Young people still an underserved market

If it’s true that the earlier you save the more you’ll save, then investors in the 18–24 demographic have the most to gain by investing now. Unfortunately, a recent study finds this group is not only elusive, with few seeking out financial advice, but also their needs and spending habits are markedly different from those of previous generations. So advisors looking to grow their young client base into lifelong investors may need to change their game plan.

A study by TD Waterhouse found that the 18–24 crowd largely ignores the financial planning community. Only 10% of the age group have a professionally developed financial plan, in comparison to 38% of the general populace.

The study says its not due to a lack on interest in investing, though. When asked if they used the services of a bank, credit union or trust company for their investments, six in 10 young adults — only slightly fewer than the national average — answered affirmatively.

Patricia Lovett-Reid, senior vice-president at TD Waterhouse, points out that small asset base may underlie this. Nevertheless, she says, these are the investors that will be key to the future of an advisor’s business, so it is important to actively target them for financial advice.

“I have to believe that it’s because they don’t feel they qualify, or they’re at a stage in life where they don’t think they can ask for professional guidance. We as advisors need to be more receptive to it,” she says. “No one expects young people with modest incomes and assets to be working with a full-service broker or to have their own investment advisor, but many financial institutions are eager to build lifelong relationships with clients and welcome the opportunity to provide guidance and a basic plan for those just starting out,” she says.

Lovett-Reid says that advisors recognize the changing dynamic of society, a society, she highlights, that will have more people over 65 than under 15 by the end of the next decade. Today’s young people will have to carry the load left behind by their parents, as well as care for elderly parents, all of which will put tremendous strain on their finances. By the same token, Lovett-Reid says there will be a massive transfer of wealth down the line, with the huge assets accumulated by the boomer generation going to their children.

“Start talking to your boomers about their children and where their children are going to be. Not only are the children going to be a great potential client, but we’re also going to see this great transfer of wealth. If you haven’t developed a long-term relationship, the likelihood of you securing that client’s wealth over the long term is pretty remote,” Lovett-Reid says.

She adds that advisors who are looking to go multi-generational and take on younger clients do need to understand the realities of young investors. Younger people are more educated but have also accumulated unprecedented debt, especially from the costs of their post-secondary education.

“It isn’t easy to fund. People in the sandwich generation, caring for their parents and kids — there is only so much money to go around.” She says advisors need to educate their younger clients on things like good debt and bad debt but also help manage them through it.

Debt management is one of the core specialties of Christopher Mason, a CFP based in Kingston, who says that for the past 13 years, younger clients have been the “backbone” of his business.

“I’ll go after high credit cards, if that’s not easily managed, then I’ll look to establish lines of credit or consolidations to lower their interest payments,” he said. “I do a lot of work with young people as far as budgeting is concerned. It’s because of my upbringing — I was out of the house at 17, was married at 18 and bought my first house at 19. It’s not impossible, but you really do have to know where your money is going.”

Mason said it’s as important to identify your client’s personal and professional potential as it is their wealth. “I’m always looking at the potential of the client, over their immediate ability to invest,” he says. He points out that it’s already beginning to reap rewards.

“I have a young client that as a student, somebody went into her classroom and showed her a chart — putting away $2,000 a year for eight years, starting at age 18. If they earn 10%, they’ll be a millionaire by the time they are 65. She was 18 then, and I think she is 30 now. She’s one of my first clients, and she’ll be more than a millionaire.”

Although he’s had success with a younger clientele, Mason says advising youth is not for everybody, particularly early on in one’s practice.

However, he thinks advisors who aren’t interested in low-income clients still have a duty to help younger clients find someone who is. “Find somebody who is willing to work with a client who may only have $250 a month to put into a pack, has a young family, some life and disability insurance and needs some advice. There are people out there, like me, who will work with them.”

Filed by Mark Noble, Advisor.ca, mark.noble@advisor.rogers.com

(01/30/07)

Mark Noble