Getting business owners to diversify


 Successful business owners usually have strong confidence in the growth of their business.  As a result, they tend to invest most of their assets in their business.  They know their business, but are not nearly as knowledgeable about more liquid investments.  They are nervous about putting money into investment they can’t control and reluctant to turn large sums of money over to others to invest for them.

As a result, they often put their financial future at risk because the bulk of their net worth is tied up in the success or failure of their business.

The financial shock of 2008 brought this home to many companies.  Between 2008 and 2010 more than 200,000 small businesses closed.  The failure rate for new businesses is between 50{030251e622a83165372097b752b1e1477acc3e16319689a4bdeb1497eb0fac93} and 70{030251e622a83165372097b752b1e1477acc3e16319689a4bdeb1497eb0fac93}.  Once a business is established, the failure rate drops.  But any number of things can come along; changes in demographics, changes in the economy or even changes in surrounding area can cause a previously thriving business to close.

The challenge for the investment manager who offers to help the business owner diversify is to point out that a total focus on investing everything in his business leaves him and his family in a precarious situation.  One money manager likens it to riding a unicycle when they should be sitting on a piano bench.

The unicycle may be exciting and profitable, but you can easily fall.  The four legs of a piano bench are (1) the business, (2) a tax-qualified retirement plan, (3) a personal taxable portfolio and (4) real estate.  If the business is a huge success, the business owner wins big and, at retirement can sell out or leave it to his children.  If the business fails at some point, the other three legs of the piano bench are there to provide for his family and himself.

One investment advisor persuaded a reluctant entrepreneur to invest $5 million in a diversified portfolio instead of plowing it back into his company. At the meeting where the client finally agreed, his wife gave the advisor the thumbs-up behind her husband’s back, triumphantly mouthing the words, “My kids can go to college!”

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Arie J. Korving, CFP Co-founder, Korving & Company 3


Arie J. Korving, a CERTIFIED FINANCIAL PLANNER™ professional, has been delivering customized wealth management solutions to his clients for more than three decades. Prior to co-founding Korving & Company, he was First Vice President with UBS Wealth Management and held management positions with General Electric.

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