Financial Advice Options for Young Professionals – Traditional Financial Advisor

Personal Finance
financial advisor for baby boomers

Today’s blog is the second in a series on the financial advice options for young professionals. Many young professionals reading today’s blog may have parents working with a financial advisor. If so, it’s likely your parents find themselves in their mid to late 50’s gearing up for retirement or somewhere in their 60’s enjoying the fruits of their labor. Regardless of where they fall into the traditional financial advisor’s target market, one thing is likely certain: they have accumulated substantial assets and are now focused on the most efficient means of distributing those assets in an orderly manner to support a comfortable retirement.

This relationship with a traditional financial advisor and the prerequisites for starting that relationship are far different than the situation many young professionals find themselves in. What follows is a breakdown that outlines the challenges of serving young professionals in a model built for their parents.

An Overview of the Traditional Financial Advisor’s Business Model

The traditional wealth management model that largely serves retirees with large portfolios has done a far better job of mitigating many of the conflicts that come with getting advice in other product-centric models. This is in large part due to the way that most advisors in a traditional wealth management model bill and that is by charging a percentage of assets managed. Generally speaking, advisors charge 1.0% on assets under management (“AUM”), so if you have $500,000 in assets that an advisor is managing, she would charge $5,000 per year.

This amount typically covers portfolio management designed to try and produce greater returns than you might otherwise be able to generate on your own, through behavioral coaching, proper asset allocation and/or quality security selection. In addition, most advisors now provide some form of comprehensive financial planning as a value-add service that can help individuals plan for retirement, determine when to take social security, etc. The trend of adding financial planning as part of an investment management service has largely been driven by the advancements in technology that have somewhat commoditized investment management.

While the traditional wealth management model does a much better job at keeping consumer’s best interests first, it has historically only catered to those in or nearing retirement, neglecting young professionals oftentimes when they need guidance the most—at the start of their journey.

The Challenge of Serving Young Professionals in the Traditional Model

The challenge for traditional advisors operating under the traditional fee structure of charging 1% on assets is that for most young professionals they might only have $50,000 saved outside of a retirement account (if that), which means an individual would only pay $500/year to an advisor. It doesn’t take a brain surgeon to realize you likely aren’t going to get a lot of advice and service for $500/year, especially when you consider to remain profitable an hourly bill rate might be $200-400/hour (much like an attorney or CPA).

To combat this issue, many wealth management firms charge a slightly higher percentage fee on accounts under $500,000, usually in the 1.0-1.5% range, however even at that level it’s usually does not generate enough revenue to provide comprehensive planning as part of the investment management services. This means typically those young clients aren’t profitable for the business and subsequently don’t receive much attention in the form of comprehensive planning or proactive service. The relationship ends up largely being investment management focused, which oftentimes is the least pressing issue for young professionals who are likely in need of guidance around saving for a home, paying off student loans, preparing for their child’s tuition, etc.

This tends to leave young professionals fairly dissatisfied with the service received from traditional advisors, who are almost always better versed in the intricacies of social security and income distribution, than the more pressing issues facing Gen Xers and millennials like student loan repayment plans, cash flow management, and college planning. This is largely reflected in the satisfaction surveys that show that nearly 50% of investors age 30-42 are dissatisfied with their advisor.

An Outdated Client Experience

The last area that the traditional financial advice model often falls short in working with young professionals is in the delivery. Young professionals are incredibly busy, oftentimes with kids, spouses who both work, and/or advancing their careers through graduate school amidst working a busy job. On the flip side, many retirees find themselves with kids out of the house, no major work requirements, and the time and flexibility that makes meeting with an advisor face to face in the middle of the day a fairly easy occurrence.

Unfortunately for young professionals this client experience oftentimes doesn’t fit into their busy lives and makes receiving the tremendous benefits of financial guidance and comprehensive planning even more difficult.

Looking Forward for Young Professionals

Money continues to be the leading cause of stress among all working Americans. Financial worries (64% of adults) continue to outpace the stress caused by work (60%), family responsibilities (47%), and health concerns (46%). These stressors are compounded by the fact that they are all somewhat interconnected and that virtually all young professionals lack the time to properly manage their finances amidst their busy lives. To make matters worse, historically the financial services industry has not had adequate solutions for objective financial guidance, until now.

Enter Lifewise and the movement of young advisors looking to make objective financial planning and guidance available to our peers, not just the gray haired baby boomers with seven-figure portfolios that the industry has for so long craved. Next week, in the last post of this blog series, we will dive into more detail about the movement to help millennials and Gen Xers navigate the financial complexities that come with starting a family, advancing in a career, and planning to support children.

About Matt Cosgriff, CFP(®)

Minneapolis Financial Planner | Intrapreneur | Young Professional | Millennial Guru | Tech Aficionado | Traveler | Food Lover | Minnesota Wild Fan | Movie Quoter | Follow on Twitter| LinkedIn

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Providing the perfect blend of powerful technology and human guidance, Lifewise is geared toward young professionals searching for a better way to make wise choices and sound financial decisions. Backed by BerganKDV Wealth Management, Lifewise is supported by a team of CPAs, CFPs and CFAs who stand ready to guide you through every financial challenge and windfall.

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