Why Young People Need Financial Advisors

I recently read an article by Bruce Horovitz in the Washington Post about picking a financial advisor that really caught my interest.  I agreed with a lot of it, especially the point that picking the right advisor can be one of the most lucrative decisions you can make.

Horovitz asserts that “…you don’t have to be a financial lightweight like me – or wait for a crisis – to need a financial advisor.”  He also rightly points out that the decision to choose an advisor should be based on necessity. 

However, a line later in the piece highlights a common misconception of the purpose of financial advising: “If you have a six-figure household income — and $250,000 or more in investments — it’s probably best to let someone else call your financial shots.”  He then explains how advisors help pick the right investing strategy and manage the emotions that come with being in the market.

While I agree investing plays a big role in good financial planning, it’s only part of the picture. Other issues like risk and debt management, learning about the tax system, and understanding the benefits and pitfalls of owning a home play just as crucial of a role in your overall financial health, especially for younger people who face these decisions early on in life, without having a structured financial education.

I’ve already written about key factors to look for when choosing an advisor, but today I want to emphasize why good financial advice is critical to those in their 20s and 30s.

The Current Model

Most people assume that financial advising only involves helping those with large portfolios figure out how to best grow and use that money for retirement. Horovitz felt lucky to get an advisor that worked mostly with “seven-figure portfolios,” when his next egg “struggled to reach six figures.”  A lot of young people feel similarly that they somehow don’t deserve financial advice from a professional because they don’t have a high-net worth.

And it’s not only consumers that think that way; some advisors believe that as well.  In an article published last September, Retirement Advisor Melody Juge argued that most Americans under 50 have no need for financial advice. Juge only works with people over 50 and claims “ [m]y industry wants me to say that everybody needs an advisor, but I don’t think they do.”

She added that pushing services to Generation Xers and millennials for advice that they might not need does more harm than good. Juge said, “When people are in their 20s and 30s and just starting to earn money, why would we want them to spend one to two percent paying for an advisor when they should be accumulating?”

You’ve probably heard that 1% number a lot. Most advisors that currently focus on managing investment portfolios make money by taking a 1% fee from the portfolio. This charge is in addition to mutual fund expense ratios or transaction costs for portfolios held in a brokerage account.  You can see how the total cost of advising can easily jump from 1% to 2 or 3%. And that’s why it takes fairly large portfolios to justify those types of fees.

A Newer Approach

Despite the this fee based approach having been around for decades, a new trend is emerging in who advisors serve and how those advisors are paid.   Younger advisors who know that their peers need financial guidance are trying to find ways to get them quality, personalized advice through a pay-structure that they can afford.

In fact, two of those advisors – Alan Moore and Michael Kitces – developed an entire network called the XY Planning Network which seeks to develop a financial planning model that can help younger generations. (Full disclosure: I am a member of this network.)

Most advisors in the network charge an upfront fee for a financial plan (e.g., $1000-$2000) and then provide continual advice for a monthly retainer (e.g., $100 – $300). This pay structure gets the client invested in the process and provides a comprehensive analysis of their financial situation, not just based on investing.  The plan focuses on money management, taxes, insurance, estate planning, investing and more.  The continuing retainer funds future monitoring, counseling, and plan adjustments for the life changes that will inevitably come.

Some advisors also offer additional lower cost (e.g., 300 – $500) sessions that allow the client to focus on one or two important issues.  

The main goal is to give access to affordable, independent, and client-focused advice in a time when young people need it most.

Is It Worth It?

The crux of this question becomes whether this newer approach is actually worth it to this younger clientele.  It provides advisors with an income stream that can make it profitable to serve these generations, but is it a mutually beneficial endeavor?

One of my favorite quotes regarding the importance of early advice comes from New York Times Your Money columnist Ron Lieber when he said “You have to win your 20s at this point.” He was referencing the crippling financial decisions 20-year-olds have to make when it comes to student loans, picking the right type of insurance coverage, and investing for their future.

Making a misstep early on can put you in a large hole that takes time, effort and of course money to get out of.  Getting on the right track becomes all too important as safety nets like pensions and social security slowly dwindle away, and we take on more and more responsible for our financial well-being.

In their response to Juge’s assertions, Moore and Kitces highlight all of the decisions 20- and 30-somethings make that have lasting impact – marriage, divorce, starting a business, paying down debt, etc.

I also think of situations that I’ve already encountered where clients need guidance on managing their credit score, how to prepare financially for adoption, having the right property insurance coverage, or switching out of a retirement account that was set up through a high-cost annuity.

All of these situations involved young people that could have lost tens of thousands and even hundreds of thousands of dollars over the span of their lifetime by making a poor decision early on.

So yes, good decisions early in life matter….a lot.

I’m proud to serve generations that can really benefit and find value in the advice that I give. And I hope this change in the industry benefits us all.