How to Select the Best Financial Advisor as a Business Owner

How to Select the Best Financial Advisor as a Business Owner

How to Select the Best Financial Advisor as a Business Owner

Selecting a financial advisor is a critical decision for any business owner. As a Certified Financial Planner with nearly a decade of experience, I’ve seen both sides of the table: seeking financial advice as a business owner and providing it as an advisor. Working with over 500 business owners across 15 years, I’ve developed a keen sense of when advice from a financial advisor lacks the necessary competency in business planning. Unfortunately, this happens quite often, and it’s concerning how some advisors may not realize the damage their advice can cause.

The Pitfalls of Poor Financial Advice

A striking example of poor advice occurred several months ago. A business owner client had taken out a sizable government-secured loan to acquire assets for business growth and to maintain liquidity. This loan had excellent terms: a fixed interest rate of 3% over 30 years. Given the inflationary environment, this cost of capital was very low. The business was generating $250,000 in free cash flow annually, with the owners saving 20% of their income in external retirement accounts.

What was the financial advisor’s advice? “You must pay down that business debt! You must be debt-free.” While being debt-free can be a good goal, it isn’t always the best strategy for business owners. Debt can be a tool for growth and liquidity. In this case, the advisor suggested replacing inexpensive 3% debt with capital from the business, disregarding the high current borrowing costs of around 9%. An experienced advisor would have asked more questions to get the full picture, such as understanding the business’s profit margins, balance sheet, and short- and long-term liquidity needs. Instead, the client could have invested in short-term treasuries, earning risk-free returns of 5.5%, creating an arbitrage opportunity and keeping capital ready for business needs.

How to Avoid Incompetent Financial Advisors

To avoid financial advisors who don’t understand the complexities of a business owner’s financial picture, you need to be proactive. Ask detailed questions and interview multiple candidates.

Essential Questions to Ask a Potential Financial Advisor

  1. What are the biggest economic risks you would advise us on?

Sample answer: “Considering the current economic climate, I’d advise on risks related to fluctuating interest rates, potential recessions, and geopolitical uncertainties.”

  1. What kinds of investments would you recommend to increase our revenues within the next five years?

Sample answer: “I’d recommend diversifying into emerging markets, considering sustainable investments, and exploring technology-driven sectors.”

  1. Is positive cash flow enough to tell whether a company is profitable?

Sample answer: “No, positive cash flow indicates liquidity but doesn’t necessarily mean profitability. Other factors like expenses, debts, and investments must be considered.”

  1. We are planning to expand our business with two new stores/offices. How does this affect the investment advice you will provide us?

Sample answer: “I’d assess the financial viability, forecast potential revenues, and determine if your cash position is sufficient to invest and pursue your business goals.”

  1. Can you look at our balance sheet and provide insight into what you see?

Sample answer: “I see you have a quick ratio of 1 and a current ratio of 2, indicating you use both cash and debt to invest in the business.”

  1. What information do you use to forecast next year’s financial status? How do you organize your data and present your results?

Sample answer: “I use historical data, current market trends, and economic indicators. Data is organized using financial software, and results are presented through comprehensive reports and visual aids.”

  1. How do you ensure you’re up-to-date with finance industry developments and regulations? What resources do you follow?

Sample answer: “I attend industry seminars, take online courses, and follow publications like Financial Times and Bloomberg.”

  1. How do you believe interest rates will affect our business and investments with you?

Sample answer: “High-interest rates will make financing debt more expensive, possibly delaying projects or encouraging cash use. Conversely, reserve accounts can yield 5% returns on operating cash.”

  1. Is my business structured properly for taxes?

Sample answer: “Your single entity setup subjects you to self-employment tax and high marginal tax rates. Consider adding additional business entities for asset protection and lower total taxes.”

What to Look for in a Good Financial Planner

An ideal financial planner is analytical, up-to-date with industry trends, possesses excellent communication skills, and has a proven track record of successful financial planning and advising.

Red Flags

Be cautious of candidates who lack analytical skills, don’t prioritize continuous learning, or can’t provide clear explanations of complex financial concepts. If they can’t read a balance sheet or don’t know the difference between a cash flow statement and a profit and loss report, steer clear!

Selecting the right financial advisor is crucial for the growth and stability of your business. By asking the right questions and understanding what to look for, you can ensure you find a competent advisor who will help your business thrive.

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How to Select the Best Financial Advisor as a Business Owner


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