In order for a business to be sustainable and thrive in the long run, having a product or service that remains in high demand isn’t enough by itself. The CEO and COO need to hire the right people and keep customers and employees happy, and the CFO must make smart choices with the company’s finances. The majority of startups and small businesses nowadays aren’t run by a team of experts however; they’re often run by individuals or a few family members. So these brave entrepreneurs don’t have top notch CFOs with 30 years of investing experience to rely on.
These founders typically wear multiple hats and only have him/herself to make all of the important business decisions. Their special skills probably aren’t in investing, tax minimization, or money management because their talents are generally the heart of the business itself, whether that’s brewing homemade chai, designing a fashion line, or supplying lights to underprivileged families in the Philippines, etc.
Do Entrepreneurs Need Financial Advisors?
There are so many things to do when running your own business besides just creating the product/service itself. There’s marketing to think about, research, development, advertising, bookkeeping, taxes, cash flow, customer service, hiring, and more. Investing and optimizing the retained earnings on a company’s balance sheet cash are probably some of the last things an entrepreneur is going to think about, let alone act on. That is a problem.
Think about Apple and its $137 billion dollars of cash sitting there doing nothing. Investors have hammered the stock by roughly 40% from the $705 peak partly because Apple’s cash is a drag on profitability. When core revenue and earnings are growing by 15-20% a year while a full 1/3rd of the value of the company is growing at less than 1%, investors get frustrated and sell. Clearly it is important to optimize a company’s cash to provide value to yourself and to shareholders.
National savings rates are at a paltry 0.1% on average. To give you an idea, let’s say you have $100,000 in your business savings account. At a rate of 0.1% you’d only earn $100 bucks a year in interest. What a joke! It almost feels insulting how low savings rates are now.
Why Cash Isn’t Always King
You might think, “well 0.10% is better than losing money,” but what you can’t forget about is inflation. The core inflation rate is currently around 2.0% which means you’re actually losing money just leaving your cash in the bank. You’d need to earn at least 2.0% in interest to “break even” because the cash you have today is worth less in the future, even just a year from now.
Food inflation is running between 2.5-3.5%, which is why I’m trying hard to get fit and eat healthy for cheap. And college education costs are skyrocketing around 4-5%. So I really hope more students start aiming to graduate in 4 year or less. Now you can start to see why just holding cash isn’t always king.
I myself am guilty of sitting on too much cash right now at a horribly low rate of 0.15%. So I made an appointment with a personal banker at Chase to see what type of offerings they have that are low risk, but better than cash (I consider myself a pretty low risk investor as I can’t stand volatility and hate to lose money). The banker wanted to pitch me on their Private Client platform because I was hoping to invest a decent amount of money in some structured notes, but unfortunately I was in for some disappointment.
Know What You’re Paying For
Although Chase does have some 1 year attractive structured products that track the EAFE, S&P, and Dow Jones through their private client service with J.P. Morgan, they have reeeeally high qualifications. Turns out they only allow clients to invest in their structured notes if they have $1,000,000 or more in liquid net worth (that excludes property)! Plus each product they showed me requires a minimum investment of $100,000. Other banks aren’t as strict from what I’ve heard, but JPM wasn’t going to budge on those minimums for lil’ ol me.
I was pleased that the Private Client advisor I met with was well versed, opinionated, and experienced. She did’t come across as aggressive or too sales’y, probably because I wasn’t a big fish that she was over eager to bait. One of the short term focused low-risk funds she pitched me has a 6-8% annual return track record, net of 1.15% in fees. And a long term equity focused fund she showed me “typically” returns around 15% net of fees.
The fund returns were appealing, but when I left the meeting I just felt like going out and buying the Russell 1000 or S&P 500 on my own instead. I could pay just $9.99 in commission in my trading account for an ETF very similar to one of those funds vs a $1,150/year management fee at JPM. Since I only have a portion of my liquid assets at Chase, I just didn’t see this advisor adding enough value for what I was going to invest since their account minimums are so high.
When A Financial Advisor Is Worth The Cost
Since I’ve been proactively managing my personal finances for over ten years now and follow the markets pretty regularly, I have a harder time forking over money for someone else to manage my finances than a lot of other people. I’ve built a pretty diverse set of assets and income streams, have minimal debt, enjoy discussing investment topics, and like being in control of my money. So, I’ve realized paying for a financial advisor really isn’t for me.
If on the other hand you have a lot of debt, a single income stream, all of your money invested in only one or two asset classes, and you don’t know or aren’t interested in what’s happening in the financial markets, then you’ll probably love getting help from a financial advisor. You just have to find one who fits your needs, is experienced, and has reasonable fees. They’ll take the stress out of managing your money and will do all the hard work for you.
Before you hire a financial advisor, here are some questions you should ask before hiring. Their job is to actively invest your hard earned dollars so you can focus on your business and doing what you love. If the following bullet points pertain to you, you should consider getting a financial advisor.
* You find comfort in having a professional look out for your best interests because you lack the expertise.
* You’ve found a financial advisor who you like and trust to do the right thing.
* Your business is taking up all of your time.
* You have a growing cash balance that you don’t know what to do with.
* You’ve never sat down with a finance professional to do a diagnostics of your finances.
