Posted 12.10.2021 in Investment Planning
One of the key discussion topics was how these business owners approached investing once they started extracting substantial wealth from their business via dividends or a business sale.
The interviews revealed tales of successes and failures. Whilst there were many different approaches and investment strategies, success left clues. My commentary below seeks to capture the broader trends that we noticed with the group that led to some people feeling like that had more effective outcomes than others.
The Key Challenges and Insights:
Roughly 20% of those interviewed (often the wealthiest) held a considerable proportion of their investable wealth in cash, either in the business or personally. Typically, this group had always invested their profits back into growing the business or into commercial/industrial property for the business to operate out of. When it came time to extract wealth either through a business sale or because they were carrying significant surplus cash, they were unsure how to invest and often didn’t feel compelled to seek advice. From an investment perspective, cash is not king. It is comfortably the worst–performing major asset class in history.
For people with significant levels of wealth that don’t need to invest to achieve their goals – there is a great conversation around how you can balance your need for a sense of security & safety with the greater impact & legacy you could leave on the world through optimising your affairs and maintaining your growth mindset. A considered investment strategy can be designed to both preserve and grow your wealth in a way that will give you confidence and not put at risk what you have worked so hard to build.
Around half of the interviewees shared stories about losing a significant amount of wealth because they were speculating with too much money rather than investing. This was often through small–cap shares, high trading strategies, private businesses or DIY property development. This group of business owners tended to be more comfortable taking risks, love the excitement of picking a winner and were often well networked and naturally attracted lots of investment opportunities – both good and bad. Some had lost millions, but most just discussed the frustration and opportunity cost (time and money) when these investments had not worked. There is always room to have fun and chase the big wins with some of your capital. Just make sure you get the balance right as part of a broader strategy.
There was a pretty even split between people that were doing it themselves and those using an adviser to help them. Typically, the DIY’ers enjoyed the process and excitement of investing and being in control of their destiny – often also the key motivation for them first starting their business. However, most of these people also felt they were not maximising their affairs and were constrained by the time it took to manage everything, particularly from research and administrative perspective. True freedom is having complete control of how you spend your time, so it is worthwhile to analyse how much time you spend on the things and people you love.
We are all a product of our lived experiences which shape and influence our investment decision making. It is important to understand your investor personality(s) and how you are hardwired. We have done significant research into this and have categorised the different investor personalities into – The Family Guardian, The Freedom Seeker, Apprehensive, The Builder, The Social Spender, The Maximiser, The Maverick and The Controller. There is no right or wrong investor personality, but by better understanding yourself, you can create an investment framework and team that will help you have a better investment experience. Contact me if you want more detail about the different investor personalities.
Most business owners who felt on track and that they were optimising their investment strategy were using an investment adviser to help them build and manage a diversified portfolio of assets. The most satisfied ones were working with an adviser who understood their broader family financial position and objectives. The adviser helped them manage their overall investment strategy, not just one part of the investments (i.e. just managing a share portfolio). An unconflicted sounding board also allowed for a more balanced & strategic approach to reviewing and monitoring all family investments and greater insight & objective analysis of one-off opportunities.
Too often, the spouses of the business owners interviewed had little visibility around the overall financial position and no relationship with any of the key advisers. This was often a key tension point for those interviewed both in terms of the negative impact this lack of transparency had on the relationship or the fear that a lack of interest may set the spouse up for failure in the event they had to take full control of the finances themselves for any reason. One interviewee spoke about referring all his friends to his adviser purely because of the peace of mind and positive impact bringing his wife into the financial conversation had on his marriage.
Hopefully, these challenges and insights were useful and triggered some thinking about approaching your family investment strategy.
If you would like any further information – feel free to email me at firstname.lastname@example.org.
We are progressing our broader business owner insights project and are aiming to release a comprehensive model and research at the end of the year.