A $12 Trillion Race Is on for the Financial Services Industry. Here's How to Win It.
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According to Orion Advisor Services, $12 trillion of business owner wealth is expected to transfer during the next ten years in the United States. This makes it one of the most significant opportunities for the financial services industry in a generation -- but also one of the most challenging.
Business owners have been ignored for the most part by the marketing efforts of financial services firms. For the past 50 years, asset managers, wealth advisors and insurers have spent the majority of their efforts on marketing to the so-called “wealthy affluent” and corporations and their officers. And the unique behavior patterns, retirement goals, balanced planning needs, and risk mitigation strategies that business owners have are truly different than those of the “wealthy affluent.”
Corporate executives who make the majority of their wealth through current income are fundamentally different than those whose main wealth will one day come from the successful transition or sale of their company. For one, a business owner's current income is usually much more modest. They tend to be highly tax-efficient personally, but typically are under-balanced with their wealth management and planning based upon the concentration of their wealth tied to private shares in one industry (their own).
In terms of insurance, it is not much better. While executives (the wealth affluent or professionals) tend to have adequate insurance protection through their firm or company’s “key person insurance” coverage, business owners are not as lucky. According to the 2017 Insurance Barometer Study by Life Happens and LIMRA, 71 percent of entrepreneurs say they need life insurance, yet only 59 percent have coverage. Why? The math is more difficult to calculate as it ties directly to the value of their private shares and their ever-changing businesses.
The wealth and asset management industries are beginning to appreciate the business owner market due to the sheer size of the assets under management (AUM) opportunity. In the next ten years, over 10 million businesses will be transitioning and will need proper succession and exit planning as part of their wealth management and financial planning process. (Source: CNBC/FPA study.)
The challenge for financial advisors and their business owner clients and prospects is the fact that 78 percent of business owners think they will fund their retirement with the sale of their business. This presents a significant planning opportunity and challenge. The advanced advisor will prospect and engage with business owners for the successful transition of their business and embrace holistic planning that factors in the value of their private shares, not just their liquid assets or those in the market.
The next 10 years are a race and a challenge for the financial services industry that has never been seen before. Business owner wealth transfer is a generational opportunity where advisors and firms will be made or lost. Those who win will be able to build their product and services suite with the business owner in mind by leveraging technology and thinking like the entrepreneurs they hope to serve. Financial services firms and their advisors can’t take the same “butter knife” they use for the wealthy affluent as they do for entrepreneurs. The winners of the financial planning “knife fight” will be those that understand the value of the client and their actual business through technology and customized products.