Does Asset Allocation Make Sense for You?

At Note, we frequently encounter business owners who tell us they get approached by “wealth” managers preaching asset allocation. These managers possess little information about them, their businesses, their objectives, or the headwinds they’re facing. These managers then readily preach about the importance of diversification and the investments that owners need to make.

The thing is, most business owners aren’t thinking about asset allocation at all. Rather, they’re focused on asset concentration.  

Why?

Because their life savings and sweat equity are tied up in their business. This is punctuated by the debt they’ve taken on in order to feed the engine of their business – their most concentrated investment.  

While asset allocation may be wise advice from an “Investment 101” standpoint, it is not an effective conversation with most small business owners. Many I’ve spoken to over the years are quick to say, “I have nothing to invest.”

However, if I have their ear, I’m able to persuade them they have everything to invest. 

They have themselves, their tomorrows, and the investments they’ve already made. With good fortune and perseverance, those assets will give them the kind of financial capital that wealth managers very much want under their management. However, it can take a decade or two before that happens. Only then does asset allocation advice become relevant.

An effective financial advisor must be able to see you – the business owner working to build equity. They must recognize the importance of promoting asset concentration, not preaching diversification. They should fully understand your business, your objectives, and the headwinds you are facing. Only then can they be dedicated to working with you to mitigate the risks associated with business ownership. Only then can you more easily move from concentration through liquidity, and onto successful allocation.

Self-employed and Deferred Payroll Taxes

If you are self-employed, you shouldn’t count on the payroll tax break the president has issued via executive order — at least not yet. 

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Payroll taxes are normally shared by employers and employees. Each covers a 6.2% tax to fund Social Security, as well as a 1.45% tax to fund Medicare.Self-employed people foot the entire bill for these levies themselves, at a cost of 15.3%, and pay for them as part of their quarterly estimated taxes

The president’s executive order would suspend the employee’s share of payroll taxes from September 1st through the end of the year. It would cover workers who make no more than $4,000 per biweekly pay period or $104,000 annually. 

It is currently unclear whether this relief would apply to the self-employed, which is raising a number of tax concerns including whether employers or employees could face surprise tax consequences and compliance issues related to the executive order.

Separately, business owners, including independent contractors and freelancers, are already eligible to defer the employer’s side of the Social Security tax via the CARES Act. Under this provision, employers may choose to defer the share of tax that would have been paid from March 27 through Dec. 31. They would then pay 50% of the amount owed next year and the remainder in 2022.

With so many unanswered questions, the best course of action if you are self-employed is to continue to set aside your self-employment taxes and pay them as usual. At the very least, you should wait until further guidance is issued by the Treasury Department to decern on whether you qualify to defer this slice of the tax.

If you have questions, or need to talk about this or any other financial issues, give us a call. We’re to help