Financial Goals, Concerns and Actions of Women Business Owners

of Women Business Owners February 24, 2012 Jill B. McCullough, DM, CFP Assistant Professor Youngstown State University Mary Quist-Newins, CFP, CLU, ChFC Director State Farm Center for Women and Financial Services

Acknowledgements About The American College and The State Farm Center for Women and Financial Services The American College is the nation s largest non-profit educational institution devoted to financial services. Holding the highest level of academic accreditation, The College has served as a valued business partner to banks, brokerage firms, insurance companies and others for over 85 years. The American College s faculty represents some of the financial services industry s foremost thought leaders. For more information, visit TheAmericanCollege.edu. In 2007, State Farm endowed a Chair in Women and Financial Services at The American College. This faculty appointment was the first and only academic chair in the country devoted exclusively to the study of women and their financial concerns. State Farm Insurance made another generous donation to The College, enabling the creation of a new Center for Women and Financial Services in 2011. As the first academic center of its kind, this focal point of research, education and knowledge serves as the nation s leading authority on the economic issues and opportunities of American women, both as consumers and providers of financial products and services. Through leading edge research, financial education and awareness building, The Center s mission is to promote the advancement of women in the financial services industry and to advocate for the economic security of American women. About the Authors Professor Mary Quist-Newins, ChFC, CLU, CFP, has the distinction of being the Director of the State Farm Center for Women and Financial Services and holding the research chair. During her 20-year career in financial services, Quist- Newins has achieved success as both a field producer and a corporate leader. Treasury & Risk recognized her significant contributions to the financial services industry by naming her to the magazine s elite list of 25 Outstanding Leaders in Finance Who Happen to be Women in November 2008. In 2010, Quist-Newins authored the comprehensive academic textbook, Women and Money, Matters of Trust. In 2011, she was honored by Women in Insurance and Financial Services (WIFS) as the Woman of the Year for her commitment to increasing awareness of the financial services issues affecting women. In addition to holding a Master s in Business Administration from the Garvin School of International Management, Quist-Newins has earned the prestigious Chartered Life Underwriter, Chartered Financial Consultant and Certified Financial Planner advanced designations. She received her BA from the University of Washington. Dr. Jill McCullough supports The Center s original research through findings analysis, research report development, papers in academic journals and the development of course curricula. She received a Doctor of Management in May 2010 from The Weatherhead School of Management at Case Western Reserve University in Cleveland, Ohio. Dr. McCullough has an extensive teaching background that includes finance, accounting and business technology. In addition to her fellowship at The American College, she is currently an Assistant Professor of Finance at Youngstown State University. Dr. McCullough s areas of research concentration include: Behavioral finance and organizational management; Financial services product development strategies; Entrepreneurial behavior as it affects financial decision making; Delivery mechanisms of financial services. Page 2 2012 The American College, All Rights Reserved.

Contents Acknowledgements... 2 Study Overview: Financial Goals, Concerns and Actions... 4 Opportunity to Provide Service to an Important and Growing Market.......................................... 4 Study Focus: Retirement.......................................................................... 5 Overall Retirement Planning Concern............................................................... 6 Figure 1: Women Business Owners Concern for Retirement Planning.......................................... 6 Confidence in Their Efforts Despite Inaction in Retirement Planning...................................... 6 Figure 2: Concern for Retirement Planning Contrasted with Opinion of Adequate Attention Paid...................... 6 Few Have Formally Calculated Their Eventual Retirement Needs... 7 Figure 3: Retirement Planning Actions... 7 Little Concern for Specific Retirement Planning Items................................................... 8 Specific Retirement Planning Concerns... 8 Figure 4: Retirement Planning Concerns... 8 Confidence in the Adequacy of Their Efforts............................................................. 9 Figure 5: I take an active role in understanding my retirement needs........................................... 9 Figure 6: My financial advisor told me I was on track and I trust/believe her..................................... 9 Use of Retirement Plans.......................................................................... 9 Retirement Plan Ownership.......................................................................... 9 Figure 7: Use of Retirement Investment & Retirement Plan Types... 9 Maximizing the Owner Benefit in a Retirement Plan... 10 Figure 8: Maximizing the Owner Benefit in a Retirement Plan... 10 Maximizing the Value of a Transfer or Sale of Business to Fund Retirement...................................... 10 Figure 9: Maximizing the Sale or Transfer of Business for Retirement.......................................... 10 Advisor Used for Retirement Planning...11 Financial Advisor Type..............................................................................11 Table 1: Women s and Men s Use of Advisors by Area and Type...11 Financial Advisor Gender............................................................................11 Summary & Implications...................................................................... 12 Methodology... 13 Works Cited.................................................................................... 13 2012 The American College, All Rights Reserved. Page 3

