This story was originally published on May 6, 2013. It is part of 12 Days of Wealth Management: The Year in Review.
Theyve 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 countrys 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 youre going to see a transfer of wealth, says Jim Dario, managing director of product management at TD Ameritrade Institutional. Its 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.
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 dont respect money and tend to squander it.
Thats actually a fairly common Gen Y attitude. A recent survey found that 31% of Gen Y doesnt 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 its not a helpful attitude for advisors trying to help young clients build wealth. Its not that they dont care about their future, says Pirnack. For the Pataguccis, lifestyle is their No. 1 concern. They wont 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 dont 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 its 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.
Other firms dont even bother with the big spenders, prescreening potential Gen Y clients for financial smarts. Were looking for good savers, says Jamie Malone, financial strategist at Joyce Payne Partners in Richmond, Va. Its 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 dont 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 firms fundamental approach.
We may make certain changes to serve our clientele well, but were not going to change our business based on where the money is, Joyce says. Were making sure that we stick with our knitting, be good at what we do and segment the clients that we want within Gen Y.
Other advisors take a separate tack, offering different kinds of service offerings to younger clients than to their older counterparts. Ted Jenkins, co-founder of oXYGen Financial in Alpharetta, Ga., believes advisors need to recognize that Gen Y clients have more information and less time than ever before, and adapt to it.
The more things you can get done for clients, the more valuable you become to them, he says. Theyre more demanding upfront because they have more information upfront, and so they expect a lot of value out of their time and money.
For Jenkins, that means offering many targeted services -- from taxes and business solutions to insurance and personal lifestyle -- under one umbrella. The goal, as he puts it, is to act as a clients private CFO.
In Dallas, United Capital managing director Brandon Moss takes a similar approach. Along with financial advice, advisors on his team can expect to provide a variety of concierge services -- from hiring nannies to helping a client arrange weekend plans. It's a completely different paradigm for these younger clients -- the issues are different, says Moss. It's moving from job to job and even having multiple income streams. It's getting a nanny versus daycare. It's paying for private elementary school while still taking a really awesome family vacation.
Clients pay for these services with either hourly fees or a monthly retainer, Moss says. United Capitals Dallas office also tries to appeal to younger sensibilities with a nontraditional look and experience.
Mosss team eschews mahogany desks for glass tables in a bright, colorful workplace that suggests a technology firm rather than a traditional planning practice. In meetings with advisors, clients are equipped with large monitors or touch-screen devices that let them follow their advisors online actions, as well as manipulate their plans themselves -- all in the name of making the planning process more interactive.
If the clients prefer, they can also opt to conduct meetings via Skype or gotomeeting.com, says Moss.
They are used to working in fun, interactive and transparent environments -- why should our process be any different? asks Moss. Theyre much more engaged and emotionally connected than before, and [the client relationship] becomes more than management of money.
CHALLENGES & PAYOFFS
The big challenge for advisors, of course, is how to get a short-term payoff while building a long-term relationship, since most Gen Y clients dont yet have the assets to generate a substantial AUM fee.
Some advisors are recalibrating the way they charge, introducing monthly retainer fees or a premium for extra services. And while advisors may be doing more, these younger clients are often willing to pay a higher monthly fee to cover the work, according to Moss and Jenkins.
Younger clients are also seen as champions of transparency and communication, and are quick to reward it -- good news for RIAs and other fee-based fiduciary advisors. This generation is more fee-conscious, and is instantly turned off by advisors who act like product salesmen, says Jenkins. If youre going to work in this market, you have to be an advisor that is product agnostic.
Even so, however, margins may still be low -- and there is no certainty that advisors will be able to retain their clients during a transfer of wealth. There is no guarantee clients will stick around 10 years down the road, but this business is not all about making money, says Jenkins. Were building the industry the way its supposed to be.
The greater risk, argue some advisors, is that Gen Y will continue to struggle with its financial planning needs. Only 17% of all Gen Y consumers are currently working with a financial professional, according to the LIMRA survey.
If they cannot find an advisor that truly connects with them, theyll most likely drift from firm to firm, and that is not a long-term solution, says Moss. They need people and firms that are going to be around for as long as they are and truly understand them and work the way they do.
Register or login for access to this item and much more
All Financial Planning content is archived after seven days.
Community members receive:
- All recent and archived articles
- Conference offers and updates
- A full menu of enewsletter options
- Web seminars, white papers, ebooks
Already have an account? Log In
Don't have an account? Register for Free Unlimited Access