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The Financial Advisor as Personal CFO for Small Business Owners

The Financial Advisor as Personal CFO for Small Business Owners

| May 10, 2019

Current update: Phil was interviewed by Sean Bailey, Chief Editor, from Horsesmouth. Horsesmouth helps financial professionals educate their clients and grow their businesses. Every day, we serve tens of thousands of advisors, consultants, agents, accountants and other professionals, representing every major financial firm and business model. We are guided by extensive primary research and two decades of experience. The company was founded in 1996 and is headquartered in midtown Manhattan, with employees spread out across the country.

I’m from Iowa, a heavily agricultural state. I myself grew up on a farm, helping my Dad raise corn and beans, and we had a cattle operation. And still today I’m still involved with ownership and management of that farm. A lot of my experiences in life I relate back to the ag experience, the farm community. I studied statistics in college, then moved to Kansas and worked as a research statistician for National Crop Insurance Services. They sent me on to do graduate work in engineering management, which then lead to a job as a Senior Financial Analyst with Sprint. That’s where I started taking financial classes, and then doing financial analysis for a Fortune 500 company. And at that time, the interest in taking that experience to the personal level and working with business owners really started to drive me.

I decided that if I was going to be an advisor, I would move back to Iowa, where I felt I had a natural market. It was in December of 1999 that I relocated here in West Des Moines. For the first five years of my career, I operated under a financial services firm. Then in 2005 I decided to break out on my own and founded my company, Capital Resource Management. I continued to work with estate and business planning, and gradually grew more holistic until we got to the comprehensive place where we are today—serving as our clients’ personal CFO, taking that 50,000 foot view for them.

Personal CFO  

Many times, when I first meet someone, my assumption is that as a business owner he already has a circle of advisors around him. This could include a business attorney, property casualty agent, accountant, CPA, pension or 401(k) advisor, and others. These are unique, specialized advisors. 

What we like to do is have a discussion with the business owner and take it up to the 50,000-foot view. It’s kind of like going up in a helicopter. We’re going to overlook their entire financial situation at one time, not just from a financial perspective, accounting perspective, or legal perspective, but across the board. This allows us to identify coordination gaps and opportunities in the areas of creating, preserving, and transferring their wealth. 

I like to use an analogy. I tell prospects, “Mr. Business Owner, are you familiar with the concept of a board of directors?” Most nod their head and say, “Yes, absolutely” or even, “I have one.” I go on to explain that the role of a board of directors is to come into the company with the owner a few times a year and talk about everything that is going on with the business. My firm’s role, basically, is to come in as a personal CFO and help coordinate the services of all these other advisors so that everybody knows clearly and distinctly what the owner values and what his goals and objectives are. We are the ones who coordinate the team in a way to help him fulfill those planning needs and take the planning to a higher

Coaching clients to be good investors

Through the goal discovery phase we get a very good idea of what the client is looking for in regard to retirement, and we like to use distinct planning goals. Those require time and money to achieve. There’s a strong emotional and behavioral aspect of creating and preserving wealth, and within the last year we’ve really started to roll up our sleeves and educate our clients about that. We coach them about behavioral finance issues.

Part of that process is training myself in behavioral finance. I got into this after hearing Jay Mooreland speak a few years ago at an industry conference. I started to follow his work and last fall I decided to subscribe to his Behavioral Finance Network, which is limited to 200 individuals at a time. I’ve found it invaluable.

I recently returned from a meeting with Jay and other like-minded advisors from the network where we had a half-day work session diving deeper into some of the cognitive issues and behavioral biases of investors and financial planning in general. It’s really comforting to know that I’m working with a leader and with other peers who place an emphasis on this type of consulting.

The level of discussion that we’re having with our clients over the last few months in particular is great. We saw a steep drop in the market in the last quarter of 2018. The news media hyped that this was the worst correction we’ve had since the Great Depression. How do you suppose someone ill-prepared for a headline like that would respond? Unfortunately, for many the response is to sell, to seek safety—which is something that will harm them.

