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Practice Management

If you handle one thing for small-business people—even if it’s a small thing—they’ll come back to you with bigger things.

This Practice Management article is intended for financial advisors only (registered representatives of broker dealers or associated persons of Registered Investment Advisors).

Rhonda Arnett, a senior financial consultant with PrimeVest at Columbia State Bank in Tacoma, Washington, feels a special connection to small-business owners (SBOs). When she was younger she worked for one—her father—who owned an auto repair shop.

A natural with numbers, Arnett did his bookkeeping. “Accounting came easy to me,” she says. Arnett got a certified public accountant (CPA) designation and worked in that field for a while before realizing her true calling as a financial advisor specializing in SBOs. “I like helping people plan where their business and their personal finances are heading,” she says. She is currently set to produce $610,000 on assets under management (AUM) of $80 million this year, and 30–40% of her book is small businesses.

As with most advisors, she usually starts out helping clients set up group retirement plans, a low-return business that usually leads to bigger gains managing the business assets and personal assets of the owners.

Working with SBOs is a long-term business strategy, says Mary Ahearn, a senior vice president for retirement services at CUSO Financial Services, who specializes in training financial advisors in business services. “But if you handle one thing for small-business people—even if it’s a small thing—they’ll come back to you with bigger things.”

Those bigger things include a lifecycle’s worth of products and services, says Ken Thompson, senior vice president and division head of M&T Investment Group, which last June started a special advisory team to focus on small- to mid-sized companies. First, he says “a business needs startup capital. Then they need group health plans, life insurance, personal retirement programs for the owners and managers, and some kind of employee retirement plan.” During the building phase, they may need cash management, treasury management and casualty insurance, Thompson adds. “As the business matures, they may need custody services, retirement plans for key employees, and finally a succession plan, key-man insurance, business valuation service and advice on charity planning.”

A Foot in the Door
Retirement plans are a good starting point for a "conversation with SBO" prospects in part because they are a valuable employee benefit that helps with retention. But advisors agree that in the beginning, managing retirement plans can be a slow-going.

It takes a while for the relationship with owners to develop, says Charles Walker, a senior advisor at CommunityAmerica Credit Union in Kansas City, Kansas, a $1.8 billion institution. “You can’t devote too much time to your business clients because you aren’t getting that much money out of running retirement plans. He spends only about 10% to 20% of his time with SBOs. But with his business clientele growing at a 5–10% annual rate, he is starting to see a payoff.

Even if advisors don’t earn much on group retirement plans, it is a regular stream of recurring revenue, says Arnett. “Every month, people contribute money to their plans, so every time you invest that money, you get those fees, and that sets a ground floor for your compensation. It’s time-consuming, but you will get paid.”

Mike Alef, a Sorrento Pacific Financial advisor at BNA Bank in New Albany, Mississippi, says retirement plans are the backbone of his SBO business. He distinguishes his service with a personal approach. “With a big company, the employer is basically provided with a retirement product and then it’s up to them to make it work,” he says. “We work with the employees one-on-one. We handle all the enrollment issues and talk with people about asset allocation.”

Alef applies the same personal touch to owners. “The point is that with small businesses, you’re not just selling a commodity, you’re solving a problem,” he says. “I approach this with the idea that I want to cover all the financial aspects of the business owners’ lives.”

Retirement plans are often an easy sell when advisors tell SBOs that if tax laws allow them to sock away a lot more of their own personal wealth in a tax-deferred plan if they provide one for their workers.

That’s worked well for Pete Plut, a financial advisor with Investment Centers of America at First National Bank of Le Center, a town in northwestern Minnesota of only 2,200 people. “Everyone knows everyone, so knowing people wasn’t a problem,” but getting in the door was, he says. His first big break with SBOs was Woelfel’s Building Construction. It was March, close to tax time, and the firm’s owner was inquiring about IRAs for himself and his eight employees.

Plut told him that if he created a Savings Incentive Match Plan for Employees (SIMPLE) IRA, with a 3% match, he and his spouse could raise their own tax-deferred contributions from $2,000 to $7,000 a year. “I got the company’s business right then and there, and the owner became a private investment client,” he says.

Plut used that strategy to prospect door-to-door, visiting the mom-and-pop stores along Main Street. Since most of them only had a personal IRA, the SIMPLE IRA was a big hit. “Their employees and relations became clients, too, and soon I was getting into other kinds of products,” he says.