Study Overview: The Financial Goals, Concerns and Actions of Women Business Opportunity to Provide Service to An Important and Growing Market Women business owners represent an increasingly robust and important market segment for the financial services industry and its professionals. According to the Center for Women s Business Research, women-owned firms (firms where women hold more than a 50 percent stake in the business) now account for four in 10 of all closely-held concerns i. This represents a substantial market segment. Over 10 million businesses are now majority owned by females. This is also a growing market segment. The number of women-owned businesses has increased by 44 percent from 1997 to 2007 a rate twice as fast as that of maleowned businesses ii. In 2009, women-owned firms created/ maintained employment for more than 23 million Americans and had an estimated economic impact of $3 trillion iii. Rarely has there been such an easily-identified, growing group of potential clients for business service providers. Yet, this segment has frequently been under-identified as a market for financial services and products. A one-size- fits-all approach has been the standard for services provided to men and women small business owners. Unfortunately, women small business owners, similar to women in general, face formidable financial risks. Greater longevity, lower financial literacy and higher probabilities of disabling health conditions create significant financial challenges. While each of these risks can be difficult to manage, when combined, their drain on an individual s financial resources can be devastating. If financial services industry thought-leaders are to successfully engage this market, it is critical for them to gain awareness of the specific priorities and challenges facing women. Strategies must be crafted that address the concerns of women small business owners. In addition, more time must be allocated to better train representatives on how to properly address this market. This project was undertaken with the goal of learning more about women business owners financial concerns. We obtained responses from 835 female business owners who have recent business revenues greater than $50,000. The results yielded a robust body of information that was summarized into a series of issue- oriented reports focused on retirement, financial management, asset management, protection planning and advisor preferences. It is the goal of the researchers to help strengthen the bridge between the women that own small businesses and the financial services providers who can best help them achieve financial success. Page 4 2012 The American College, All Rights Reserved.

Study Focus: Retirement Business owners, unlike most workers, were always responsible for funding their own retirement. It might be assumed, therefore, that retirement planning is a routine aspect of their financial activities. Evidence suggests, however, that small business owners have done very little planning and saving for the time when they must transition out of their businesses. In fact, 40.8 percent of U.S. small businesses do not even have a retirement plan in place iv. Women are particularly vulnerable to the risks associated with inadequate retirement funding. Since they live longer than men, they face a greater risk of running out of money to pay for expenses during their retirement years. This longevity risk is also often accompanied by increased medical costs that can further drain retirement savings. To get a better picture of the retirement planning status of women business owners, this study concentrated on their retirement goals, concerns and actions. We focused first on the small business owners general opinions and concerns about retirement planning. We then asked about the actions they have already taken, as well as the actions they feel they should be taking. Next, the owners were asked to identify those financial products they use for retirement preparation. We also asked in-depth questions concerning their use of retirement plans and strategies for transitioning their businesses. Finally, we asked small business owners about their preferences when choosing financial advisors. The responses to these questions strongly suggest that women small business owners are very confused about their retirement planning. Even worse, they often may not be making any decisions at all, leaving them vulnerable. Here are some of the more alarming results of our research: The majority, 84 percent, are concerned about retirement. One in three (34 percent) have not estimated how much they will need in retirement. The majority, 77 percent, do not have a written retirement plan. Just 37 percent believe their retirement planning needs are complex. Approximately 50 percent say they want to maximize their business value to help fund retirement, yet only 10 percent have a written plan to accomplish this. These responses are particularly troubling since the average age of the women business owners surveyed was just over 50. Retirement, for many of them, will occur within the next 20 years. These responses, as well as many others are detailed in the following pages. The results clearly indicate that women small business owners need more guidance and professional financial advice in order to reach their financial goals. 2012 The American College, All Rights Reserved. Page 5

