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Why entrepreneurs make the worst investors

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Many entrepreneurs often neglect their finances, and some of the greatest portfolio losses that I have seen (sometimes in excess of 50%) have been in portfolios of previous business owners.

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

Here are some common themes I’ve noticed that may shed some light on this:

1. Simply too busy

First and foremost, it’s obvious, 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 planning

Historically, the pensions industry has charged too much for complicated products with poor investment performance. Entrepreneurs have been put off by the negative press 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%, 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 previously been plagued by scams and mis-selling haunted by commission bias. Not so long ago you could have been a window cleaner one day and a financial adviser the next.

Thankfully, there is now a new breed of adviser that is completely unbiased and good quality advice is well worth paying for. The recent introduction of the RDR has helped to stamp out commission bias in the industry. Business people can now feel assured that financial advisers can be trusted and that they want to work for clients’ interests, not their own.

4. Economic uncertainty

Entrepreneurs have become increasingly more hesitant to invest because of the economic uncertainty since 2008. The economic downturn of the late 2000s and early 2010s caused people to take fewer risks and a reluctance to invest money into their future. During times of economic uncertainty, people are more likely to hold on to what cash they have instead of pursuing investments. There are various model portfolios to suit different investors that are transparent, diversified, low cost and lower risk, a quality financial adviser should be able to offer this.

5. 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.

You should never take more risk with your capital than you need to in order to achieve your goals. Excess risk is pointless risk and return of capital, is just as important as return on capital.

So what should business owners do to take hold of their finances and start effectively managing their money?

How to make money and manage money

Entrepreneurs should seek out a quality adviser who they feel they can work with over the long term.

Two hours a quarter should be invested to focus on personal finances and create a plan for the future.

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 has been the managing partner of wealth management firm Equilibrium Asset Management for 18 years.

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