When former wirehouse advisor Blair Hodgson moved to New Orleans roughly more than a year ago to build her own business within an independent firm, she didn't just change her address and style of practice, she also decided to take on a completely different type of client.
After hearing, over a few years, several young friends and acquaintances - including several doctors and lawyers - complaining that they didn't meet the minimum level of assets to hire her, it dawned on the 30-year-old planner that the market for young professionals might be underserved when it comes to financial advice.
"Wow, maybe this is something I should look into," she remembers thinking. "Maybe there's another model besides charging based on AUM," she thought, given that minimum levels for assets under management typically range anywhere from $100,000 to $1 million.
So Hodgson changed her strategy and her practice at Ferro Financial to seek out younger professionals. She turned her attention to doctors, lawyers and entrepreneurs younger than 40, charging hourly for those who didn't meet her firm's $100,000 in minimum assets.
"I realized that there are so many other advisors, wirehouses or banks that are going after the same [older] market, and meanwhile there is an underserved market that is really better for me and more likely to work with someone in their age range," Hodgson recalls. "They have needs that are not being met."
As more of the baby boomer generation heads toward retirement, their Generation Y kids are emerging as a client base to take seriously. This group - roughly those 18 to 35 years old, and including many young tech entrepreneurs, doctors, lawyers and other high-income professionals - now constitutes an important, potentially lucrative and largely untapped market for planners who know how to serve them.
Getting in on the ground floor with many of these young high-earning clients can be a fruitful long-term investment with a big payoff, Hodgson says, adding that the financial industry hasn't adequately approached "young people who are making critical decisions at this point in their lives. They're paying off debt, deciding what homes to buy, and they don't know there's an option for them for financial advice," she says. "So it's about getting the word out that there are advisors like me who are able to work with them in a different way, and then they become the market."
PICKING THE WINNERS
Finding and recruiting the right clients is, of course, key to success with this market, and it's not a simple task. Just getting the word out to these young clients can be a challenge, planners say. Many wealthy Generation Y clients are new to money, even those who may be second or third generation heirs in a wealthy family.
Firms such as Federal Street Advisors actively reach out to second-generation clients early on to introduce them to the family's wealth strategy. Many times, the key to drawing in this client base is bringing them to the table with the parents or grandparents in order to build them into the planning process, according to John LaPann, president and chief investment officer at Boston-based Federal Street.
"We have to be diligent about establishing a separate relationship with members of the younger generation," LaPann says. "If we don't, we're really not meeting their needs as clients, separate from their parents or grandparents, and we run the risk of being viewed as their parents' advisor, rather than a full family advisor."
Similarly, drawing in outside clients requires a less traditional approach and a new way to deliver information. David Grant, a financial planning analyst with Vantage Financial Partners in Arlington Heights, Ill., is helping his firm transform in a variety of ways to appeal to a younger audience.
The firm's new website, for example, integrates multimedia and social media in an educational, interactive format. "We are looking to change our strategy on the coaching side to make it appealing to younger markets because that's how we'll continue to grow our practice," Grant explains.
Even though there may not be as much money at stake with young clients as there is with older, more established ones, many firms still have a selective process for deciding who to advise. It's important to keep that selectivity, since taking on a client so early in the game can bring some different risks, planners say.
"We actually have a pretty narrow [view] of who we want to take on as a client and that person has to be conscientious about money," Grant says. "If they're going out and blowing their paycheck, then we don't want to work with them."
Since many of these younger clients are also below investable asset minimums, advisors use different strategies or change the terms of retainers to help address the chance of unforeseen complications. Hodgson, for instance, charges by the hour when helping some clients set up accounts with firms like Vanguard or Fidelity.
PLANNING IN REVERSE
Generation Y typically is not worried about the same issues that keep their parents up at night. Many have 35 years or more until retirement, for example, and are grappling with the financial issues people tend to face earlier in life, such as how to pay off debt and still manage to buy a first home.
To that end, Hodgson has devised a financial planning pyramid that essentially reverses industry standards. She places management, retirement and other issues that are farther out on the horizon near the top, while debt reduction, planning for a first or second child, putting a will in place and other more immediate issues constitute the foundation of her practice.
