Teach Money Smarts

Help your associates gain long-term financial stability.

January 1, 2008

Your sales associates are the key to your long-term financial success. So it makes sense to pass on some of your financial wisdom to them. After all, you wouldn’t be where you are today without having mastered your own financial future.

So, how can you help them do likewise?

One way is to teach them yourself by passing along your hard-won knowledge, leveraging the credibility you have with them as someone who’s made it in the business.

Or you can set up a series of programs that give your associates a chance to hear from, and ask questions of, financial planning professionals who can bring the latest insights into managing money.

Whichever way you go, there are four principal topics your associates must master to position themselves for a solid financial future: managing their cash, planning against risk, retiring, and passing along their book of business to a partner.

Here are a few thoughts on each of them, with ideas on what role you can play to help make sure these ideas make it into your associates’ planning.

Cash Flow

One of the most difficult aspects of any business is managing cash, so for sales associates whose income is characterized by its unpredictability, cash management is critically important.

One way to get a handle on cash flow is to establish two budgets, one for business and one for the home. Getting these into place doesn’t mean counting every penny, but your associates need to be realistic about the amount they need each month to spend on themselves and their families, on the one hand, and their businesses on the other.

You can’t determine these figures for them, but you can help them see what is and isn’t realistic on the business side. What’s more, you can supply them with hard data, drawn directly from your brokerage records and the economic statistics you use in planning your budget.

Once budgets are established, associates should make a commitment to live within those budgets. Your role is to help them stay disciplined, especially during the lean months.

Of course, circumstances change, so your associates should think of their budgets as works in progress. They should revise them annually to reflect their cost-of-living changes. And since you’ve already compiled data on inflation and other aspects of the economy for your company reports, you can supply this information to them, as well as the hard-dollar costs on their business expenses, such as their E&O insurance premiums.

The two budgets — business and personal — must be looked at in tandem, because together they show how much your associates need each month to run their businesses and maintain their households. Once those pieces are in place, your associates’ next step is to set up three accounts:

  1. Income savings. This is where your associates deposit their income — not some of it, but all of it. A good goal for them is to build this account to a level equal to three to six months of total (business and personal) expenses. About once a month, they’ll be transferring money out of this account into the other two accounts.
  2. Business checking. This is for paying their business-related expenses each month.
  3. Personal checking. This is for running their household.

Discipline and order are the reasons for the separate accounts. It’s imperative that your associates start thinking about what they too often dismiss as an arbitrary process. Many sales associates spend whatever they make whenever they make it. That might be OK during flush times, but as today’s slowdown shows, business is ever-changing. Imposing order on the chaos is their first step toward running their practice as a business and not as a job.

Risk Management

Every business owner must manage risk. Your associates are no different, and already they’re paying their share of your brokerage’s E&O insurance. But is that enough? Do they also have property-casualty coverage (protection that covers their auto and home against fire, flood, or earthquakes)?

That seems like a lot for a typical sales associate, but given how much is riding on their ability to continue to generate sales, why not help them cover all of their bases by recommending some form of umbrella coverage?

This type of coverage is so named because it sits above their auto and homeowner’s insurance and acts like an umbrella. For example, it might kick in when a liability claim due to a collision exceeds the limits of the auto insurance or if a tree on their property is blown over by a heavy wind and damages a neighbor’s property.

Associates can go one step further by setting up their practice as a separate business entity. A corporation or limited liability company can limit their personal liability for their business actions. It might even make it easier to take advantage of tax-deductible benefits. The financial planning specialists you bring in to conduct seminars for your associates can point them in the right direction for setting up these legal entities.

Other considerations: life and disability insurance.

Life insurance is a better tool for providing benefits to family members after a death than many types of savings and investments because, unlike those other assets, the benefits are tax-free and creditor-protected and cost only pennies on the dollar. The proceeds can provide the cash to eliminate household debt and replace lost income to the family. At the same time, many policies provide a tax-deferred cash reserve that can double as an emergency fund.

