High-Income Self-Employed Have More Options, and Need More Help, to Become HNW Clients

4th Dec 2014

His practice is thriving. What to do with the increasing income stream?

His practice is thriving. What to do with the increasing income stream?

High-Income Self-Employed clients are the main users of our defined benefit plan solution, so we spend a lot of time studying them. So should all financial advisors, according to Martha White in a recent article on FinancialPlanning.com.

“The needs of those workers are likely to be very different from those of the average client,” White writes, “and planners need to know more about the variables that can affect independent workers in order to best advise them.”

Do you already work with a number of high-income self-employed (HISE) clients? Would you agree that the following are key differences that need to be weighed when working to turn “high income” into HNW?

  • Short-term disruptions in cash flow: Income for independent professionals can fluctuate until they establish themselves in their market niche. Your plans must accommodate this risk.
  • No cap on earnings potential: The sky’s the limit in certain professions. Some of Dedicated DB’s clients, such as doctors, solo-practitioner lawyers and farmers, can make over $1,000,000 each year.
  • No Safety Net: Self-employed clients need a bigger “rainy day” cash cushion. Advisors agree that it should be much higher for the self-employed.

“I like to see people have 18 to 24 months in terms of a backstop cash flow,” says Andy Smith, senior vice president at the Mutual Fund Store in Indianapolis, as quoted by White in her article.

“Usually, I’m going to keep reserves in a money market account,” says Micah Porter, president and CEO of the Minerva Planning Group in Decatur, Ga. “The worst thing you can do with reserves is to chase returns.”

Most also need their own short and long-term disability policies, which you might help them arrange.

No Standard Path to Retirement: High Income, Self-Employed clients have more tools available to help them turn income into HNW. These include aggressive contributions to 401k plans, and into a defined benefit pension plan, as Bob Glovsky, vice chairman and a principal at the Colony Group in Boston, noted in White’s article:

“If they’re over 50 and making a sizable amount, they may want to explore a defined-benefit plan,” Glovsky said. “For people making at least six figures annually who don’t have much saved for retirement, this lets them catch up by saving more than they can with defined-contribution plans.”

These plans have to be planned carefully against the client’s volatile income pattern, and there are administrative fees involved. (Less than you might think, however.)

FAs have a high-value role to play in guiding High-Income Self-Employed (HISE) clients into a comfortable retirement as HNW clients by using all available tools to steadily converting their income to assets.

If you ever have questions about the role a defined benefit pension plan can play in creating a wonderful retirement for small businesses and independent business people, call us. You can also run some scenarios using our online illustration tools.

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