ABS data shows that the proportion of Australians working for themselves has doubled over the past 40 years. More people are taking the leap into self-employment – drawn by flexibility and potential financial reward – but with those opportunities come heightened risks.
For advisers, this represents one of the most underserved and high-need client segments, according to Acenda partner education manager Marshall Ross.
Small-business owners not only face income volatility and business risk; they also tend to blur the lines between personal wealth and business finances, often exposing themselves to issues they don’t fully recognise – which is where Ross said advisers can make a profound difference.
One of the big problems, he explained, is that small business owners wear two hats but often don’t recognise it.
“They wear their hat as a business owner, and they wear a hat as a person in their family with personal needs. The challenge is that those two things often become intertwined,” Ross said.
“When we talk about risk and advice you might give people on the way they structure their finances and set up their lives, the decisions that you make can either amplify your risk exposures or create buffers in your risk exposure.
“When we give people advice, we help people make decisions. We help people structure their affairs. We want them to create buffers, and we don’t do that around particularly the distinct needs that come with these two independent hats, or these two independent areas people have. They amplify the risk.”
Essentially, advisers can add value by clearly distinguishing these worlds and helping clients structure their finances so that risks in one area don’t undermine stability in the other.
However, business owners also carry more personal risk than salaried workers. While employees benefit from paid leave, redundancy protections and stable income, small-business owners often have few buffers. Their income depends heavily on their own health, skills and capacity to work. When something goes wrong, there is typically no fallback.
According to Ross, this means the discussion needs to begin with income.
“Income is a great starting point for those conversations around some of the long-term needs that might come with risk for business owners, this is a great way to start to contextualise the conversation,” he said.
Income protection also has the benefit of the premium being tax deductible, however business owners still often feel as though they don’t need the cover.
A lot of the pushback, Ross said, comes down to the client believing they either can’t get it because they don’t pay themselves a wage or don’t need it because the business will continue to pay an income.
“This one comes up all the time,” he said.
“The simple question there is … just ask them a good open ended question, which is ‘OK, how long? Give me a time period.’ They will lie to you, though, when they answer that.
“So, the better way to answer that question is, ‘if your business partner wasn’t in the business, how would you be comfortable paying?’ Then you get the honest answer.”
Ross added that advisers need to find a way to get the honest answer of what would actually happen in order to demonstrate the benefit of taking out income protection cover.
Similarly, a structured risk-management framework can help business owners understand their vulnerabilities and make informed choices, however advisers shouldn’t overwhelm clients with too many choices. Presenting three or four clear pathways – reduce, avoid, transfer, or retain – can help the client feel both empowered and supported.
