The Future is Now
Why you need to get a financial advisor today
Have you ever taken the time to think about how your life is going to be in the next 10 years? What about in 20 years? If your answer is no, it might be time for you to start considering what your future plans and goals are. In this week’s article, we want to tell you about the importance of saving and the Wealth Management industry.
We understand that millennials are the DIY (do-it-yourself) generation, but for some things in life, YouTube is just not an adequate partner. According to a report by Deloitte*, the majority of millennials claim they have complete control over their wealth, even though they lack financial knowledge when compared to older generations. We were one of the most affected generations by the financial crisis. Hence, we do not trust the entities (and the people) that were involved in this crisis to manage our money. However, here’s the interesting part: 84% of millennials seek financial advice, which highlights the fact that we need somebody on our side to guide us in this process.
When we think about managing our wealth, we should do it in terms of net worth. You can figure this out by taking what you own (assets) minus what you owe (liabilities). Managing your own money can be stressful, time-consuming, and it might take a while before you get a handle of things. It can become a burden. Some people cannot even figure out where to start — but don’t worry, we are here to help you.
Wealth management involves the collaboration of many experts, that work towards the same common goal: managing all aspects of one’s personal finance. This can include tax planning, estate and trust, insurance, retirement, investing, cash, risk management, etc. Almost all of the well-known financial institutions have a Wealth Management division: Wells Fargo, First Republic Bank, Charles Schwab, Fidelity, Merrill Lynch, and others among them. Also, there are independent Wealth Management firms that would have their own approach. These are often referred to as Registered Investment Advisors, which would provide a holistic approach, meaning they would cover all areas mentioned above (not directly but in tandem with the other experts involved). Nonetheless, there are others that would choose to provide insights of only one or two of these subjects.
For the purpose of this article, we will focus only on the financial planning and investment sides of Wealth Management. These two go hand in hand, as the advisor must develop your long-term financial plan before building your personal investment portfolio. Think of yourself with gray hair (or bald for that matter). That’s what we mean by long-term.
Always remember that a dollar today is worth more than a dollar tomorrow. Thus, the sooner you start, the better. Just imagine that, hypothetically, you are 25 now and you want to have a million dollars by the time you are 60. That gives you a time horizon of 35 years. For you to accomplish your goal of a million dollars, you would have to save close to $30K per year. Following that thought, if you start to save by the time you are 40 (reducing your time horizon to 20 years), you would have to save almost $50K per year. These figures are assuming you are not investing the money to get some interest in return. Now, let’s say that instead of putting that money in a bank account where it’s earning nothing, you invest it. The graph above represents the growth of your $30K annual savings if 1) you do nothing, 2) you invest it in fixed income (which generally has the lowest returns), and 3) you invest it in an index that replicates the S&P 500. As illustrated in the graph, by doing nothing you would achieve your goal of $1 million, by investing in fixed income and earning a modest return you could have close to $2 million, and by investing in an index like the S&P 500 you could reach $10 million over the course of 35 years (based on historic returns of the index).
The earlier we start saving, the faster we can make it a habit and develop a strategic plan. What this would entail is making sure you set up a list of not only financial goals, but also life goals. This is where the process with your financial advisor would begin.
The first thing a wealth manager would do is to get to know you. What are your goals? What are your needs? How much do you earn? What do you own? When would you like to retire? Are you married? Do you have or plan to have kids? Have you taken any loans recently or are you planning to? Do you have a mortgage? So on and so forth. After analyzing your situation, a financial planner would come up with your long-term plan, which would include a very important measure for your investment strategy: risk. One’s assessment for risk should be based on risk capacity and risk tolerance. For example, a 20-year-old would have the capacity to take on more risk than a 50-year-old, however, he might not be able to tolerate it because he is a risk-averse person. Based on your risk assessment, a financial advisor would develop a portfolio strategy in line with your needs. What we mean by that is that he would balance the allocation between equity and fixed income. For instance, an aggressive strategy would be distributed 80/20 between equity and fixed income, while a conservative portfolio would be 40/60 or 20/80 (with more weight on fixed income than equity to lower risk). Throughout time, your financial advisor would be monitoring how has your portfolio performed. If necessary, he would re-balance the weights so they remain in line with your strategy.
Guiding your thinking from what you hear or read on the news from financial professionals is not always the best idea. Oftentimes, these people want to convince us that by following their trading advice we’ll get rich quickly. Instead of trying to outsmart the market as most people do, and lose in the process, you could start planning early and focus on investing in a sustainable way. Wealth Management is an industry that is here to help you, and make your life easier. We know this topic is stressful and while nobody likes to think about this kind of thing now, it is still very important to talk about. Perhaps, this is why it’s a good reason to have somebody on our side to help us go through this exhausting process.
The way millennials do things might be different to other generations; however, the way in which they manage their wealth and think about the future might not be something that we would like to change. There is no exact science that tells us how to choose the best financial advisor, it merely depends on what each person is looking for and what the others are offering. Just make sure to do the proper due diligence before making any major decisions.
If you liked our article, please like and share — help us get millennials to make wise investments and get interested in the stock market. See you next week!
Disclaimer: This article is based purely in our own knowledge, experience, and research. It should not be taken as an expert’s advice for stock picking.
*Here’s the link to the report by Deloitte if you would like to get more insights about Millennials and Wealth Management: https://www2.deloitte.com/content/dam/Deloitte/lu/Documents/financial-services/lu-millennials-wealth-management-trends-challenges-new-clientele-0106205.pdf