Let’s say they sold. Let’s fast forward to January of this year. I believe the S&P was up close to 6%, give or take. If I’m not mistaken, it was the best January we’ve had since 1987. The fourth quarter was the worst quarter since the Great Depression and then we had the best January and perhaps one of the best quarters that we’ve seen in at least 10, maybe 30 years.

4 areas of consultation

When we’re consulting with clients, we focus on four areas. The first is asset allocation, which is a discussion of offense and defense. There’s nothing that you or I or anyone else can do about market volatility. That’s going to be here no matter what. The thing we can control is how much we allow ourselves to be exposed to that volatility.

The second piece is active risk management, and the coaching part of behavioral finance is a key part of that. We rebalance strategically at the right time and use good, sound financial investing tools and techniques. Next is tax management, trying to be the most tax-efficient that we can, particularly in the current environment.

The final key area is manager selection, whether that’s us implementing our own in-house financial models or outsourcing certain experts that we need for uncertain situations.

Fighting the internal biases in our minds

Not only do I hear about behavioral finance issues from clients, but honestly, even financial advisors are subject to the same emotions. We need to be real with ourselves. The key reason we need to understand behavioral finance and its importance is that we are human beings and we often feel before we think. If we go back to the cave man, for example, without a functioning amygdala—where the “flight or fight” response comes from—the cave men would have thought the saber-toothed tiger would make a great house pet, and evolution would have ended right there. Fortunately, we do have an amygdala, which help us in certain situations to avoid something that’s dangerous. But when it comes to investing our mind is predisposed to trick us.

We need to spend time learning about the inherent biases in our minds. We have to allow time to thoughtfully and rationally think about what is going on in the investment marketplace and with our investments. It’s called ego depletion. What that means is our system can only handle so much stress before it shuts down and becomes blind to its surroundings. Unfortunately, we see this happening. When the market is selling off and going down, down, down, people who haven’t had effective coaching about how their mind is working just shut down and become blind to what’s going on. We typically react in the worst way. The process of investing and creating wealth is fundamentally pretty simple. It’s about buying low and selling high. Unfortunately, the media and other outside influences that clients and investors are subject to know this, and they use it to their advantage to create a sense of urgency or despair in whatever they are communicating. I’m not belittling them, I’m just asking, how useful is it really? What does CNBC know about this investor and why should this be important to them? How is it impacting their goal?

That’s where we step in. We’re a filter. We’re education and a resource to help investors avoid big mistakes. I’m very honest that our clients don’t come to us to buy products. They come to us to develop a plan that represents their view of what they want their future to be. We have to defend that plan. I have to have certainty that my clients are confident in their understanding of how the market works, both financially and behaviorally. I think about how we can best teach our clients to avoid those big mistakes and stay on the path.

Clients appreciate the behavioral finance discussion

It’s been wonderful to sit down with our clients and explain to them why we’re having this deeper discussion. I’ve yet to have one case where they were disappointed with that discussion. I like to go through some questions with them to help illustrate how biases work to disrupt our well-intended plans.

I’ve been posting on my website a series of short videos, about two minutes in length, called “Mind Games.” Each segment that I produce is based on the content that Behavioral Finance Network provides. I facilitate that to the public, to my clients.

What’s really interesting is that when we’re able to effectively identify how our minds like to trick us, most of my clients have an “aha moment” and it’s often with laughter. They say, “Oh my gosh, you’re so right. That is what I do. That is what I think. Oh my goodness.” They begin to understand that we have to have some faith and confidence to be good investors. We have to think about what the market is going to do in the long term, not just today or in a week, or in a quarter, but what it’s going to do in the next 10 or 20 years and beyond. What is the probability that the market will be higher than what it is right now?

If someone asked me, “Phil, when is the Dow Jones going to hit a million?” I could calculate that pretty easily. We look at the average return of the market and it looks like in about 40 or 50 years the Dow Jones is going to be at a million, so the client’s children or grandchildren will experience that. I don’t know if we’ll be around by then, probably not, but that’s what is going to happen. I have a feeling that those children or grandchildren will probably be facing the same emotional and behavioral issues that clients have to overcome today in order to be successful investors.

