think tomorrow will be better where the general public doesn’t. They believe they can make 20 percent, 30 percent, 40 percent if they put their profits back into their companies,” said Cleveland-based Ameriprise advisor Eric Tolbert who sits on the board of the National Small Business Association. Their confidence is reasonable at least for franchisees which account for 12 percent of American businesses, said Don Boroian, founder, chairman and CEO of the four-decade old franchise development and consulting firm Francorp. Boroian said a franchise owner should be able to reap a 15 percent annually on the investment on top of a salary.

Susan Kezios, president of the American Franchisee Association, isn’t so sure. “One third are making money, a third are losing money and a third are breaking even. It’s really tough,” said the advocate. Tolbert said it can be especially tough to talk a business owner into protecting the family’s finances by diversifying savings out of a single asset.  “That’s a conversation I would never have with a policeman. That’s a conversation I would never have with a teacher,” the financial advisor said.

The financial damage the ego of owners reaches its zenith when it comes time to consider selling the business, Tolbert said. The advisor recalled one client who carried on with an auto shop his father started half of a century ago. CVS offered him $800,000 eight years ago for the property which he declined as way too little despite pleas from Tolbert and his accountant the offer was fair.

Another client once down $1.4 million three years ago for a restaurant that Tolbert said was actually worth much less. Since then, a street improvement cut down traffic in front of the eatery and the owner has had to file bankruptcy because of the resulting decline in business.

CFP Board Ambassador Steve Podnos said business owners who left other advisors and come to him complained their past professionals took a “one size fits all approach” to financial planning and didn’t recognize the differences in the needs of entrepreneurs and non-owners. To develop the expertise required to serve them, Podnos said he regularly takes online seminars in succession planning and other issues specific to their interests. CFP outlets offer nearly 100 in-person and 50 web training sessions on small business. While Podnos said he wants to be able to provide clients with savvy for their business and personal financial needs, he acknowledges some business owners want to farm out their business advice needs to others.

Justin Ross, 31, owner of Justin’s Café and The Big Stick near the Washington Nationals baseball stadium in Washington, DC is one of them. Ross said he wants his bank to take care of the business of Justin’s in helping with a financial plan and loans while he relies on his financial advisor to teach him how to make a success of the business of Justin.  “I contact my advisor to help get my money working for me. I don’t want it just sitting in a bank account,” said the bar and restaurant owner. He said he is particularly interested in learning more from his advisor about mutual funds. At the same time, he said he said experience of the thousands of people who mistakenly placed their trust in Bernie Madoff has made him is wary about relying too much on one person to direct his financial path. While he trusts her now, Ross said he want to have a healthy doubt, “I don’t know her that well. She could be stealing from me.” When the millennial looks at how he views personal finances compared to his friends and family members who aren’t entrepreneurs, Ross said he’s obviously more willing to be riskier than they are because he’s constantly borrowing money to keep his business running.

Kelli Harrington, who owns the Zen Spot yoga spas in Eugene and Portland, Oregon with her husband, said the desire to take on risk in the business also influences their investment decisions. She said she and her husband not only own individual stocks, but ones that are particularly risky as well.  “Life is risk. One of our codes living fearless,” said Harrington.