For example, Plut recently got a longtime bank client, who owned a construction firm with 35 employees, to shift his $2.5 million 401(k) retirement plan from a brokerage company to him. “The guy they had dealt with retired and the brokerage firm handed it off to a 22-year-old rookie who clashed with the 62-year-old owner,” says Plut. “That gave me a shot. I had cold-called him at just the right time.”

Plut then convinced the owner to convert his and his wife’s IRAs to Roths. “Then the wife’s mother passed away, leaving a pile of stock certificates, which she brought to me,” he says. “I split them between her and her sister and that led to a brokerage account for the wife. After that I got four of their five grown kids’ accounts, including regular IRAs, 529 plans, life insurance... it’s opened up the floodgates.”

After 10 years, Plut has some 300 clients, about one-quarter of whom are SBOs with 10–15 employees. He expects to produce $200,000 this year on about $21 million in AUM—not terribly big by bank rep standards, maybe, but enough to provide a comfortable living in Le Center.

Plut does a lot of the work in person, after an unlicensed assistant sends out some materials and maybe makes an initial phone contact. He offers help setting up a retirement plan, and four out of five times, he gets it and the owner’s personal account as well.

He’s now prospecting 25–30 miles across the county outside the town limits and eyeing bigger firms. Even in Le Center, he’s always adding clients. “New businesses open up, new owners come in,” he says. “Do I have every plan in town? No. But I try to put myself out there to small businesses as the go-to guy.”

Alef, too, has turned retirement tax planning into a catalyst for more SBO business. For example, he had a client couple, Ben and Chrystal Coleman, both entrepreneurs in their early thirties, who jointly own two companies, one a partnership just involving themselves and one a company with several employees.

“They were earning more money between them than they needed, and wanted a retirement plan that would allow them to defer a lot of taxes,” he recalls. “I told them, ‘You may not want to hear this, but you’ve got to include your employees in a retirement plan if you want to defer your own income.’ We took a census of their employees and came back with a safe harbor profit-sharing plan that let them defer 65% of their income.” The Colemans then gave Alef their personal investments and he expects to get their life insurance, college savings plans and possibly long-term-care insurance business down the line.

In addition to retirement plans designed for small businesses, such as profit-sharing, SIMPLE and Simplified Employee Pension (SEP) IRAs, many SBOs don’t know they can take advantage of non-qualified plans, says Arnett. With non-qualified plans they can make larger tax-deferred contributions to their own retirements without involving employees at all. “I find that often small-business owners haven’t really thought much about it or they aren’t really getting good service, so I can say, ‘Here are some new products and new ideas you might want to consider.’”

Exit Strategies
Of course, retirement plans aren’t the only way to address SBOs’ needs. Arnett recently worked with the owners of a property management firm who had key-man insurance that had been sitting dormant. “We suggested looking over the policies and found they were underinsured against the loss of their key people,” she says. “We were also able to get them better coverage at lower rates for all three key people. That insurance deal led to my getting management of the principal owner’s personal accounts and a $2 million 401(k) plan for their 25 employees.”

Succession planning and exit strategies will be increasingly big issues for SBOs in the coming decade as baby boomer entrepreneurs reach retirement age and decide to sell or pass on their businesses. Several trillion dollars’ worth in small businesses will reportedly need an exit strategy. “The coming thing in the financial advisory business is succession planning,” says Arnett. That transition calls for minimizing the owners’ tax burden from a sale and deciding how to invest the proceeds so as to best provide for a comfortable and secure retirement.

Arnett and others at Columbia Bank are responding to this need with events geared to SBOs. “We just sponsored a big event, a reception, with 40 local businesses invited, to talk about succession and wealth planning,” she says. “It turns out that very few small-business people are prepared with an exit strategy for their business. So we’ve teamed up with a good group of attorneys and CPAs to help them plan. If they already have an estate planning specialist or someone knowledgeable about succession planning working with them, we don’t push them to use ours, because that can create friction. But when they don’t have them, they are really grateful.”

Exit strategies and succession planning for SBOs are at the core of Jeffrey Wyatt and Jayson Hyrne’s business at Wells Fargo in Jacksonville, Fla. While the duo started out dealing with small firms’ retirement plans, they found it wasn’t their area of expertise. “We’ll do it now as an exception for special clients,” says Wyatt. Instead, the partners specialize in estate and financial planning. “Often, you’ll find that an owner is planning to sell the business and is interested in making plans for his or her own future, so that’s business you can get,” Wyatt says. “And second, if they have operating funds in the company that they aren’t planning to use for two or three years down the road, that has be invested somewhere so that they don’t have to worry about losing it.”

