Entrepreneurs are generally driven and passionate about their businesses, but that focus could lead them to overlooking their personal financial planning in favour of progressing their commercial ventures.
Experts warn that such a laissez-faire approach to personal finance can be dangerous. If a start-up proves successful, the founder could end up with a substantial amount of money in the bank with no plan for how to make the most of it. And, in a worst-case scenario, if the business collapses, the entrepreneur might have no financial safety net. Given the high rate of failure among start-ups – it is estimated that one fifth of new UK businesses go under in the first year and 60 per cent in the initial three years – personal financial planning should clearly be taken seriously.
Another common misconception, according to Acumen Financial Planning, is that only older generations need to worry about such things as retirement and succession. It says that younger professionals, including entrepreneurs, should be considering their own financial futures and getting into good habits at an early stage in their careers.
David Gow, director and financial planner with Acumen, says one challenge in getting younger people to actively plan is their lack of knowledge about the subject.
He explains: “Early in my career, I noticed that young people could come out of education without knowing that much about finance – they didn’t really know what a mortgage was, what pensions are, or about basic savings strategies. They could come out of school and tell you what photosynthesis was, but they couldn’t tell you how to do a tax return. Some of these financial skills are perhaps the most basic but relevant skills young professionals need to plan for the rest of their life.”
While he thinks financial education in schools has improved over the years, he believes more can be done to get young people thinking about such topics as investment and retirement strategies, rather than just focusing on getting on the property ladder.
His Acumen colleague, financial planner Neil Grant, agrees there are a few simple steps that young professionals can take, such as spending less than they are earning, identifying how much they have to contribute towards achieving their financial objectives and having emergency funds and short-term goals in place.
This is particularly important given the global trend towards younger professionals running big businesses, such as large tech companies in the US – from Facebook to Twitter – and an increasing number of people becoming entrepreneurs earlier in life, rather than following more traditional career paths.
Gow’s advice, which might seem counter-intuitive, is for such people not to get too involved in their business. “I understand that might seem a strange thing to say,” he admits. “Young professionals can get ridiculously passionate about their business and totally involved in it. That’s great, but they have to make sure they are covering their basic expenses, for example. If that doesn’t happen, then you are usually in a spiral of decline.
“When you have a start-up, you have different phases of the business. The first phase is just getting it up and moving and you are excited and exuberant, but you should also make sure you are able to pay the bills and have an emergency fund in case anything goes wrong. Get that early stage sorted before you conquer the world.”
As entrepreneurs are often characterised as risk-taking go-getters, they might not always want to heed the advice to slow down in order to get their personal finances in shape, but Gow says they are more likely to listen to someone if they have developed a trusting professional relationship.
He explains: “A strong-willed and passionate entrepreneur is unlikely to listen to a single piece of advice. However, I do believe that when they value a professional relationship, they will listen to a trusted adviser and financial planner.”
Grant warns the consequences of not taking advice could see individuals being unable to sustain a certain lifestyle when they decide to retire, or not having effective succession planning or a sound exit strategy in place.
According to Acumen, financial planning also has to adapt to the changing needs of a client as their life changes, from buying a house to starting a family, or wanting to cash in on their business. “Overall it’s about being flexible and showing what the future could look like,” says Gow.
Another factor that comes into play when advising the younger generation is the changing role of technology, including its impact on the financial services industry and interaction with clients.
The “Advice Nation” report from Unbiased, an organisation which helps people access independent financial planning, pointed out that only a minority of advisers use any form of social media to engage with clients. This could lead to a disconnect with younger clients who, it said, are “firmly attached to their tablets and smartphones and will increasingly live both their personal and financial lives through these devices.”
It warned: “As this age group matures into the cornerstone of the advice market, advisers who fail to keep pace may find themselves becoming progressively invisible.”
This trend is amplified by the emerging financial technology (fintech) sector – which is strong in Scotland – challenging traditional banks, insurers and advisers.
Gow agrees that technology has vastly improved, and start-up founders, entrepreneurs and the younger generation in general will want to consume information through social media channels.
But he believes one-to-one financial advice will still have a vital role to play.
“Client financial planning advice in the form of face-to-face conversations, rather than just through bits of information that tends to happen with technology, adds a huge amount of value,” says Gow.
“Tech should help deliver advice more easily and more efficiently, but it’s still important that someone sits down to discuss their fears, ambitions and passions. It’s difficult to have that just through technology. It’s a combination.”
This article first appeared in the Vision supplement in the Scotsman – see it in full here.