Generation Z Needs a new Model for Financial Advice
“Those who need help the most are receiving it the least and those who need help the least are receiving it the most”
The Financial Service Industry has a Youth Problem
To be more accurate, young people have a financial service problem, in that they aren’t receiving the financial services they need.
The traditional model for how a financial advisor gets paid is determined by the amount of “Assets Under Management” (AUM). Under this model, financial advisors don’t get paid directly by their clients. Instead, they take a percentage of the investments they manage on behalf of their clients. It’s not uncommon for advisors to charge 1%-2% of the value of your investments each year.
Say you had $500,000 in retirement savings that a financial advisor is managing on your behalf. If the advisor charges a 2% annual fee, they would make $10,000 each year.
Some advisors provide a discounted fee as you cross certain thresholds for Assets Under Management. Some common thresholds where discounts apply include;
- $1 million
- $2.5 million
- $5 million
Using the Assets Under Management business model, there is no financial incentive for a financial advisor to even speak with someone in their 20’s.
Young people simply don’t have enough money to invest for the advisor to make any money. If you are 23 years old and have $5,000 to invest at a 2% annual fee the advisor would only make $100 per year from this young client. Compare that to the $10,000 they could make from a client with $500,000 to invest and it’s easy to understand why the financial services industry is shunning the younger generation.
The Sad Irony
As financial planner Micheal Kitces points out, the irony is that the young people being shunned need financial advice more than the older generations who advisors are competing to serve.
Think of all the major financial changes and milestones that take place before retirement age.
- Moving out of mom and dad’s house
- Managing a credit card for the first time
- Managing student loan debt
- Beginning and building your career
- Maximizing benefits provided by an employer, including making the most of a 401(k)
- Filing taxes
- Buying your first life insurance policy
- Planning for current and future healthcare costs
- Getting married
- Buying the first house (how much house do I need?)
- Having kids
- Saving for retirement
- Switching jobs or careers
- Starting your own business
These life events present difficult choices that might impact a person’s finances for decades. Unless you have enough money for an advisor to manage, you might be making them on your own.
As Kitces points out, the major financial planning considerations for the 60 plus crowd include living off your investments, the death of a spouse and estate planning. While these issues are no less complex, there are fewer financial choices to make once you reach retirement age.
Those who need help the most are receiving it the least and those who need help the least are receiving it the most.
Young Adults Need a new Financial Planning Model
There is a growing number of financial planners moving away from the “Assets Under Management” model and moving towards a “fee-only” or “fee or service” model. This involves charging a set fee that is charged per hour, per job or on a monthly subscription fee.
If this model became standard practice in the financial services industry it would make professional financial advice accessible to the young people who need it most.
With two caveats.
1. The fees must be affordable to younger clients
2. The advice provided is tailored to the individual client's needs.
The first point is obvious. If the fees are too high, young people just starting out in their career won’t be able to afford it.
The second point, however, is critical, the advice provided must reflect the greatest needs of the clients. As simple, low-cost index ETF’s continue to grow in popularity more and more people are comfortable with being a DIY investor.
There will always be some that are willing to pay for professional help managing their investments but as our life and careers get more complicated, people need help managing all areas of their financial lives.
In a previous article, I discussed how financial stress is impacting our mental health. In that article, I reference a report that outlines 8 personal finance topics people would be willing to pay for professional help with.
- Knowing if they’re paid fairly
- Maximizing their salary at their current job
- Planning career moves that earn them more money
- Monthly budgeting, right-sizing their debt
- Planning affordable vacations
- Dealing with the spending pressures that status anxiety exerts
- Having someone to talk to holistically about their financial life
These are all things that keep many people up at night.
How great would it be to have someone to talk to about how you can ask your boss for a raise. What if someone was willing to sit down with you and teach you how to use travel rewards to travel for less money. Wouldn’t it be great to have someone to talk to about what is stressing you out in your financial life?
Every industry in the economy is experiencing rapid change as we adapt to new technology and consumer preferences. It’s time for the financial services industry to move away from the “Assets Under Management” model and be done with the culture of “selling” and focus exclusively on helping people navigate their financial lives.
This article is for informational purposes only, it should not be considered Financial or Legal Advice. Consult a financial professional before making any major financial decisions.