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Is This the Gateway to Millennial Clients — Finally?

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How do you build a practice around millenials? One of the keys is selling them insurance products, according to planner Mark Avallone.

The founder of Potomac Wealth Advisors in Washington, D.C., Avallone estimates that as many as one-third of his new clients are in their 20s and early 30s. These young people, he says, desperately need a way to protect their lives, incomes and assets.

That makes selling insurance products a natural fit. But there are other advantages as well. Charging young, relatively poor clients flat fees for planning services can strike them as exorbitant, he says. And few of his young clients have built up sufficient portfolios to justify a fee structure that’s based on AUM. So the commissions that he earns through the sale of insurance products can pay the planning bills without burdening the client with up-front fees.


“Finding the right type of policy in the right amount with the right structure is where we can provide real value,” Avallone says. “[A millennial’s] cost of insurance is low, the benefit for buying it is high and we get paid well to provide that solution.”

However, being both a broker and an investment advisor in an environment that increasingly appears to take sides on the fee versus commission debate can be complex. Avallone says his initial conversations with prospective clients may tell him which hat to wear. If a client comes in needing a full financial plan, Avallone charges a fee to develop a plan that meets a fiduciary standard. 

But when a client is only looking for ways to mitigate risk, Avallone simply brokers an insurance policy that pays a commission and avoids having to charge the client a fee.


When clients require both a financial plan and a risk-management plan that involves insurance, Avallone charges for each service separately. Clients can pay for the planning advice through an assets under management arrangement or via a flat fee, while the commissions earned on the insurance portion pay for the risk-management portion.

“Planning fees are separate because the purity of the advice is important to me,” he says. “I am driven by helping clients, and I don’t want to scare them away by the cost. We try to work with each client to figure out the right approach. We consider the insurance to be separate from the planning and ongoing asset-management relationship.”

In the early stages of the planning process, Avallone has his clients fill out an extensive questionnaire detailing their assets and their debts. He also asks clients to list their most important professional and life goals and their biggest concerns.

If they’re not on track, he wants to know what changes they’d be willing to make to turn the ship around. All too often, his young clients come in with high incomes, but massive debts from student loans and mortgages that leave them with a negative net worth. There’s little one-size-fits-all advice in these situations, he says.

Sure, he likes to suggest ways to accelerate the repayment of student debt. But if you have to choose between repaying debt, or investing or addressing some other major priority, the advice is as diverse as the clients he serves. 

“That’s why we have long conversations when we go through the planning process,” Avallone says. “We discuss the trade-offs, but to imagine that the decision is all about the numbers is missing half of the equation. There is a personal and emotional component.”

The structure of Avallone’s practice is also a bit touchy-feely. While many financial advisors will turn away clients who have less than $500,000 to $1 million in invested assets, Avallone says there are no bright lines on a client’s balance sheet to determine whether they’re a good prospect. He has no minimum fee to design a plan; he’s even reluctant to mention an hourly rate.

“The client has to take planning seriously; they have to understand that markets go up and down; and I have to get along with them,” he says, when asked about what makes a good client.


As for his minimum investments? “It’s generally not feasible for us to work with someone who doesn’t have $100,000 or more. But even then, if they are protecting their family with the right strategies, there is a nucleus for a relationship that we can grow over time.”

If there is a common thread to the advice Avallone offers millennials, it’s that no one strategy works all the time. While a buy-and-hold index fund strategy might work for long stretches, for instance, this approach can result in huge losses during a bear market.

That’s one of the reasons Avallone advocates that clients purchase term insurance to protect their families.

But he also recommends adding a mix of low-cost mutual funds and permanent insurance to his clients’ portfolios. The case for low-cost mutual funds is well known. His argument for including permanent insurance is two-fold. 

The first is to save on taxes. Although many of his young clients have little in the way of investable assets, they often are high wage earners. He works with doctors, lawyers, entrepreneurs and technology executives in the Washington area, where both the cost of living and average salaries are relatively high. Most of his clients have six-figure incomes.

This means that when they are faced with paying capital gains taxes on their investments, they often get hit with excise taxes aimed at high- income taxpayers. These can boost their federal capital gains rate to 23.8%.

By the time state and local taxes are also accounted for, the tax man has deprived them of nearly a third of their profits.

This kind of daunting tax bill discourages clients from rebalancing their assets after a market run-up, even when it would otherwise be to their advantage to lighten up on stocks and reduce their risk.


But there’s also this: Some permanent insurance products allow clients to protect their accumulated gains.
While clients may not view that as particularly important, when the stock market is rising, it’s a very different story when prices tank. Then having some insurance against losses can play a pivotal role in preserving the client’s wealth.

“No one strategy is best all the time,” Avallone says. “Being in a low-cost fund and choosing to buy and hold can be great, but it took seven years to get back to even after stocks started sliding in 2007. Planning for an event like that should be part of your overall strategy.”

Ultimately, this mixed approach is what Avallone thinks works best for his practice, as well.
“I run a custom shop to help people live a better life,” he says. “I am a dually registered advisor, and I think that’s the best way to help people.”

Kathy Kristof, a Financial Planning contributing writer in Los Angeles, also contributes to Kiplinger’s and CBS MoneyWatch. Follow her on Twitter at @kathykristof.

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