Does your business need protection?
Business protection is a topic that often can be overlooked in dealing with the day-to-day running of a business but it deserves attention
What happens to a financial adviser firm if the founder falls ill? What if a senior partner dies, causing the bank to call in a loan? There are many such scenarios that can put small businesses in jeopardy and, while not pleasant to think about, having a strategy in place to protect against them could avert disaster.
Business Protection is by no means anyone’s favourite topic, but it deserves more attention than it gets.
The term covers a range of scenarios that represent risks to businesses, especially those with a higher level of key person risk than others. This is particularly relevant to adviser firms: the Association of Professional Financial Advisers (APFA) notes there were 14,550 advice firms registered with the FCA at the end of 2014, and the average number of advising staff in those businesses was 4.53.
Small adviser firms are often heavily dependent on one or two founders or directors who contribute the most to company profits, and maintain the firm’s key contacts and relationships. How would these firms cope if one of their main players became incapacitated? Industry research suggests that 40% of businesses would cease trading in under a year if a key person died or became critically ill, and 60% of firms said they would struggle to appoint a replacement within six months. Key Person Protection can help protect firms if the worst happens.
There is also business Loan Protection, which offers cover in the event that the person who guaranteed the loan dies. This insurance can help businesses pay outstanding overdrafts, loans, director’s loans, or mortgages. Share Protection can assist in buying back a partner’s shares in the business if they become incapacitated.
The reason business Protection has been so overlooked is that financial advisers are often guilty of looking after their clients’ interests better than their own, says Wes McCranor, managing director of business protection specialist Hammond Business Partners.
“I would like to think all adviser firms should consider some form of business protection at a bare minimum,” he says. “People insure their cat, their dog and their boat, but they wouldn’t have any assets, they wouldn’t have that lifestyle, without their business.”
McCranor gives the example of a client who is an IT contractor working on a day rate of £500. “If he can’t work, where does his income come from? A key person policy would cover his income and his business. A financial adviser’s business is more at risk than others because it is often reliant on one or two people – if that adviser or that paraplanner can’t work then the business is over. So a key person policy is very important for adviser firms. If you do have a one-man band, you have to make sure that one man is covered.”
Business protection can be expensed through the company
and may be subject to tax relief
McCranor adds when he tells clients business protection can be expensed through the company and may be subject to tax relief, they become more interested in the subject. “If they can get cover tax efficiently and the business can fund it, this is a much more exciting conversation to have.”
Protection accounted for just 2% of sales volumes for adviser firms in 2014, according to data from the FCA. Perhaps when more advisers begin to count protection as a larger part of their revenue stream, they will be more likely to take their own advice when it comes to safeguarding their business.
First published in Zurich’s Advice Matters magazine. Written by freelance journalist Hannah Smith.