You’re busted

Baby Busters. Gen-Xers. No matter what you call today’s adults in their 30s and early 40s, these are the people who’ll fi ll up your client books in the coming years. But advising Gen-Xers is not the same as advising people facing retirement or those just starting out their adult lives.

Let’s consider the approaches of three households in the Gen X demographic.

1. Sheila and Conrad Green FINANCIAL ISSUE: They need a plan. Conrad is employed in the sales and marketing arm of a large public company in the beverage industry, while Sheila is a former public-sector worker who moved to part-time employment after their fi rst child was born. Sheila hasn’t had any income (other than the Universal Child Care Benefi t) for the last two years.

Conrad earns just over $100,000 per year, with a bonus of 75% of salary if he meets his targets. There’s also a company pension with his employer matching contributions, and a car allowance.

When Conrad’s company was fl ourishing, the Greens’ plans were expansive. They wanted to have another child right away, Sheila planned to leave the paid workforce to become a stay-athome mom, and they were considering trading up homes.

But over the last two years, the fi rm has fl oundered, with next-tono employee bonuses. And Conrad’s holdings in company stock are down nearly 50% from this time last year.

Now, he and Sheila aren’t sure which of their plans are viable. They’ve put off having another child while Sheila goes back to work for a few years. With the real estate market softening, they are concerned that many of their sources of wealth are now at risk.

Conrad has been managing his own self-directed RRSP, worth $90,000, and his defi ned contribution pension plan, worth $120,000. Until recently, he felt suffi ciently knowledgeable and appropriately risk-averse to manage his investments. But now, with the loss of his expected bonus income, both he and Sheila are uncertain.

From their point of view, what they need more than anything is an understanding of the trade-offs inherent in each of the choices they might make. So, although their personal situation is enviable—they have significant assets relative to their peers—they’re still left with basic unanswered questions about how to move forward.

“We’d just like to know what we can plan for in the next few years,” Conrad says. “Can we afford to have Sheila out of the workforce long-term? Can we put our daughter in private school and, if we have another child, can we afford private school for that child, too?”

2. Aaron and Ruby Walker FINANCIAL ISSUE: Debt and randomness. Aaron and Ruby are nearing 40, have two small children, two full-time jobs, and collectively earn $220,000 in gross income. Recently Aaron’s parents gave them $200,000 as a “warm hands” inheritance— and want to know how best to deploy it.

Ruby is interested in moving to parttime work, but worried about the effects on her pension. Aaron wants to explore self-employment, but doesn’t know whether that would generate sufficient cash flow.

The Walkers have relatively meager savings compared to their high incomes (about $70,000 in RRSPs). Their expenses— including both a full-time housekeeper and daycare—moderately outstrip their take-home pay each year. For the past few years, they’ve added in family vacations financed entirely on credit. The result is credit card bills totalling $50,000.

Aaron and Ruby have attempted to quell their concerns by purchasing large amounts of insurance. Ruby has life and disability insurance through her employer, and both have purchased large universal life policies, critical illness policies, and an individual disability insurance policy for Aaron. They are not adding funds to Aaron’s UL policies or RRSP.

Not surprisingly, their insurance salesperson is also the advisor for their RRSPs. They didn’t schedule an appointment with him to discuss what to do with their windfall because they are concerned he’ll steer them away from any options, such as paying down their mortgage, which don’t produce a commission for him. And they are also wondering whether they are over-insured.

In the meantime, they’re now holding a large amount of cash—all $200,000 of their windfall—in their chequing account, not sure whether to put it in RRSPs, pay down the credit card debt (Aaron has managed to keep the rates to 2% or so by transferring from one promotional credit card to the next), reduce the size of their mortgage, or keep the funds liquid to bolster cash reserves in case he starts his own business.

3. Liz Chandler FINANCIAL ISSUE: Can she have it all? Liz is 45 and works in the human resources department of a U.S.-based telecommunications company’s Canadian division. Her concern is how long she has to work in her current job to retire and travel. What trade-offs does she need to make this possible?

“Do I need to work longer to afford the travel I crave now plus a healthy retirement savings balance, or should I cut back on travel so I can leave fulltime work sooner?”

Liz has a defined benefit pension plan, which has recently been replaced by a defined contribution plan. She also has a good-sized, self-directed RRSP. Her yearly salary is inching up toward $90,000, and she has about $140,000 in her RRSP plus another $35,000 in a LIRA. The value of her defined contribution pension plan is under $10,000 but is expected to grow quickly with her employer’s matching contributions on the first $7,500.

