Business should factor into owners’ overall asset allocation plans

Remaining portfolio can be balanced against risk

For most business owners, the company itself is their largest asset. But in many instances, these executives are not including the business in their overall asset allocation plan, wealth managers say.

Partly, this is because the business owner is so busy running the day-to-day of the business, he or she doesn’t have time to look at the big picture, said Bill Morse, senior vice president, branch manager and financial advisor at B.C. Ziegler and Co.’s Mequon office.


“Frankly, many business owners don’t do financial planning because their time is so absorbed into running the business, their baby, that all their energy and their time and their money is tied up in that business,” Morse said.

“That business is a member of the family, practically, so they’re enraptured by it and they’re so close to it that it hasn’t occurred to them to step back and say ‘This is an asset and where does it fall in the spectrum and especially where does it fall in the spectrum of risk?’ That’s what, in my opinion, it’s very important to consider,” said Sara Walker, senior vice president, senior portfolio manager and chief economist at Associated Bank in Milwaukee.

A company could go under, which is a major risk to consider, even if it is uncomfortable, she said.

“Whether you’re owning an individual stock or a business, don’t fall in love with it because it’s not in love with you,” Morse said. “Intellectually, if this business fails, how is it going to impact our lives and how do we plan around that? Have money in cash and bonds and stocks, so if something goes wrong with the business, you’ve got other things you can rely on.”

Many business owners think they’re more diversified than they are, because they’re not considering the industry and niche of the business and weighting other investments against it, said Christopher Didier, managing director with the Family Wealth Group at Robert W. Baird & Co. Inc. in Milwaukee.

“The key thing is just No. 1, that business owners realize the business itself is risky and that they don’t overestimate what the diversification they have right now is,” Didier said.


For example, if the company owns its building, Morse would avoid real estate investments in the rest of the owner’s portfolio, since so much of his or her net worth is already tied up in real estate. If a company is a pharmacy, he would limit the rest of the portfolio’s exposure to health care.

“Look to invest in assets that perform differently than the business does,” Didier said. So if the business correlates closely with the economy, look at assets in another area.

Another risk factor is that business owners are susceptible to reaching for returns that are not available, Didier said.

“Business owners oftentimes have a very high return expectation because they generally get very high returns in the businesses they operate and they also are not always aware of the risks they’re taking,” he said. “When they go into financial markets, then those are risks that they may not be all that familiar with, plus they see it moving up and down on a daily basis, whereas they don’t value their business on a daily basis.”

Even if they’re not planning to exit their business anytime soon, business owners should consider many years ahead of time what–if any–value they can expect from the company down the road, Walker said.

Among the questions she asks clients to consider are: What is the end game of the business? Do you see a sale on the horizon? Do you see a transfer of ownership to your family at a discount or at market value?

“The succession one is a key question that helps a portfolio manager distinguish between a hobby and a going concern or an asset,” Walker said.

“A lot of businesses are successful because they’re spinning off enough cash flow that they’re giving us a nice living,” Morse said.

Of course, things like the value of the business and markets’ performance will change over time.


“Can I tell you what the stock market’s going to be 20 years from now? Well, we can’t,” Morse said. “What’s critical about planning is it’s not a one-time gig. It’s a living plan.”

Once the owner has determined what kind of exit he or she plans to make, the investment portfolio can be molded around it.

“If they’re taking on all that risk over in their business, their investable assets should compensate for that and be more conservative and perhaps have more of a fixed income allocation than someone else would have who has a regular kind of 8-to-5 type of job,” Walker said. “If the business owner still wants to participate in the stock market with their investable assets…you build a portfolio that doesn’t perhaps have as much small cap exposure, but has more in large caps and large companies that can pay dividends.”

Morse recommends companies take their cash reserves, which are often in money markets, and reallocate it into a “CD ladder,” in which one-quarter remains liquid in the money markets, one-quarter goes into a one-year CD, another quarter goes into a two-year CD and the last quarter goes into a three-year CD. When the one-year CD comes due, if the owner doesn’t need the money, she could reinvest it in a three-year CD and continue the cycle.

Despite a penalty that may be incurred when the money is needed, it still may be a better investment than leaving the money sitting in money markets, he said.

“It hits both your liquidity and gives you a little bit better yield,” Morse said.

Didier in 2008 co-wrote a whitepaper highlighting the tendency for business owners to overlook their most significant asset, and what they can do to avoid some of the pitfalls.

“You can always hold (the business) on part of your balance sheet as something that’s there,” he said. “It’s something that’s visible to you that you’re thinking about.”

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Molly Dill, former BizTimes Milwaukee managing editor.

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