Many of my baby boomer clients wonder whether they should keep their wealth in their businesses, or sell and invest the proceeds elsewhere. While they understand the need to diversify, they find investing in other markets less appealing since they don't have the experience and perceive it to be a greater risk.
Working with business owners, my challenge is just as much about helping them invest money as it is helping them change their perception of themselves. You see, many of my clients view themselves as business owners when they should be thinking of themselves as family wealth managers. This is a surprisingly difficult shift for owners to make.
I first heard about this concept from a multi-generation family business owner who viewed his role as "caretaker of the family wealth" and, given that they had been successful for four generations of the business, there was clearly a message here.
Another difficulty for owners is to realize that their level of risk has changed. There are now a number of different investment products designed to deliver returns against specified risk levels such as hedge funds which help diversify some of the risks associated with owning only equities. The equity stock market has long been the primary diversification option, but fears of volatility, crashes and other forces beyond the control of a business owner have often seen only a small portion of their wealth invested. Today business owners can tap into a far wider range of investment options, as well as good portfolio managers at reasonable prices.
The change in mind set from business owner to family wealth manager is daunting, says David McLean, founder of the ROMC Fund. His advice applies to business owners who are used to weighing risk and the likelihood of returns, and who approach their investing with the same passion as owner-operators. Here are a few ideas to help make the shift in outlook from owner to wealth manager:
1. Diversify your risk. Above a certain age, you need to diversify your wealth. Forcing this strategy earlier, rather than later, will help to protect wealth for owners and their families. Business owners, particularly older generations, believe there's less risk with the bulk of their wealth invested in their own business because they know the cycles and feel more in control of their destiny. They view an investment fund or stock market as being subject to forces beyond their control. Even billionaires feel the pain when their company value drops, such as the most recent collapse in wealth of the Brazilian billionaire, Eike Batista, and his oil company OGX, which was the largest default in South American history. Owners can be blindsided by their emotional attachment and, despite their company taking several years to decline due to market forces beyond their control, they too often fail to protect their wealth. They're dogmatic that they can turn it around but too often run out of time.
2. Dedicated to the long play. Business owners know how to invest their capital into their company for the long term. Tech entrepreneurs have probably the window to grow their business, and even they usually have five-year plans. Investing should have a longer time line than the average technology entrepreneur. Investors then learn how to stick-handle through the stress points in the investment cycle which, as with business cycles, will happen.
3. Look at the return on investment. Mr. McLean says that in his experience, business owners see clearly what their capital is earning in their business, but find it difficult to understand as much in an investment fund. In Warren Buffett's parlance, this sort of reporting is termed "look-through earnings" which is used by ROMC Fund. Business owners can understand the ROMC fund as well as their own business, and compare return on capital (ROC). "Making financial decisions in a company and investing are both concerned with return on investment (or ROC). An owner putting capital into a plastics manufacturer understands instantly how much they have to leverage up to get an acceptable return.
4. Understand the risk and reward link. "If the business owners commit to measuring owning shares in a fund with a higher return and lower risk than their business, they may find they earn more wealth with less stress," says Mr. McLean. Those dark, four o'clock in the morning moments, worrying about meeting payroll or losing a key client, all take their wear and tear toll on health.
5. Do your due diligence. "Some people can spend more time selecting a fridge to buy than selecting their investment fund or stock. Business owners know to do a thorough check of where they place their capital." They are used to the time consuming, nit-picking process of due diligence, which may take up precious energy, but it is worth the peace of mind.
The journey to thinking like a wealth manager can be difficult but as that fourth-generation family business owner demonstrates, the family and future generations will appreciate it.
Jacoline Loewen is the director of business development of UBS Bank (Canada), named Best Private Bank Globally 2014. Ms. Loewen is also the author of Money Magnet: How to Attract Investors to Your Business. You can follow her on Twitter @jacolineloewen.