As the average age of financial planning clients continues to climb, there has been increasing talk in the industry about how advisors can attract and profitably serve younger generations.
But talk is one thing and action is another entirely. Traditional pricing structures constrain many firms from accessing these younger clients, who just aren’t wealthy enough to serve under the conventional AUM model.
And there’s simply no denying the fact that the AUM model, however constricting, reigns supreme.
Today, RIAs are the fastest-growing industry channel and even among the top-50 broker-dealers, the majority of revenue now comes from AUM fees and not commissions. And while advisors have largely found success operating under the AUM model, the fundamental challenge is that only roughly 7% of US households have enough liquid assets—at least $100,000—to invest in a liquid account that can be transferred to an advisor and are willing to delegate to an advisor.
This leaves a large portion of the population—and especially younger generations—out in the cold without access to financial planning. More concerning still, the younger generations that are being largely ignored by most financial advisors need sound financial advice quite possibly more than the generations before them. And yet a report from TD Ameritrade Institutional shows that 23% of registered investment advisers don't have a strategy in place for soliciting younger clients.
Advisors admittedly have to dig a little deeper to see the appeal of serving younger generations of clients, who often come burdened with debt and typically have nothing to invest. Sure, that can be a tough sell.
They do, however, have income—and you can charge based on that.
In fact, there is considerable opportunity for profitability in charging financial planning fees based on income and not assets; advisors who were once limited to 7% of the marketplace under a traditional AUM model now have the opportunity to serve the remaining 93% of eligible households who would not otherwise have access to financial advice.
The opportunity is even greater when you consider the fact that younger clients want financial advice and are willing to pay for it. A study from The Guardian Life Insurance Company of America shows that 83% of millennials value an advisor they trust and recognize that advisor as critical to their financial confidence.
Younger clients recognize the power solid financial advice has to increase their income and net worth to achieve their goals. They just need the opportunity to access that advice by being charged appropriately for it, which means charging them not based on the assets they don’t yet (and might never) have, but rather on the income they do have to pay for advice.
Before we get too far ahead of ourselves, let’s consider what separates these younger clients—namely millennials—from the generations that come before them.
Who are the Millennials and What Makes Them Unique?
Millennials, aka "Generation Y", represent anyone born between 1981 and 1996 (ages 23 to 38 in 2019). At over 75 million people, this generation is America's largest and comprises nearly 25% of the population.
Millennials face financial problems largely unique to their generation. Some people even believe millennials are facing the scariest financial future of any generation.
Why? Let’s dig in.
#1. Crippling Student Debt
The average millennial graduated with $30K in student loan debt. 63% of millennials have over $10K in student loans (and 75% carry some form of loan debt) and have taken on at least 300% more student loan debt than their parents.
#2. An Uncertain Financial Future
More than half of millennials don't have a retirement account. And based on current trends, it's predicted that many millennials won't be able to retire until they're 75. In 40 years (around the time millennials will be retiring or in retirement), $1 million in savings is expected to have the same spending power as $306,000 today.
#3. Increased Cost of Living
In 2017, the average millennial made just over $35K, which is roughly 20% less than baby boomers made at the same age (when adjusted for inflation). On top of that, rent and home prices have increased faster than incomes; millennials can expect to pay 39% more than baby boomers who bought their first home in the 1980s.
#4. Savings/Spending Dichotomy
Like other generations, the spending habits of millennials tend to reflect their priorities. Unlike other generations, they have largely different priorities, namely convenience, a focus on experience rather than things, and a delayed start with respect to owning a home and starting a family.
Millennials tend to be bigger spenders than the generations before them, especially when it comes to dining and extras, like the latest and greatest technology. According to a report from Charles Schwab, millennials spend more than other generations on comforts and conveniences like expensive coffee and eating out. In the short-term, they spend more than freely than older generations such as baby boomers, and as a result, they have less money to contribute to savings; more than half of millennials have less than $5K in their savings account.
How the Subscription Model Can Help
Between astronomical student loan debt, the ever-increasing cost of living, and lower salaries, the millennial generation clearly needs financial advisors—good ones they can actually afford.
And yet only 30% of financial advisors are looking for clients under 40.
To clarify, the largest generation that not only needs but actually wants financial advice is being largely ignored by financial professionals.
This is where you come in. With the right model, you can successfully access this largely untapped market.
There are two keys to an effective business model for the millennial market:
#1. It should be recurring in nature to encourage an ongoing versus transactional relationship.
#2. It must be low cost enough to be affordable; ideally the fee should be broken into bite-sized, "easy to swallow" payments.
If only there were a model that embraced these principles…oh wait, there is. It’s called the subscription model.