"The name of the game is reduce debt first and save as much as possible," Hodgson says. "A review meeting isn't really the traditional, 'Here's what the portfolio did this year.'"
At Vantage Financial, Grant has implemented a self-guided and cost-effective coaching program to educate young investors on the importance of money management. The Vantage website features a coaching program that consists of three sessions and touches on all the basics - from education funding to estate planning. There are webinars, book excerpts and small apps like a net worth calculator to help guide novice clients. Once finished with an assigned course, the clients then report back to their coach - an advisor with the firm - who will then advise them on specific trouble spots and fill the gaps in their financial planning strategy.
"Then, hopefully, they're at a point where (a) they can do it themselves; (b) they can afford to move to the next level of advising; or (c) they have enough assets to be part of an [asset management] program," he says.
According to Grant, Gen Y clients have gravitated toward this solution for two reasons - the main one is because it costs less. He charges $1,350 for the coaching plan, which is less than half the cost of the $3,000 plan that incorporates a financial advisor. Also, many younger clients are already knowledgeable about financial basics, thanks to advice from parents and peers, so they really only need a few specific adjustments at that stage in their lives.
HELPING HEIRS GROW
Planning strategies for second-generation clients in wealthy families are somewhat different from strategies planners might use for young clients who are just starting to build their wealth. Since wealthy families by definition already meet minimum levels for assets under management, the strategy at many firms focuses on increasing young heirs' share of responsibility and independence, according to LaPann.
He often advises the older generation of a family to share a segment of its wealth with younger members. He will sometimes push high-net-worth clients to share as much as $1 million that a child or grandchild can take ownership of and curate. "A lot of our clients will have a couple million for that, which is a lot in our terms, but in terms of the family is a smaller portion and decisions about how to invest that money will give [the kids] a chance to gain experience," LaPann says.
At their firms, Grant and LaPann both seek to give their second-generation clients a sense of independence. It's standard practice at Vantage, says Grant, to make sure that a child has a different advisor from the parents in order to resolve issues of where and how to invest.
"They don't want their parents' views filtering down through the advisor as to how to invest their money," Grant says. "It's usually best to go elsewhere."
Like a parent trying to master texting lingo, older financial professionals who are just starting to reach out to younger clients through social networks like Twitter and Facebook may find their message lost in translation.
"One of the more interesting challenges for us, as it is at other firms, is how each generation likes to receive their communication. The 88-year-old grandparent is still looking to receive a letter in the mail. The 58-year-old parent is looking for your email. And the 28-year-old next generation client expects a text," LaPann notes. "They're not looking at paper, they don't necessarily read their emails and a lot of their communication is now instantaneous."
The broad age range presents a formidable challenge to financial advisors who learned their trade in a day when letter writing was the primary means of communication. According to LaPann, the difficulty for older advisors is not what to say, but how to say it. Many older planners are not as well versed in the legal and social challenges of new media and need some retooling to reach out to younger clients, he says.
In researching the younger demographic, LaPann often relies on his younger staff members, who may be two or three years out of college, to help share how they receive information. As a result, he and other advisors at Federal Street have begun sending younger clients short texts such as "Call me," "Check your email," or "I need your help on something," in order to make the connection.
Grant has updated his website and keyed into social media in order to reach out to clients, expand his coaching program and build his younger client base. "We can post a video within three minutes," Grant predicts. "Which we'll then push out to our LinkedIn and Facebook and YouTube and Twitter accounts, all with a press of a button. And that's going to be the future," he explains. "Younger people are going to want more and more content before they actually sign up."
Having younger advisors on staff has two advantages, according to Hodgson: It's easier to relate to clients. Her strategy was essentially born from the conversations she was having with her peers.
Also, having younger advisors makes younger clients feel more secure, since it's unlikely their planner will retire within the next 10 or 20 years. That lasting relationship is particularly important for Hodgson, who views working with younger clients as a long-term investment strategy.
"This is my strategy for having an asset management business" that will last, she says. "It is to help people make the right decisions today so they'll have assets down the road - and be my clients."
Mason Braswell is a writer for Financial Planning.