Why entrepreneurial wealth creates unique risks
Entrepreneurs face a unique financial landscape. They usually have a less diversified financial starting point because a large portion of their net worth, future income, and personal financial risk is tied to one asset: their business. This is very different from salaried employees, whose income and wealth streams are usually more stable and diversified.
- Recognise that comfort level with investment risk may not match capacity
This concentrated exposure means an entrepreneur’s investment strategy may need to look very different from that of salaried investors. While entrepreneurs may feel emotionally comfortable with risk, their capacity for further loss can be materially lower – an important distinction.
- Build a portfolio that counterbalances business risk
A robust approach begins with diversification. Since the business already acts as a large, sector‑specific, illiquid equity position, the external investment portfolio should act as a stabiliser rather than amplify exposure to the same risks. Key strategies to achieve this could include: global equity diversification to reduce reliance on a single sector or geography; defensive assets, such as government bonds and shorter‑duration fixed income, and investment in assets with low correlation to the entrepreneur’s own industry.
- Stress‑test financial resilience
Entrepreneurs should examine how a downturn in their business would affect their entire financial picture, ensure external assets act as a buffer rather than amplifying risk and review scenario‑analysis regularly. A chartered financial planner, such as JM Finn’s can use modelling tools to stress test different scenarios.
- Implement liquidity planning: a critical component for entrepreneurs
Cashflow for entrepreneurs can be unpredictable – tax payments, expansion rounds, or unexpected operational demands may arise, creating liquidity challenges. Because business wealth is typically illiquid, maintaining cashflow outside the company becomes essential to ensures financial stability during periods of business turbulence. Practical tools include larger emergency reserves, keeping a portion of wealth in readily sellable assets and keeping investment portfolios aligned with shorter‑term liquidity requirements than those of salaried employees.
- Manage concentration risk over time
Reducing reliance on a single asset can be challenging when that asset is the entrepreneur’s life’s work. Nonetheless, there are ways to mitigate concentration risk gradually, including partial derisking, such as staged equity sales, diversification into new asset classes and tax‑efficient extraction strategies as the business matures or approaches an exit event. These steps support long‑term resilience without forcing abrupt shifts in ownership.
- Align investments with personal life goals
Entrepreneurs often overlook the importance of separating business risk from personal priorities. Creating distinct portfolios for retirement, education costs or long‑term family security helps ensure these goals are met regardless of business performance. These portfolios should use risk profiles distinct from the business – and chosen risk strategies must reflect personal objectives and capacity for loss.
- Consider using a discretionary wealth manager
Entrepreneurs’ financial lives are inherently complex – and often time poor. Keeping track of market movements is a full-time job for our investment professionals, so opting to outsource investment decision-making to a discretionary wealth manager such as JM Finn could often be the best approach. The combination of concentration risk, illiquidity and heightened volatility requires a personalised, expert-led approach for business owners. We combine investment expertise with an award-winning financial planning service to devise a comprehensive plan to help you manage liquidity planning and long‑term wealth structuring alongside an investment portfolio that is suited to both your attitude to and capacity to take investment risk.
Whatever stage you are at in your investment journey as an entrepreneur, JM Finn can help - contact us to learn more.
The information provided in this article is of a general nature and is not a substitute for specific advice with regard to your own circumstances. You are recommended to obtain specific advice from a qualified professional before you take any action or refrain from action. The value of securities and the income from them can fall as well as rise. Past performance should not be seen as an indicator of future returns. All views expressed are those of the author and should not be considered a recommendation or solicitation to buy or sell any products or securities.