Overall Retirement Planning Concern We first asked women small business owners how concerned they were, near-term, with their overall retirement planning. The majority, 84 percent, admitted that they were concerned or very concerned about their retirement planning. They appear to be keenly aware that this financial responsibility needs attention. Confidence in Their Efforts Despite Inaction in Retirement Planning How confident are business owners that they are paying sufficient attention to their overall retirement planning? Surprisingly, even though the majority, 84 percent, feels that retirement planning is a strong concern, about one half, 51 percent, are satisfied that they have paid enough attention to this aspect of their finances. Figure 1: Women Business Owners Concern for Retirement Planning Business entrepreneurs are reported to exhibit a high sense of self-efficacy v. This may explain why despite being concerned about retirement planning, small business owners are content with their own actions. They have a positive opinion of their own ability to control personal circumstances. So while these owners are aware that they may eventually face retirement savings challenges, they believe that they will be able to find a solution when the time comes. This exaggerated optimism, which helps propel them through the uncertainty of being a business owner, may dangerously cause them to ignore the realities of their future retirement needs. This tendency towards overconfidence may also present challenges for financial advisors. A knowledgeable advisor can play a critical role in small business owners retirement planning. The owners feeling of I can figure this out on my own, however, may cause them to underestimate the importance of professional advice. Also, women in general report feeling talked down to and patronized by financial services professionals. As a result, strong and confident female small business owners are likely to be resistant to working with advisors who do not show respect for their success and abilities. Figure 2: Concern for Retirement Planning Contrasted with Opinion of Adequate Attention Paid Page 6 2012 The American College, All Rights Reserved.

Few Have Formally Calculated Their Eventual Retirement Needs Although women small business owners overwhelmingly recognize retirement challenges and needs, there is little evidence that they are making consistent efforts to address these issues. To the contrary, owners seem to suffer from retirement planning inertia. When asked about specifics, the business owners had very little worries. Only 39 percent fear not having enough money in retirement and only 35 percent fear outliving their assets (see Table 2). Perhaps this is because they have not actually projected the amount of funds they will require to support retirement. Although 66 percent of the owners claim they have estimated the amount of funds they will need to retire, other responses suggest these calculations have been very haphazard. Only 32 percent say they have estimated retirement needs with the help of a financial professional. In addition, only 23 percent say they have a formal, written plan for managing income and expenses during retirement. Fifteen percent say they have used an online retirement calculator or just made simple calculations on paper. Only 29 percent say they have more clearly identified their financial needs in this area. While a major source of retirement funding for a business owner can come from the sale of the business and/or retirement plan assets, less than a half of the business owners surveyed reported starting a new plan or increasing their retirement savings amount. Have more clearly identified retirement financial needs 29% Increased retirement savings amount 40% Started a new plan 40% Have estimated the amount of funds needed for retirement Used a financial professional to calculate retirement needs 32% 66% Used online retirement calculator to estimate retirement needs 15% Used simple paper calculations to estimate retirement needs 15% 0 10 20 30 40 50 60 70 Figure 3: Retirement Planning Actions 2012 The American College, All Rights Reserved. Page 7

