Advising Today’s Business

Advising Newly Minted Gigs, Freelancers & Entrepreneurs

How do you help the client that just quit his job to start his own business?

by Dennis Ho

Mr. Ho is Co-Founder and Chief Executive of Saturday Insurance, a licensed, independent insurance agency founded by Ho and COO Chris Cheng. Visit saturdayinsurance.com for more information.

Today’s gig economy is marked by legions of people starting their own businesses or embarking on freelance careers, freed from corporate shackles (voluntarily or not), but also unprotected by the “company” safety net.

According to recent federal self-employment statistics nearly 27 million Americans have left full time jobs since 2017, bringing the total number of self-employed individuals to 42 million in the U.S. alone, 33% of the workforce. Global consulting firm McKinsey found that there are roughly 68 million freelancers in the US. These are largely people over the age of 50, with children (and college tuition to pay) and elderly parents who may need care. Others are younger, still paying student loans and supporting young families.

But while these individuals will naturally want to invest much of their time and money into their new careers, they shouldn’t forget about making sure to have a financial safety net in place. As advisors, it’s our responsibility to help clients maintain a balance between investing in their businesses and protecting themselves from unforeseen events that could lead to financial disaster.

I can speak to this personally from two perspectives. First, as a married father of three small children who left the corporate world to start an online insurance agency at the age of 41, I’ve experienced this firsthand. Suddenly, after 20 years with a steady paycheck, corporate benefits and plenty of vacation days, it was all gone. In its place was an uncertain new business and a monthly set of bills that needed to be paid. Second, as an independent insurance agency, Saturday Insurance has helped many new entrepreneurs navigate the same challenges.

In dealing with clients in similar situations, I would offer the following words of advice:

Their ability to take investment risk has changed, though they may not know it
Prior to starting a new business, I was firmly invested for growth. 90%+ of my savings and retirement assets were invested in stocks because I had a 30-year time horizon and steady income each month. Becoming an entrepreneur changed all of that because not only did I lose my steady income, I also had to plan for the potential risk of needing to tap my retirement savings in an emergency. In thinking through my new situation, it was clear that my risk profile had changed, and my investment strategy should change with it.

As an actuary, I see risk everywhere, so I was fortunately able to recognize this new reality early on. But I’ve met many entrepreneurs that don’t recognize this change. They are so convinced that their business will be a roaring success that they continue to spend and invest the same way they did while working at a 9-5 job.

As a trusted advisor, one of the first steps you should take when your client becomes an entrepreneur is to help them re-assess their financial profile and update their savings and investment plan accordingly.

The Right Insurance Is More Important Than Ever

As a freelancer or entrepreneur, your ability to work each day is much more critical to your current and future income than it is in a corporate job. Make sure your client doesn’t forget about having life, health, and disability insurance to protect from unexpected events.

A few years before I left the corporate world, I purchased an individual long-term disability insurance policy so I would have some extra protection. I had no idea at the time that I would end up starting my own business but having that disability policy has given me peace of mind. My wife and I know that if I get hurt, our family will still be able to cover basic expenses.

'Cash Is King' is an old adage but takes on renewed importance when it comes to entrepreneurs. Add to that the volatility of a startup and cashflow needed to support a family and you quickly have a situation where cashflow is critical to survival

In the past, it was difficult for new entrepreneurs to get disability insurance because insurers typically required a two-year track record of business earnings, but that’s no longer the case. For example, Guardian Financial offers a special program targeting startups that offers coverage for up to $100,000 of income based on the applicant’s most recent employment income prior to starting their company. This makes it easy for any new entrepreneur to get covered, so there’s really no excuse to hold off on disability insurance these days.

Protect Their Company, Too

Depending on the business, an owner may also be exposed to potential litigation or damage to property, so having coverages such as errors & omissions and general liability insurance are also critical. These are important to procuring business, as well, since potential clients often want to know that you have such protections (some require it) and it will help you go after “bigger fish.”

Don’t Forget About Retirement

Retirement planning usually takes a back seat in situations like this because money is tight and there is so much focus on the new business. As we know, even delaying contributions just a few years could cost thousands of dollars at retirement due to lost interest and tax deferrals. Also, it’s easy to forget that many folks are losing 401(k) matches, profit sharing and other benefits when leaving the corporate world. It’s important to help your clients understand the benefits they’ve lost and to reiterate the importance of continuing to save for retirement. An added bonus of not forgetting about retirement is you set some boundaries on what assets can be risked in the business and what assets must be protected at all costs, which could be a lifesaver if the new business doesn’t turn out as expected. Beyond Traditional and Roth IRAs, make sure to explore the various savings options uniquely available to small business owners such as Simplified Employee Pensions (SEPs), SIMPLE IRAs, and Solo 401(k)s.

Cash is King

This is an old adage but takes on renewed importance when it comes to entrepreneurs. In many cases, starting a business requires a substantial upfront and ongoing investment. Add to that the volatility of a startup and cashflow needed to support a family and you quickly have a situation where cashflow is critical to survival. In my case, I do my best to project cashflow needs (business and personal) several months out and ensure we have enough liquidity to support these needs. As an advisor, helping your client manage their cashflow might be one of the most valuable things you can do for them at this stage of their life. As an added bonus, this analysis should probably be revisited every quarter, so it gives you a good reason to have a meaningful discussion with your client every few months.

Open Up Your Network

As a new business owner, your client will learn very quickly that networking is critical to their success. Customers, vendors, partners, and employees are all best sourced through word of mouth. If you can offer any useful introductions or point them in the right direction to someone that can help solve a problem they have, I can promise they will be eternally grateful. It might be as simple as introducing them to a good accountant or insurance broker, or perhaps connecting them to people who might be able to use their services. With the ease of connecting people via social media or email these days, it doesn’t take much effort to introduce your client to 3-5 people that could change the course of their business. Since starting my business, I’ve had numerous contacts offer up unsolicited help or introductions and I’m always on the lookout for how I can repay these folks for their kindness.

Clearly, helping freelancers and entrepreneurs transition from the corporate workforce to self-employment is a new imperative in today’s evolving employment landscape, one that we here take very seriously. So often, they come to us knowing they need help but aren’t sure where to start. By focusing on these six rules, we can help them build the right financial safety net, which better positions our clients to succeed and protects them, if they don’t.