Colin Lawson on why business owners make the worst investors

Many of the business men and women I have met often neglect their finances, and to top it off some of the greatest portfolio losses that I have seen (sometimes in excess of 50 per cent) have been in portfolios of previous business owners.

So why is it that the business brains of Britain, who make thousands of pounds for their companies, don’t do the same when it comes to personal wealth?

Risky strategy

I’ve noticed some themes which might help shed some light on this:

1) Too busy making the money to manage the money.

When you are running a business it can often take up a lot of your time and energy, the business is usually worth considerably more than any wealth built up outside of it and so managing personal assets is usually a low priority.

2) An aversion to pensions and pension planning.

At the moment, it is rare that you see the word pension in print without the words "crisis” or “scandal" immediately following it. The pensions industry has historically charged too much for complicated products with poor investment performance. Business people have been put off by the negative press around pensions and horror stories they hear from friends and family who have been stung.

However, over the last few years the regime has been transformed and pensions are now low cost, flexible and have almost unlimited investment flexibility.

In some cases the total tax relief can be in excess of 60 per cent, which is why the government restricts how much you can pay in and the size of the fund that you can accumulate.

Modern pension plans should be a must for all high earners.

3) A distrust of financial advisers

The financial advice industry has been plagued by mis-selling scandals and haunted by commission bias. Not so long ago you could have been a window cleaner one day and a financial adviser the next.

Many business owners suffer from "buyers’ remorse" about products that they were sold in the past that were simply not fit for purpose.

There is now a new breed of adviser that is completely unbiased and good quality advice is well worth paying for. The introduction of the RDR next year will also help to stamp out commission bias in the industry. This will help business people see that financial advisers can be trusted and want to work for clients’ interests, not their own.

4) A high tolerance to risk

You cannot run a business without having a high tolerance for risk and, unfortunately, many individuals and advisers wrongly assume that portfolios should be structured to meet that risk profile. This can often lead to catastrophic losses. I recently met a new client who had built up a business over 30 years and upon sale he invested all of the proceeds with an adviser who created a high risk portfolio which lost 50 per cent in just one year.

So that’s 15 years of blood, sweat and tears wiped out in just 12 months.

Setting aside

You should never take more risk with your capital than you need to in order to achieve your goals. We believe that excess risk is pointless risk and that return of capital is as important as return on capital.

So what’s the solution?

Business owners should seek out a quality adviser with whom they feel they can work with over the long term. They should invest two hours a quarter to focus on their finances and create a plan for the future.

They should gain experience of investing and the adviser’s track record and ability with relatively small sums of money, so that when they do sell the business and get a big cheque, they have confidence in what this can achieve for them.

Colin Lawson is managing partner and founder of Equilibrium Asset Management www.eqasset.co.uk

 

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