* You believe the benefits you will receive from having a financial advisor far outweigh the cost.
Keep Your Finances Organized And Shop Around
Sitting down with a financial advisor at a bank branch is free. I encourage everyone to spend an hour out of their busy weeks to listen to what a finance professional has to say. You’ll probably need at least $100,000 to $250,000 in investable assets before they are willing to take you on.
Start Using Free Financial Tools To Grow Your Wealth – Before you consider paying for a financial advisor, I recommend you first manage your finances yourself for free with Personal Capital. Personal Capital is headed by ex-Intuit CEO Bill Harris and has fantastic tools to help manage your various accounts. You can check your 401k for excessive portfolio fees, manage your budget, understand your asset allocation and also track your net worth. If you’ve got a ton of your net worth sitting in cash like Apple, you know it’s time to start mobilizing.
Only after you’ve spent some time managing your own money would I then suggest paying a financial advisor 0.89-0.49% a year to manage your assets. You’ll be surprised how much you can do on your own once you aggregate your accounts. Seeing the big picture opens your eyes to better decision making.
Read a great Personal Capital review to find out more about the free financial app.
Get A Free Personalized Investment Plan – Wealthfront is an excellent choice for personal wealth management for those who want the lowest fees and can’t be bothered with actively managing their money themselves. In the long run, it is very hard to outperform any index, therefore, the key is to pay the lowest fees possible while being invested in the market. It’s free to open an account and get a personalized investment plan. Wealthfront charges $0 in fees for the first $10,000 you invest with them, only 0.25% for any money over $10,000, and only have a $500 minimum to get started. Invest your idle money cheaply, instead of letting it lose purchasing power due to inflation.
Save Money On Student Loans – SoFi is a fantastic social lending company that provides rates as low as 2.6% variable with auto pay and 3.4% fixed with auto pay. The reason why they can offer lower rates than the rest is because they analyze you based on merit, quality of employment, and education besides just a credit score and financials. There are zero origination and prepayment fees. Offer terms are from 5, 10, 15, 20 years in both fixed and variable. Both private and public student loans can be refinanced.
Besides low rates, one of their best features is their unemployment benefits. If you lose your job while repaying your loans, you don’t have to pay your loan for up to 12 months while you look for a new job! Interest will still accrue, but having this cash flow break is a huge benefit. They also provide job assistance guidance as well. Over 500,000 users have refinanced with SoFi for an average $15,767 in lifetime savings. Learn more and refinance or apply for a new student loan here.
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Updated 2018
Since we are planning for the long haul we are almost always invested in stocks. We do keep about 15-25% of cash on hand for market corrections to swoop in and take advantage. Once my wife goes back to work we will take a look at investing in real estate.
I’m waiting for a correction to happen so I can put some more money to work. The tough part is waiting! Real estate sounds like a good goal in your horizon. It’s fun to go look at open houses even before you’re actually ready to buy just to learn about the markets in your area and also get ideas for staging and decorating.
I’ve studied personal finance and the financial markets pretty closely for more than ten years, and I am still learning new things that continue to alter my approach to my finances. I think most entrepreneurs should learn about finance, but they shouldn’t devote lots of their own time to it until they have significant assets to manage. Early on, it makes a lot more sense to let someone else do that work for you. Focus on growing your business instead.
Yep, having someone else do all the legwork helps for sure. There’s plenty of time to take move control of the investment side of things down the road after business stabilizes and the difficult launching process is done.
The biggest risk for entrepreneurs is putting everything in one basket and having everything blow up in their face.
Seriously, can you imagine quitting your job, taking all your savings and dumping into your start-up, and watching your start-up get run over by the competition? You’ll end up broke, depressed, and maybe even stay permanently behind for the rest of your life.
Everyone should at least get a handle of their finances and diversify.
There are so many risks starting a business and when we’re so engaged in our own work it’s easy to underestimate the competition. I’m with you on diversifying and not putting all your money in one place.
As someone who is trying to become an entrepreneur I can’t imagine needing a financial advisor anytime soon. Why would I invest my hard earned money in the stock market where I’m hoping to get a 10% annual return when I could put that money into my business and potentially grow it by 20%. Or 50%. Or 100%.
I have my retirement accounts and I keep them funded, but outside of that I’d much rather put money to work myself then hope the market goes up.
Kevin, I think it’s great that you have confidence in your RewardBoost business. If you don’t want to diversify your wealth and go “all-in” then go for it. Hope you do well and let us know how things go in a year from now.
I’m just fearful of folks who don’t have a financial safety net and end up broke from chasing a dream that never materializes.
Financial advisers are great for anyone who doesn’t have the interest or the time to manage their own finances. I have some relatives who use financial advisers since personal finance terrifies them. The difficulty is finding one who is actually descent.
I’m of the opinion that even if you hate finance, you should know something about it, otherwise you won’t have any idea whether what the adviser is telling you is accurate or not.
Yeah there are tons of financial advisors out there so it can take time weeding out people who aren’t a good fit or are too inexperienced. I agree that having a basic foundation of personal finance knowledge is really important. Especially since a financial advisor isn’t going to call you every day and remind you not to overspend, etc.