Matt and Nick are the top producers for a mid-size insurance agency. Matt has been a wealth management client for several years and he recently introduced Nick to BDF. Both Matt and Nick are in their late 40’s, married with three children and live in the same town. They both have similar size books of business and both started at the agency in the same year. On the surface Matt and Nick appear to be in similar financial shape; both successful producers with similar earnings and lifestyles.
However, when we pulled back the curtain on their overall wealth Matt has accumulated a much higher degree of wealth than Nick. Matt is on pace to retire at age 55 while Nick is beginning to stress out about his time horizon for retirement. The drivers of their wealth difference can be clearly identified to the following attributes:
1. Accountable to Goals – Each year Matt and his wife Jen sit down and list out their goals for the year. They then meet quarterly to assess their progress. Their goals are around family, finances, and fitness. They hold each other accountable and utilize BDF to help them stay on track to their financial plan.
On the other hand, Nick and his wife Tanya have little communication around family finances and have never sat down to list out their goals let alone do a financial plan. They do like to take a nice trip every year away from their children, but money is spent not discussed.
2. Discipline Cash Flow –When discussing cash flow Nick was excited to share pictures of his newly purchased Tesla. Nick purchases a car every couple of years and likes to reward himself with a new car when he hits a new commission record. In 2015 he took his family on a trip to Europe to celebrate another record-breaking year. Nick and Tanya are spending away all their earnings.
With goals in place Matt and Jen know exactly how much they plan on saving for college, retirement, and fun each year and any excess earnings are put towards long term savings goals. Matt drives a nice car but prefers to purchase a new one every 7 to 10 years. When Matt hits his sales goal, he celebrates with a nice family weekend getaway to Wisconsin.
3. Company Stock Purchase Strategy – Both Matt and Nick are rewarded equity once the size of their book reaches certain milestones. Their agency grants them stock for which they are responsible for the income tax associated with the grants. Nick is consistently short on cash and prefers to use shares of stock to pay the taxes on the equity grants thus reducing his number of shares held. Matt truly understands the value of his company stock and he uses excess cash to pay the tax liability thus maximizing his holding of company stock. The agency’s value has appreciated significantly over the past decade and this stark difference in paying for taxes on the equity grant over the past decade has resulted in Matt having almost twice as much in company stock as Nick. Ownership creates wealth and Matt’s disciplined lifestyle has afforded him with the ability to capitalize on the Agency’s growth.
4. Professional Delegation –Matt focuses his time on energy on what he is good at – selling insurance. He delegates everything else to other professionals. Matt has built an investment portfolio that is integrated with his financial plan. He has a diversified portfolio of stocks and bonds that is very liquid and allocated to the appropriate level of risk.
Nick is a gambler. He likes to manage his own investments. He invests in companies that are run by friends and he especially likes to invest in technology startups. Unfortunately, he has a habit of picking more losers than winners. His tax return tells a story of losses and illiquid investments that have very little hope for future appreciation.
Matt and Nick have been on a parallel track for the first twenty years of their careers. Because of Matt’s disciplined and focused lifestyle, the next twenty years of their lives appear to be going in opposite directions. Fortunately for Nick, his earnings and company stock will allow him to right his financial ship if he can better emulate Matt’s disciplined approach to wealth creation.
BDF’s Commercial Insurance Practice Group understands equity compensation and the valuation of business and uses this knowledge to help insurance professionals develop financial plans while minimizing tax bills. Whether working with a producer or business owner, we focus on one’s individual goals, family involvement and living a full life.
Jim King, CPA, CFP® is an owner and wealth manager at BDF where he leads the Commercial Insurance Professionals Practice Group. He uses his understanding of the insurance industry to help insurance professionals maximize their prime earning years, develop a discipline around saving those earnings and put a plan in place to best utilize assets. His focus on creating financial blueprints for his clients has earned him recognition as a “Five Star Wealth Manager” by Chicago Magazine.