Financial advisors have the opportunity to experience considerable success by shifting away from the more traditional AUM model to the more modern subscription-based model, expanding their reach to serve a wider range of clients the AUM model simply can’t access.
The feasibility of a subscription-based model for financial planning should come as no surprise in a world where consumers increasingly prefer to pay for products and services of all types on an ongoing basis. Millennials are used to paying subscription fees (thanks Netflix!), so paying monthly for financial planning just makes sense to them.
Besides being charged differently for financial planning, what else do millennial clients need from their financial advisors?
What Millennials Want
#1. Comprehensive Financial Planning
Younger clients don't want a stripped-down version of financial planning. They're looking for "real financial planning." They want help defining their great life—that is, what they want to accomplish with their life—and they want an advisor who will help them align their finances to support that vision.
#2. A Focus on Income and Expenses
Most millennial clients face major financial decisions that heavily impact their household income—getting their first "real" job, getting married, buying their first home, having children, etc...
Planning for millennial clients should therefore focus more on the "cash flow statement" of their household. Most of their financial decisions are about where and how to allocate cash flows of their household income—and how to grow that income.
#3. A Tech-Savvy Advisor
There's no denying it—millennials love their technology. According to the same study from The Guardian Life Insurance Company of America cited earlier, millennials heavily rely on online financial tools, with 35% saying they exclusively use online tools for financial planning.
If you want to connect with Gen Y, then you need to speak their language. They won't be looking for you in the yellow pages; they'll be searching online, which means you better be there. Build a strong online presence through an optimized website and social channels (simply having a profile or a handle won’t cut it—be sure to actively engage).
And when it comes to financial planning itself, embrace the technologies that will make both your life and your clients' lives easier.
#4. An Advisor with a Focus
And by focus, I mean niche. And no, “millennials” doesn’t count as a niche considering they make up nearly 25% of the US population.
Narrow in on a specific group within the millennial segment of the population and tailor your services to the needs of that niche.
Some examples of millennial niches include career-focused with earning/income potential, recent graduates, and debt-ridden with emerging wealth.
#5. Financial Literacy
Studies have shown that millennials tend to lack financial literacy with respect to their current finances, savings, and debts. Just how bad is it? Research suggests only 24% of millennials are financially literate. Ouch.
Seek to understand their needs, educate them about their financial well-being, and empower them to make informed financial decisions.
Millennials value education and trustworthy relationships. They don't want to blindly relinquish their control over their finances. They want to learn their financial needs for themselves and offer their input.
Pave the way for open, honest communication and create a space where your millennial clients feel comfortable coming to you with questions and concerns.
A New Way Forward
The current statistics on the financial health of younger generations are both staggering and disheartening. Nearly 80% of early-adult households—comprised of nearly 75 million people—have some sort of debt; those 18 to 34 years old hold a total of about $2 trillion in debt, much of which is student debt.
College graduates with larger loan payments may not only reduce their contributions to a 401(k) plan, but not participate at all, potentially raising their financial vulnerability over time. Young adults with debt contribute only about half the amount to their 401(k) accounts as those without debt and one in four who have managed to start saving have pulled from their accounts to pay off debt. Debt has also restricted these individuals' potential to become homeowners or start their own families.
Yet these younger individuals with their crippling debt and uncertain financial future lack the financial resources to qualify for traditional wealth planning. They are therefore generally disadvantaged in their efforts to achieve lifelong financial independence and attain their financial goals.
Asset minimums set forth by many financial planning and wealth management firms pose a hurdle that many younger adults cannot overcome, barring them from the financial advice and assistance that more established, wealthier individuals can acquire.
The subscription model addresses a growing economic need by giving the next generations of young Americans unprecedented accessibility to a vital tool in their struggle to gain traction in their financial lives and achieve their dreams of financial stability and success.
About the Author
Alan Moore, MS, CFP® is the co-founder of the XY Planning Network, a support network for advisors looking to serve next generation clients. He is also the CEO of AdvicePay, the first and only compliant payment processor for financial advisors. He is passionate about helping financial planners start and grow their own fee-only firms to serve Gen X & Gen Y clients largely ignored by traditional firms. Alan has been recognized by Investment News as a top “40 Under 40″ in financial planning, by Wealth Management as one of a “The 10 to Watch in 2015″, and was the first recipient of the NAPFA Young Professional award in 2015. Alan frequently speaks on topics related to technology, marketing, and business coaching, and has been quoted in publications including The Wall Street Journal, Forbes and The New York Times. He is also the host of XYPN Radio, one of the largest podcasts for independent financial advisors. He currently lives in Bozeman, MT so he can hit the slopes on powder days.
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