First, I want to say Thank You!

I’m overwhelmed by the well wishes, congratulations and feedback as a start my new firm. I feel very fortunate and grateful to be surrounded by such supportive and loving people.

I also got a blog idea out of all of the correspondence.  More than once someone has said something like “I will sign up after I cash in my winning Powerball ticket.

While we’ve all had the Powerball and Megamillions jackpots on our mind in recent weeks (don’t forget playing the lottery isn’t all bad), I wanted to address some of the misconceptions about financial advising and those who need financial advice.

 

Financial Advising Is Not Just For the Rich

The concept that only rich people need a financial advisor is not a new one. The industry itself has targeted older retirees with a lot of assets.

Typically an advisor is paid from Assets Under Management (AUM), meaning they receive a percentage (usually 1%) of the assets that they manage. Therefore, if the advisor managed $3 million dollars for a client, he or she would make $30,000 off of that account.

This charge is in addition to any fees or fund expenses for the investments themselves. So the total charge on the account could creep up to 2 or 3%.  Additionally, the “financial advice” was geared mainly towards investments, with ancillary tips given for other topics like cash flow and debt management, taxes and insurance.

Luckily, the industry is changing.

 

A Newer Approach

Despite the AUM model having been the main source of compensation for decades, a new trend is emerging in whom advisors serve and how those advisors are paid.   Younger advisors who know that their peers need financial guidance are finding ways to get them quality, personalized advice through a pay structure that they can afford.

In fact, as I mentioned before, 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.)

The premise of this approach is to provide access to high-quality financial advice to those who may not have a high net worth or a lot of income. In addition, these people will receive holistic advice, which includes topics like risk and debt management,  learning about the tax system, and understanding the benefits and pitfalls of owning a home, all of which play a crucial of a role in your overall financial health. This type of planning is especially important for younger people who face these decisions early on in life but have not received any structured financial education.

Most advisors in the network charge an upfront fee for a financial plan (e.g., $1000-$2000) and then provide continual guidance for implementation, monitoring and changes to the plan on a monthly retainer (e.g., $100 – $300).  The plan itself provides a framework for achieving identified goals and the additional guidance makes sure that your financial decisions align with them.

This structure gives access to affordable, independent and client-focused advice from professionals who have met the highest standards of education, training and competency.  In addition, having an advisor who is a fiduciary gives you peace of mind that person must act in your best interest.

 

What You Have to Lose

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 responsible for our financial well-being.

Moore and Kitces highlighted many important decisions that 20- and 30- somethings make – marriage, divorce, paying down debt, etc – in their response to a financial advisor who thought younger folks don’t need financial advice.

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.