The Entrepreneurial Spirit: How financial planning changes for the self-employed

From a wealth management standpoint, few elements are as valuable as a strong, stable career. While many of the clients that walk through your door might be part of a successful company, there will also be those who have set out on their own path.

The self-employed will come to depend on financial planning and wealth management just as much as any other person, but the absence of an employer supporting their retirement savings - and the inclusion of all those startup costs and added expenses of business ownership - can become unique problems along the way. The guidance you give to a self-employed client will be different than what you offer to the average client.

This is an important distinction to make. What works for one may not work for another, and understanding the trials and tribulations faced by the self-employed can help you become a better, more comprehensive financial advisor and wealth management expert.

So, what tips can you offer to self-employed clients (besides showing them a 1099 form?) Here is what you need to know about clients who have gone into business for themselves:

Are self-employment and financial hardships related?
A high number of self-employed individuals would be a sign of a stronger economy and a dedicated entrepreneurial spirit, right? According to a recent Gallup survey, this may not be the case.

Looking at the worldwide population of self-employed adults, Gallup found that this segment was much more likely to face monetary shortages. Self-employed survey respondents reported a lower income on average than those working full-time for an employer. Only 18 percent considered themselves to be economically "thriving," compared to 31 percent among full-timers.

When looking at North America only, self-employed individuals made up 5 percent of the total population, good for 7 percent of the total workforce, Gallup explained. It is important to note that "self-employed" and "business owner" are not synonymous. In North America, only 80 percent of the self-employed consider themselves business owners, or 18 percent of the total population.

Prepare for your clients' differences
When you first sit down with a self-employed client, remember the differences between this segment and those working full-time for an employer. Each person has a unique story, and it can be beneficial to find out where they came from, what their goals are and whether or not they consider themselves to be a business owner.

There are other differences as well, and the self-employed's situation will impact effective wealth management strategies. In an article for Financial Planning, contributor Martha White wrote that the variables in the self-employed’s lives have the potential to affect advisors more so than with other types of clients.

For example, Jake Akoury, director of business development and training at the Needham, Massachusetts-based Bulfinch Group, told White that short-term financial interruptions can get in the way of your clients' long-term goals. Without an employer to provide relatively steady, economic safety, a financial plan will have to take into account the ebbing and flowing entrepreneurial climate.

This means a greater importance will be on savings, White noted. Self-employed clients will need that safety net should they face adversity in the short term. This might mean you recommend a cash reserve that is more than double what you would discuss with the average client. You must also take into consideration retirement planning, as a strategy that works with one person will likely have to be adjusted for the self-employed.

Make money work for the self-employed
A self-employed client's financial footing will be shakier than your average client. This doesn't mean that their money can't work for them, however, and as their advisor you have plenty of financial planning tips to offer.

In an article for Wealth Management, Kevin McKinley outlined several of the most beneficial steps self-employed adults can take as they shore up their financial futures.

These recommendations include alterations to:

   1. Social Security
   2. Work hours
   3. Tax savings
   4. Financial plan

1. Turn to Social Security
Social Security can be a valuable financial ally for your self-employed clients. McKinley wrote that these payments can be extremely helpful to clients without an employer's safety net. Normally, you would advise clients to delay Social Security payments so they receive more money in the future. For the self-employed, that cash could be exactly what is needed as soon as eligibility is met. It will also allow them to nurture their own business in order to increase their earnings down the line.

2. Think about working less
If option No. 1 sounds pretty good, then you may want to advise your clients on working fewer hours during the week. The Social Security Administration has limits on the amount of benefits earned based off of a person's employment situation. Go over the limit, and your client can see their yearly benefits drop. Controlling their weekly hours will also allow them to use official "retirement" to their advantage, assuming they meet the qualifications.

3. Look to tax opportunities
Naturally, taxes are an important part of the financial planning process for the self-employed. For example, McKinley pointed to the IRA as a useful tool in increasing your client's tax savings. You can convert any IRA into a Roth IRA as a way to turn business losses into a more favorable tax bracket. The tax- and penalty-free withdrawals that are associated with Roth IRAs after a period of time can also be helpful for certain clients who meet the right requirements.

4. Plan for the future
Perhaps most importantly, you need to work with your client to plan for the future. Self-employed individuals often face a surge in expenses when starting their own business or branching out on their own. This means they are often dealing with more bills than your average client. To help them prepare for a day when fortunes reverse - and their taxes increase - focus on the vehicles that can contribute to tax deductions.

Weigh the pros and cons
The life of a self-employed client is different than the average full-time employee, especially from a financial standpoint. As an advisor, you will need to balance all your guidance with the unique circumstances the self-employed face, and weigh the pros and cons of each strategy before moving forward.

To learn more on this topic, register for our Certified Wealth Strategist program or learn more about our other offerings at www.cannonfinancial.com.

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Sources/Resources: 
http://www.gallup.com/poll/175292/nearly-three-workers-worldwide-self-employed.aspx
http://www.financial-planning.com/news/client/financial-planning-for-self-employed-workers-2690618-1.html
http://wealthmanagement.com/retirement-planning/planning-self-employed-client

Disclaimer: The materials and information contained herein are intended for educational purposes, to stimulate thought and discussion so as to provide the reader with useful ideas in the area of wealth management planning.  These materials and information do not constitute and should not be considered to be tax, accounting, investment, or legal advice regarding the use of any particular wealth management, estate planning, or other technique, device, or suggestion, nor any of the legal, accounting, tax, or other consequences associated with them. 
While the content herein is based upon information believed to be reliable, no representation or warranty is given as to its accuracy or completeness.  For this reason, the program of study should not be relied upon as such.  Although effort has been made to ensure the accuracy of these materials, you should verify independently all statements made in the materials before applying them to your particular fact pattern with a client.  You should also determine independently the legal, investment, accounting, tax, and other consequences of using any particular device, technique, or suggestions, and before using them in your own wealth management planning or with a client or prospect.  Information, concepts, and opinions provided herein are subject to change without notice.
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