Social Security is a great example of how our brain processes information. When you just operate on an intuitive level of decision making, if you can take it at 62 you will. That’s the knee jerk reaction. That’s what happens if someone isn’t working with an advisor who understands the nuances of Social Security planning, particularly for married couples. In general, when it comes to Social Security, you have to engage the logical and fact-finding side of your brain. Some clients and individuals just don’t enjoy doing that. Unfortunately, the intuitive thinking, or “system one thinking” as Daniel Kahneman calls it, is greatly influenced by biases and leads people to make the wrong decision.

Analyzing the situation is a uniquely human capability

As analysts, we in the financial planning world hold ourselves to taking the time to analyze someone’s situation and understand how they like to receive information in order to make a good decision. It’s relevant to all walks of life, not just financial behavior, but how we process information as humans.

This is something that not a single robot can do. It demonstrates the tremendous amount of value that we bring to the table with a human perspective. And that’s very, very important in my mind.

Partnering with Mr. Market

I use an analogy to introduce this topic with my business owner clients and prospects. I tell the client to imagine that he co-owns a business with Mr. Market. My client understands the financial workings of his company and how it makes money, while Mr. Market could not care less. He doesn’t want anything to do with that. The only thing he wants to do is wake up in the morning, open the Wall Street Journal, and look up his stock price.

Well, fourth quarter 2018, Mr. Market starts to see a correction emerge. He’s opening up the newspaper and the price is going down. Ego depletion takes control. There’s only so much stress that Mr. Market can take, and so at some point he’s going to tap you on the shoulder and say, “I can’t take this anymore, will you buy my shares from me?” Now, my client the business owner, he understands what’s going on. Sure, business might be a little off, the finances might be down, but it’s not down 20%. I ask, “Are you going to help your business partner out?” They answer, “Yes, absolutely.”

That’s what investing is. The entire stock market is nothing more than a mechanism of fear and greed, plan and simple. At the 50,000-foot view, that’s all it is, sometimes fear winning out, sometimes greed winning out, and we’re stuck in the middle. Thankfully for us, it’s an upward direction if we’re willing to stay true to our plan and remember the length of time that we’re going to be investors.

Sticking with the analogy, I’ll tell my client that now when the stock goes back up, Mr. Market is going to start questioning what he did. Every day he’s going to open the paper and see it go back even higher, above where it was before. The stock price is higher, higher, and all of a sudden he is euphoric, so excited that he taps you on the shoulder and says, “I got to buy some more stock. Will you sell it to me?” The business owner looks at his finances and sees that his company is doing well but not up 20% for the quarter, there’s some disconnect going on, but yeah, you’ll sell him

Mr. Market is an example of what investors inherently end up doing wrong. They sell when things are on sale. We hate sales when it’s a stock market, but when gas is on sale we love it. Why is that? It’s the same thing, something that we need or want is cheaper than what it was the day before. But that’s Mr. Market for you. We need to use our tools and techniques to help clients understand how to take advantage of that and not let it be a detriment to their investing success.

My advice for working with business owners

The bulk of our clientele comes to us from other clients and other advisors in what I would call my natural market, small business owners. Our best advocates are our current clients and the greatest compliment that we can receive is a referral from a client who is looking to help someone they care about.

For other advisors who are looking to get into the small business owner market, the number one piece of advice I have is to spend the time to learn all you can about the issues that small business owners face. Those issues range far and wide, but financially speaking, are centered around the three main goals: creating wealth, preserving that wealth, and perhaps most importantly, transferring that wealth. Those are the big coordination gaps that I come across. You need to understand tax and legal nuances very well; you’re not presenting yourself as a CPA or attorney, but you know enough to spot gaps. This will allow you to communicate those issues in a way that resonates with the business owners and their other advisors.

Business owners operate at a very high level of system one thinking, that is intuitive thinking. This is their engine and it runs automatically. They surround themselves with what I call system two thinkers, the analysts. These are the consultants they work with. Business owners spend so much of their time running the business day to day, week to week that they have very little time and energy left over to handle the system two work, so they hire that out. You need to understand their filter and how they think. That will allow you to build some trust and rapport, and allow you to demonstrate your value in a way that makes them want to work with you.

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