Little Concern for Specific Retirement Planning Items Specific Retirement Planning Concerns Anticipated higher health care costs Increases in cost of living Not being able to have enough money to retire Not being able to have the same quality of life as current Cost of inflation Outliving my assets 42% 40% 39% 37% 36% 35% Need to continue working Low Social Security benefits 21% 23% Inability to remain active in the business Not having a solid transition plan in place 10% 15% 0 10 20 30 40 50 Source: State Farm Center for Women & Financial Services at The American College Figure 4: Retirement Planning Concerns When we asked the women business owners in our survey to identify their specific retirement planning concerns, the results were surprising. Although 84 percent of business owners say they are concerned about retirement planning in general, they seem unaware of the specific financial hazards they may ultimately face. Further, there is little consensus among the owners as to their strongest concerns. For almost every retirement item listed, fewer than 40 percent of the women expressed concern. The owners were asked specifically if they were concerned about meeting their expenses in retirement. When asked if they would eventually be able to quit working and retire, the majority were very confident. Only 39 percent worried about not having enough money to retire and only 23 percent thought that they might need to continue working in retirement. As life expectancy for women continues to increase, more savings will be required to fund a longer retirement. Despite this, only 35 percent of these women are worried about outliving their assets. Even more surprising, only 37 percent of the women surveyed were concerned about being able to maintain their current quality of life during retirement. Worries about the cost of inflation were expressed by only 36 percent, and only 40 percent were concerned about increases in the cost of living. As women live longer, they are also at risk for increased health care costs. Despite this, only 42 percent of the respondents said they were worried about higher health care costs in retirement. Currently, business owners pay a 13.3 percent selfemployment tax on their first $110,100 of earnings that helps pay for Social Security and Medicare. One might expect small business owners to be concerned about eventually receiving these benefits. However, only 21 percent were concerned about low Social Security benefits. Finally, the legacy of the owners businesses does not seem to be a concern. A mere 10 percent of the small business owners surveyed worried about whether they had a solid transition plan in place. Page 8 2012 The American College, All Rights Reserved.

Confidence in the Adequacy of Their Efforts Source: State Farm Center for Women & Financial Services at The American College Despite their inertia, owners have very positive opinions about their own retirement planning actions. Seventy- five percent agreed with the statement I take an active role in understanding my needs in this area. Simultaneously, they feel less sure about their advisors. Only 47 percent of women small business owners agreed that My financial professional told me I was on track and I trust him/her. Figure 5: I take an active role in understanding my retirement needs Figure 6: My financial advisor told me I was on track and I trust/believe her Use of Retirement Plans To finance a sound retirement, a small business owner can draw upon funds from a combination of sources. These typically include: A business-sponsored retirement plan Social Security Proceeds from the sale of a business A retirement stream of income from the business, managed in retirement by a family member or other employee Retirement Plan Ownership A well-structured company retirement plan can provide tremendous benefits for small business owners. The advantages include an automatic tax-deferred savings mechanism for owners and their employees, employee retention incentives and a diversification of resources away from the business. However, confusion over the tangle of government regulations combined with a multitude of plan choices may rattle owners confidence in making sound retirement plan choices. Deferred Annuity 401(k) 25% 40% Most owners in this study (70 percent), report having one or more type of business retirement plan. The retirement plan types used were: SIMPLE IRA Sep IRA Immediate Annuity 20% 19% 10% 0 5 10 15 20 25 30 35 40 Source: State Farm Center for Women & Financial Services at The American College Figure 7: Use of Retirement Investment & Retirement Plan Types 401(k): 23 percent SEP IRA: 21 percent SIMPLE IRA: 29 percent Deferred annuities: 17 percent Immediate annuity: 10 percent 2012 The American College, All Rights Reserved. Page 9

