Updated Thursday, July 31, 2014 as of 11:47 PM ET
Practice - Practice Management
They’d Rather Spend than Save, But Gen Y Is Your Future
by: Teck Lim
Saturday, December 14, 2013
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This story was originally published on May 6, 2013. It is part of 12 Days of Wealth Management: The Year in Review.

They’ve been called egotistic, impatient and self-entitled -- and they have a notoriously bad reputation when it comes to saving -- but advisors want them.

While Generation Y controls a mere fraction of the country’s total net worth, its members are widely considered the future of financial planning.  As a result, advisors are paying particular attention these young adults.

“They may not have much now, but you’re going to see a transfer of wealth,” says Jim Dario, managing director of product management at TD Ameritrade Institutional. “It’s going to move from $2 trillion today to $28 trillion in eight years.”

To capture some of that growing wealth, advisors from around the country are beginning to reshape their practices to accommodate and attract this rising generation.  

BEHAVIORAL FINANCE

Nick Pirnack, 27, joined Denver-based LotusGroup Advisors as a private client advisor in 2011 – and soon observed that the industry needed to change the way it dealt with younger clients.

“When working with Gen Y clients specifically, you need to approach it from a financial standpoint and a behavioral one,” says Pirnack. “The financials give the numbers and tell the story of where a client needs to be, but you also need to build behaviors that are to their financial advantage.”

Pirnack divides his clients into two categories: “utilitarians,” who know how to use money in a productive way, and a group he calls “Pataguccis,”after the designer brands -- clients who are harder to work with because of their expensive spending habits.

“The utilitarians are easy, because they are better at storing away their money,” says Pirnack. “But for Pataguccis, retirement is not even on their minds, and they don’t respect money and tend to squander it.”

That’s actually a fairly common Gen Y attitude. A recent survey found that 31% of Gen Y doesn’t prioritize retirement savings. In fact, 41% of the 720 respondents between the age of 20 and 31 said their top reason for saving was for vacation and travel, according to LIMRA, a research, consulting and professional development organization.

But it’s not a helpful attitude for advisors trying to help young clients build wealth. “It’s not that they don’t care about their future,” says Pirnack. “For the Pataguccis, lifestyle is their No. 1 concern. They won’t mind spending their money on trips every few months, and are less inclined to save for the longer term.”

DEVELOPING SAVING HABITS

Pirnack says he nudges clients toward more responsible financial behavior by meticulously combing through their cash flow.

“If you have someone who loves drinking coffee every day, you don’t want to cut that out,” says Pirnack. “Try to figure out which areas they are spending on that they enjoy the least, and cut from there -- so that they can save for their daily lifestyle and the future.”

That means less focus on investment returns, and more on helping a client form good financial habits.

“The extra return I might get on their net assets is so low that it’s not worth it when compared to changing their behaviors,” says Pirnack. “If I change their behavior now and get them to save to spend, they are more likely to realize better real life returns on the behavioral change than the market will be able to earn for them.”

SELECTIVITY

Other firms don’t even bother with the big spenders, prescreening potential Gen Y clients for financial smarts. “We’re looking for good savers,” says Jamie Malone, financial strategist at Joyce Payne Partners in Richmond, Va. “It’s something that Gen Y needs to understand, so that we have a good fit on both sides.”

Joyce Payne builds its books with clients who tend to be financially prudent and are willing to develop a long-term view, its advisors say.

“Gen Y clients often don’t appreciate how long their time horizon is on the investment side,” says founder Michael Joyce. “Their risk tolerance is colored by what the market has done in the last several years.”

Joyce says he has hired a team of younger advisors to handle their Gen Y counterparts -- but he balks at the idea of changing the firm’s fundamental approach.

“We may make certain changes to serve our clientele well, but we’re not going to change our business based on where the money is,” Joyce says. “We’re making sure that we stick with our knitting, be good at what we do and segment the clients that we want within Gen Y.”

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