When she asks her current advisor these questions, the answers don’t leave her feeling her concerns are taken seriously. “I feel like I should know what my options are,” Liz says. “But given that I don’t know, I feel like the person working with me on my finances should partner with me to sort this out. Is this more complicated than I think, or is my advisor just not interested in me?”

While she attempts to sort out a solution and a path forward, Liz is left with nagging doubts about the viability of her plans, and a lot of self-recrimination that she doesn’t possess the expertise to work this out herself.

These three households are ideal clients for any advisor. The clients are interested in accumulating wealth, have experienced success in doing so and are engaged in the search for a workable fi- nancial plan. However, they are either not working with an advisor or are experiencing disconnections in their relationships with advisors.

Lesson One: Gen-Xers are having a different experience than their parents. The tools that worked in advising their parents’ generation won’t work for them. For their parents, the universe of investing was much simpler. Mutual funds were new and relatively few in number; defined benefit pension plans were much more commonplace; and mortgage terms were, for the most part unvarying. For most Canadians of that era, wealth creation was essentially synonymous with getting an early start and paying down your mortgage before retirement.

Sociologists tell us the predictable path to adulthood is gone. People born between the two World Wars followed both an expected and compressed path from adolescence to adulthood, reaching the milestones of completing their formal education, entering the paid labour force, leaving home, establishing a nuclear household, and having children in short and relatively unvarying order.

For today’s adults in their 30s and early 40s, marriage may come after children or not at all, and on average takes place much later. The period of formal education has grown in both scope and length. Career paths and workforce engagement are fragmented, with many transitions and options on the table. And two-career households are the norm.

Taken together, these shifts mean the main challenge for early stage Xers is to manage the complexity of achieving two rewarding jobs and a stable relationship. Meeting this challenge takes longer, and compared to preceding generations, median wealth at age 35 has decreased for Canadian families.

At the same time, people are living longer. And, while the prime productivity years have moved to ages 35 and beyond, expectations for retirement have moved in the opposite direction. Today, your Gen-Xer clients are faced on a day-today basis with competing needs for immediate consumption, long-term saving for their own retirements, and long-term saving for their children’s educations.

Compared to their parents, they’re getting a later start, are shouldering more of the risk and the burden themselves (without employer-sponsored defined benefit pension plans) and expect to leave the paid workforce earlier. Taken together, these factors mean that both the stakes and the expectations for these clients are higher. The wealth creation world of the Gen-Xer is crunched and compressed, with much less room for error.

What your Gen-Xer clients and prospects need is personalized, straightforward advice about how to identify and realize, or reorient, their goals. We’re the ones that gave them “Freedom 55”—now we need to look beyond slogans. They expect no less.

Lesson Two: Ditch your pitch. These clients and prospects are among the most marketingsavvy that you will encounter. They know when they’re being marketed to, and they are suspicious of broadly based messages. They’re looking for advisors who’ll actually listen attentively to their specific concerns and provide an authoritative response.

Previous generations could look out over the landscape and see the edge of the world. These clients have their view obscured by marketing mountains. They want an advisor who can explore all views to the horizon with them.

So you’ll need to embrace complexity, acknowledge competing choices, demonstrate trade-offs and adopt tools that provide context and perspective for clients.

Your existing sales and marketing materials probably don’t cut it. Most of the messages they get (both from you and your competitors) are directed at boomers. Retirement planning is not a metaphor that works for the Gen-Xers. That’s something they’re going to handle (or not) once they’ve got moreimmediate concerns under control. The path to setting them up for retirement is through their day-to-day challenges.

The landscape for Gen-Xers’ financial decisions is more complex than ever. While they’re likely no less well informed about basic money matters than their parents, the range of choices they face is much broader, and the level of responsibility they have for their investing fortunes is much more significant.

With relatively few assets compared to your best boomer clients, the people I profiled typically receive fragmented, product-driven advice, and they can’t tell whether they are making smart choices.

These clients are poised to accumulate significant amounts of wealth in the coming decades, and they stand to fill your book (or someone else’s) as your boomer clients age and deplete their funds. While these sample clients may not provide a lot of front-end revenue for you, they will become your best and your core clients over the long term. In an ideal world, these people would find a single trusted advisor who can answer their questions and provide integrated advice. That advisor could be you. Are you ready?