Maximizing the Owner Benefit in a Retirement Plan Although the analysis of retirement plans often focuses on the benefits they provide to employees, business owners who sponsor a retirement plan also enjoy significant retirement savings advantages. The annual amount an owner can contribute to a retirement plan is contingent on complex IRS regulations related to the owner s income, the level of contributions being made by employees and other factors. Have sought education in this area Have consulted with family, friends, colleagues Have researched the web Have attended a seminar about this Have paid an advisor for a formal, written analysis 19% 19% 28% 27% 0 10 20 30 40 50 60 70 80 Source: State Farm Center for Women & Financial Services at The American College Figure 8: Maximizing the Owner Benefit in a Retirement Plan 69% Small business owners who have a retirement plan seemed to understand the importance of creating a plan structure that gave them the ability to maximize their contributions. Sixtynine percent of women indicate that they sought education to learn how to maximize their own benefit in their business retirement plan. However, the sources of this education are unclear: Only a few (19%), have paid a financial planner to develop a retirement plan analysis. 27 percent have done research on the web. About 28 percent of females have consulted with friends and family or peers and business colleagues. Very few (19%), reported attending seminars. Maximizing the Value of a Transfer or Sale of Business to Fund Retirement Are owners counting on using the proceeds from the sale of their businesses to fund retirement? Many (40 percent) reported that they will not be able to transition the business. Further, 20 percent say they will need to close or sell the business upon retirement. Only 10 percent of the women owners have a formal, written plan to transition their business when ready to retire. Have sought education in this area Will not be able to transition business at retirement Have consulted with a financial pro in this area Have done research in this area Have consulted with family, friends, and colleagues Will need to close or sell business at retirement Have attended a seminar about this Have a formal, written plan to transition business 10% 20% 19% 25% 34% 32% 40% 61% Of the 56 percent of women small business owners who reported being concerned about this issue: Sixty-one percent have sought education in this matter. Only a few, 34%, have consulted with a financial professional. Thirty-two percent have done research on the web. About 25 percent have consulted with friends and family or peers and business colleagues. 0 10 20 30 40 50 60 70 Source: State Farm Center for Women & Financial Services at The American College Figure 9: Maximizing the Sale or Transfer of Business for Retirement Page 10 2012 The American College, All Rights Reserved.

Advisor Used for Retirement Planning Financial Advisor Type The small owners did not express a strong preference for a particular type of advisor to assist with their retirement planning. Financial planner received the strongest preference. However, this was a weak consensus, with only 23 percent of female and 17 percent of male respondents making this selection. By contrast, 55 percent of women and 46 percent of men selected accountant/cpa as the advisor of choice for tax matters. Overall, the responses seem to indicate that business owners are either confused about choosing the right type of advisor or simply not confident in the help that can be garnered from engaging any of these advisors. This result is surprising. One would expect that busy business owners would be eager to delegate these planning to duties to others. This lack of confidence and/or understanding the importance of using the services of a qualified advisor for complex financial issues should be of interest to those in the financial services industry. It suggests that professional advisors might want to rethink the manner in which they position themselves in this market. It also suggests the potential for significant business opportunities for financial planners who successfully develop better approaches to meet the retirement planning needs of business owners. Percent Using Advisors by Area and Type Accountant/CPA Banker Stockbroker Financial Planner Attorney Insurance Agent W M W M W M W M W M W M Retirement Planning 19 12 4 4 7 9 23 17 6 8 6 8 Tax Planning 55 46 2 2 2 3 11 12 8 10 3 4 Source: State Farm Center for Women & Financial Services at The American College Table 1: Women s and Men s Use of Advisors by Area and Type Financial Advisor Gender Last, it is worth noting that the research revealed a strong gender bias relative to a financial advisor s gender. More than 61 percent of women business owners were found to prefer working with a female financial advisor. Conversely, 75 percent of men preferred working with a male financial advisor. Yet industry and government studies (i.e., trade organizations CFP Board, SIFMA, LIMRA, Bureau of Labor Statistics) show that women represent a fractional minority of financial advisors. Currently, only 20 to 33 percent of financial advisors are women. This suggests the industry needs to continue to focus on recruiting and developing more qualified financial professionals who happen to be female, in an effort to capture the rising premium and asset dollars women business owners represent. 2012 The American College, All Rights Reserved. Page 11