Bonding with Bankers
The advisors just received a referral from a Wells relationship banker to a client who owned an industrial company with 25 employees. “The banker had helped the guy buy the business in the first place, and now he wanted to sell it,” says Hyrne. “We went to him, and ended up helping him arrange the sale, and then managed the proceeds of that sale.” Since the client couple was in their forties with two young children they wanted to plan for their children’s future, so Hyrne and Wyatt assembled a team with a banker and a trust advisor, to help with estate planning and life insurance.

Wyatt and Hyrne are on track to produce $2.8 million on $450 million in AUM. About 10% of it is business accounts and 90% of it personal accounts, a third of which are the assets of SBOs whose business assets and retirement plans they also handle. The advisors teamed up two years ago. “Jeff is an unbelievable networker, and I’m more into analytics and planning,” says Hyrne. “We used to compete, but this is a combination that works.”

Wyatt and Hyrne rely heavily on commercial bankers for leads and referrals. “We usually go to people who have some relationship with the bank, leveraging the bankers, and then when we find a good prospect, we’ll go back to the lenders and ask what the company’s record is,” says Hyrne. “There is no comparison in terms of success rate to businesses that already have a warm relationship with the bank.”

The advisors lead with financial planning. “Bankers don’t think financial planning first,” says Hyrne. “They think lending, but if you communicate well with them, you get a lot of referrals. We start with the owner’s business financial plan, then we talk about their personal financial planning. The idea is to build trust, to show them you’re on their side so that when they need something, they’ll turn to you.”

Arnett, too, teams up with her bank’s loan officers, who appreciate her skills more in this tight credit environment. “I meet weekly with lending officers just as if I’m one of their colleagues,” she says. “These sessions started out with a lot of good mutual empathy, but it took a little time with some of the bankers to earn their trust so they knew I wasn’t going to embarrass them.”

The recession has created an opportunity for advisors to work more closely with business bankers, who are struggling to make loans right now yet still want to keep in touch with clients.

For example, a specialty hardwood firm came in to discuss borrowing some funds because their bank was having some problems. “We couldn’t offer them a loan, but we got their 401(k) plan,” says Arnett. “Our lending officer went along with me, just to keep the relationship going.”

This partnership can swing both ways: Arnett recently looked over some companies’ 401(k) plans with a loan officer who mentioned she had just downgraded a couple of their loans. “I realized that it was not the best time to be going into those companies asking to talk about their retirement programs,” Arnett says. “It might be more tactful to wait a bit.”

Reaching Out
A CPA herself, Arnett has also built alliances with local CPAs for referrals. Knowing the CPAs in town helps her win the confidence of clients, because when their CPA knows that she “gets it” about things like taxes, the client is convinced too. “Late last year, I had a conversation with a CPA over whether a Roth IRA made sense for the CPA’s client,” she says. “I was able to convince the CPA that it did, so I got the client’s conversion.”

CommunityAmerica’s Walker relies on retail bankers to help him prospect. Every time people come in to open business accounts, Walker has the customer service person ask them two questions. The first is: Do you have a retirement account for your employees? If the answer is “Yes,” they ask: “Would you like Charlie to review it?” If the answer is “No,” they ask: “Why don’t I have Charlie call you about getting one going?” If that sounds a little pushy, it’s just part of the credit union approach to serve members, says Walker. “The sincerity of the staff is what makes it work.”

In addition, CommunityAmerica holds quarterly networking events for local SBOs, ranging from cocktail parties to a day at the local baseball stadium. These sessions are great prospecting opportunities for Walker and the bankers.

At a recent event, the owner of an office cleaning company with 55 employees said that he wasn’t happy with his current $1.5 million 401(k) plan. That was Walker’s cue. “I started by asking him how often he saw his rep,” he recalls. The owner hadn’t seen him since he’d set up the plan two years earlier. “So I said, ‘Doesn’t he come out and talk with your employees about their investments?’ and he said, ‘No.’

“I explained that as the employer, he had a fiduciary responsibility to keep his employees informed, that they needed an investment committee and needed to review the plan’s investments or they could have problems down the road,” Walker says. “I also asked what the plan was costing, and he didn’t know. So I offered to come by and look it over for them.”

Before long, the owner switched his company’s retirement plan to Walker. “Later, I got him key-man insurance, and did succession planning and got his personal accounts,” he says. “I also got the personal accounts of the employees and of the company’s co-owner. It’s all about asking the right open-ended questions.”


Dave Lindorff is a regular contribuor to Bank Investment Consultant

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