Why business owners need more than a thriving company to secure their financial future.
Building a successful business is one of the strongest mechanisms for creating wealth, but it comes with two risks most owners don't fully appreciate: concentration and liquidity.
According to the Federal Reserve's Survey, business equity accounts for 34% of nonfinancial assets for self-employed families, and for many, the true figure is far higher. When the majority of your net worth is tied to a single company, you're essentially an undiversified investor in a single illiquid asset, and those are risks worth taking seriously.
At First American Bank, we recognize that business owners face unique wealth challenges and are committed to helping you develop strategies that complement the value you’ve created through your business.
The Hidden Risk of Concentration
Investing 75% of your wealth in one or two stocks would strike most financial advisors as imprudent, particularly if they’re non-marketable. Yet that's effectively the position many business owners find themselves in.
That’s not to say you should invest less in your business. Instead, we encourage business owners to build a parallel portfolio alongside their business assets that provides liquidity, diversification, and protection that your business equity cannot.
Staying the Course When Markets Move
That said, diversifying into broader markets brings its own challenges. Geopolitical events can trigger sharp, sudden moves.
For business owners already managing operational pressures, the temptation to exit investments at the wrong moment is real, even if they understand that history rewards patience.
Balancing Risk and Opportunity
Many business owners feel they take on substantial risk by investing in and running their company. While prudent risk management is important, an overly conservative approach to their investment portfolio may not deliver the long-term growth our clients hope to achieve. Concerns of volatility diminish as investment horizons lengthen, if even by just a few years.
Conservative allocations are suitable for those seeking to protect principal through stable and often modest market returns. However, if long-term wealth generation is the primary goal, a more aggressive strategy should be considered in tandem with the propensity for increased volatility through different market cycles. First American Bank considers the client's needs alongside their risk tolerance and long-term aims, creating a strategy that delivers on all fronts.
A Tailored Approach for Your Future
For business owners, wealth planning is more nuanced than for most investors. Liquidity events, equity reduction, business succession, and generational transfers all carry significant implications for tax planning and estate structuring. These are key milestones in a business’s lifecycle that benefit from forward thinking and early conversations with banking partners.
“Business owners are well advised to plan for the eventual sale of their ownership interests well in advance,” shared Luke P. Herlehy, an Attorney at Law at Dalton & Herlehy, P.C. “Collaboration with trusted advisors helps ensure an efficient transfer of assets from both estate and tax planning perspectives.”
First American Bank's wealth advisors work with each client to understand the full picture of business and personal assets before building a portfolio aligned with their risk tolerance, time horizon, and long-term goals. With our open architecture and flexible approach to investment strategy, we can adapt to each client’s unique needs.
Your business built your wealth, and a diversified investment strategy protects and grows it. Our team is here to help you do both.