Summary & Implications Women business owners represent an important and growing segment in the financial services marketplace. The results of this study suggest that business owners need more education and guidance concerning their retirement needs. Despite high levels of reported concern and involvement, a significant minority (34 percent), have not even estimated how much capital they need for retirement. Further, just one in four owners said they had a formal, written financial plan for managing income and expenses in their golden years. Fewer still had developed a retirement transition plan for their businesses. In light of the average age of respondents (just over 50 years old) and increased risks attendant with business ownership, these are astonishing disconnects. The owner s awareness of retirement planning as a matter of concern should make them open to help. However, their sense of selfability may interfere with attempts to guide them. Studies in behavioral finance may lend insight into the overconfidence of some business owners in their ability to deal with complex calculations like retirement planning. In a recent New York Times article, Daniel Kahneman, emeritus professor of psychology and public affairs at Princeton University and winner of the 2002 Nobel Prize in Economics, presented a useful description of the overconfidence bias as: The confidence we experience as we make a judgment is not a reasoned evaluation of the probability that it is right. Evidence of this overconfidence bias may be revealed in the women business owner study s findings that just over one third of all respondents said, My needs in this [retirement planning] area are complex. Additional support for this hypothesis is revealed in the finding that roughly half of all respondents said they had paid more for the proper amount of attention to retirement planning. Exacerbating the risk of overconfidence bias may be the owners near-constant focus on the here and now with their short-term focus overriding the need and possibility for more strategic thought and planning. As Kahneman goes on to say in the New York Times piece, We are prone to think the world is more regular and predictable than it really is Fast thinking is not prone to doubt. vi On the flip side, of those who may be overconfident, there is also a significant proportion nearly half of all respondents who say they should have paid more attention to strategic retirement and estate planning. These findings suggest these two topic areas may be more compelling than others as discussion starters and as areas of competency development for financial professionals seeking to specialize in serving entrepreneurs. Another aspect of the lack of attention to retirement planning may be the owners happiness with their current situation. According to recent polls, self-employed Americans are the most content with their careers. Because of this contentment, business owners may not be strongly motivated to retire. Financial advisors who specialize in this area will be challenged to educate small business owners on the importance of planning for the future. The question then becomes, who do entrepreneurs turn to when making financial decisions for their business? With the exception of using CPAs/accountants for tax planning, there is little conviction from the owners that they have found the advisor answer to their many financial problems. Despite concerns about financial issues and the use of a variety of financial products, most do not report getting professional assistance. There is evidence that once these business owners select an advisor, they are satisfied with the relationship. Yet, many owners have not consulted with an advisor about retirement planning. Women are more satisfied with a financial advisor relationship that is characterized as consultative, as opposed to transactional. Sixty-one percent prefer working with a female advisor. The challenge in the financial services industry is to find better mechanisms for meeting the needs of these women business owners. A first step may be the increased hiring and cultivation of representatives who recognize the opportunities in servicing this market. These representatives will achieve more success by developing a consultative relationship with women small business owners. There must be a willingness to educate these confident women on the importance of addressing long-term planning issues. Hiring more female representatives may bring the most success to companies interested in servicing this growing market. Page 12 2012 The American College, All Rights Reserved.

Methodology The study is based on the responses of a survey that included 835 women and 420 men business owners. Respondents were qualified to participate based on targeted characteristics including business ownership (business owners were defined as individuals who own 50 percent or more of the business and who make or share in financial and other business decisions), business revenue ($50,000 per year or more) and business tenure (in continuous operation for three or more years). The subjects were obtained by a random sample of respondents from reliable commercial research panel sources. Like much commercial research (excluding public opinion polling), statistics quoted from this study represent statistical conclusions about the available population, not the universe of all respondents who would satisfy the qualification criteria if the universe could be known. Of the 1,255 completed interviews, 835 were with women and 420 were with men; the margin of error relative to the available population for these two subgroups is ±3.3 percentage points for women and ±4.7 percentage points for men. Works Cited i The Economic Impact of Women-Owned Businesses in the United States, Center for Women s Business Research, October, 2009. ii 2011 Annual Report, National Women s Business Council. iii The Economic Impact of Women-Owned Businesses in the United States, http://www. womensbusinessresearchcenter.org/research/keyfacts, October 2009. iv Employee Benefits in the United States, U.S. Department of Labor, 2008. v R.G. McGrath, Falling forward: real options reasoning and entrepreneurial failure, Academy of Management Review (1999): 13-30. vi Daniel Kahneman, Don t Blink! The Hazards of Overconfidence, New York Times, October 19, 2009. 2012 The American College, All Rights Reserved. Page 13