Disability insurance is equally important, because it serves as your associates’ version of business-interruption coverage, something many companies maintain to replace lost income if their business is shut down due to a catastrophic loss.

Disability policies usually have a 90-day waiting period, which is why it’s important for your associates to build up their income account with at least enough funds to cover business and personal expenses for three months.

The maximum amount of coverage is usually 60 percent to 70 percent of an associate’s average monthly income, and the benefits are usually income-tax free at time of disability. You can help here by reporting to your associates their exact gross commission income over the previous two years, enabling them to calculate their monthly average income and determine the amount of benefits they’re entitled to.


As independent business people, your associates will find that the most effective way to save for retirement is to set up their own qualified plan. There are three main options:

  • SEP IRA. The Simplified Employee Pension plan is really a giant IRA. That means you can exceed the relatively low IRA deduction limits. For 2007, the maximum contribution is the lesser of 25 percent of net income or $45,000. However, you still get the ease of an IRA account with low fees and no annual IRS filings.
  • 401(k). Even a sole proprietorship can start a 401(k) plan, and in some cases your associates can enjoy more flexible contribution rules than with a SEP. For example, if an associate’s net income is $50,000, the maximum SEP contribution is $7,500. A 401(k) plan will allow for a maximum of $23,000. If the associate is aged 50 or over, the maximum is $28,000. There are some costs to set up and maintain a 401(k), but these are more than offset by the tax savings.
  • Defined benefit. This is a great plan for associates aged 45 or over and who want to put away large amounts for retirement. The contributions are not limited to the SEP’s 25 percent or $45,000. Instead, the amount is calculated by an actuary based on certain assumptions and benefit formulas. In many cases, the contributions can exceed half of net income. It’s a way for older associates to catch up on the retirement contributions they didn’t make when they were younger. These plans are the most expensive to maintain, but they can provide the highest contributions.

All qualified retirement plans provide the same tax advantages to your associates: tax deductions and tax-deferred growth which allows tax-free growth until funds are withdrawn.

While many younger associates might not be thinking about retirement, they can benefit the most from the compound growth of a retirement plan. An example will show you why: A 35-year-old who saves $10,000 a year in a retirement plan and is able to earn 8 percent per-year growth will have $1,132,832 by age 65. Assuming the same contribution and growth, a 50-year-old will accumulate only $271,521. The moral is that the sooner you get started, the better. As the broker, your marching orders are clear: Get the word out to your younger associates.


This is often thought of as a type of planning for larger companies, but even a sole proprietor can benefit from thinking about an exit plan. Most associates accumulate years of market knowledge, business intelligence, and contacts that can be useful to someone just getting started. At the same time, a younger associate can provide energy and fresh ideas. If all this is blended together into a mentoring relationship, each associate can benefit.

Capitalizing on the synergy of this relationship is the foundation of every succession plan. It enables senior associates to get full value for their experience and might even help them remain productive much longer than they would on their own.

As the broker, you’re well-positioned to help set up these mentoring relationships, and you can help your associates even more by sharing with them models that have worked in past relationships.

Be the Bridge

Your associates shouldn’t have to reinvent the wheel every time one of them wants to plan for his or her future. You’ve been there and done that. What’s more, you know what’s worked in the past with other associates. Helping them with this process demonstrates the value you add to the relationship.

Be the bridge that can help them by making it clear how important early planning is, sharing data about the brokerage and the economy that they’ll need to factor into their budget, putting them in touch with financial planning pros who can walk them through insurance and retirement options and help them decide whether to create a separate business entity, and bringing them together with potential partners to create a succession plan.

Bill Sornstein provides succession planning and financial planning services through two companies, Succession Strategies and Tri-Circle Financial & Insurance Services, both in Santa Ana, Calif. He can be reached at 714-560-9022.

Rachel Owens provides succession planning and financial planning services through two companies, Succession Strategies and Tri-Circle Financial & Insurance Services, both in Santa Ana, Calif. She can be reached at 714-560-9022.