Michael Kitces is out on the road speaking to advisers about 70 times a year at conferences across the United States. He had a discussion with Morningstar Advisor about how he built a successful model for helping younger generations set solid financial foundations for their future. A portion has been reproduced below.
Tell us about the situation of a young investor.
Not a lot of young people have a pile of assets on which an adviser can charge a fee, but that doesn’t mean they have no ability to pay for financial advice. It simply calls for a different kind of business model to provide them ongoing advice and get paid for it.
Millennial and Gen X clients face fundamentally different financial challenges than those who are nearing retirement. These young people are trying to get a career going, getting married, starting families, and buying houses—though not necessarily in that sequence. They need help to make good financial decisions.
How do younger investors think differently about investing?
They want to see some connection between how they're investing money and a social purpose. In the past, there has been a utilitarian view that you invest your portfolio to maximise your long-term returns for a given level of risk. If you end up accumulating more money than you need, you could always take some of those excess earnings and donate them to charity or use them for a specific social purpose.
Today, younger generations increasingly want to see their capital deployed in a manner that can have an impact on the world. They literally want to see their capital get invested in companies that are doing good and affecting the world in a positive way.
What’s on their minds?
We may talk to them about things like debt management—dealing with credit card and student loan debt. The idea of managing human capital as an asset is a very big deal. When you’re in your twenties and thirties and you have a multi-decade time horizon, growing your earnings by an extra 1% a year has a dramatically higher long-term impact on wealth than getting an additional 1% of investment return.
What are some typical discussions that come up in your financial planning conversations?
We often discuss cash flow, budgeting, and prudent spending. Clients may ask things like “how much is actually reasonable to spend for a car?” We explain to our clients that just because the leasing company or lending agent will let you spend 30% of your income on a Mercedes, that doesn’t actually mean it’s a good financial decision. A lending limit is what the lender figured out is the absolute maximum amount of pain that you can go through and still, at the end of the day, manage to pay them the money back and not default. It’s not a prudent spending target.
When you explain that to people, it’s a really powerful and important piece of advice. They may not actually have anyone else telling them that.
For younger investors, another dynamic we find is simply that their goals are very short term as their circumstances change every year or two because of the frequency of major life events such as marriage, having children, changing jobs, or starting a business. When we actually get to the point that a client’s short-term goals are being met and their cash reserves are filled up, suddenly the investing conversation pops up, but it could be a few years into the advisory relationship.
So would you say you’re shifting the conversation to introduce the idea of goals-based planning?
Absolutely. Identifying goals comes first, and everything else comes after that. But notably, you can’t just sit someone down and expect to hear what his or her goals are. You have to show that person what’s possible before he or she can understand what the trade-offs are in the first place. So we might go through an exercise to figure out at what rate it’s possible to save, and what that could turn into two, three, 10, all the way to 30 years down the line. That’s not something you naturally know if you’re just entering the workplace and you haven’t gone through that kind of financial education. But it’s not quite what I would call financial literacy. It’s a step beyond that, translating current financial decisions into what their longer-term trajectory would look like, and helping younger investors decide if they’re happy with that path and the trade-offs it entails.
Sometimes what it takes to actually change our behaviour is a catalyzing event that’s deeply personal. Would you agree that a good financial planner is going to recognise that and be a guide through those events?
We increasingly see this as a critical part of delivering financial advice. For example, we can show someone who is debt-ridden and sees no way out that there actually is a path to conquering their debt. Telling a client they shouldn’t be in debt isn’t helpful. They know. Helping them actually conquer their debt is transformative.
Younger clients and robo advisory….
A faulty assumption is that millennials don't want to communicate with an adviser because there are robo-advisor platforms available. What we actually see is that both the adviser and the client can benefit from the technology, while the adviser takes care of the parts of advising that can’t be done effectively with technology alone.
As an adviser, you’re already at risk of being irrelevant to millennials simply because you may not be offering them advice in the areas that matter to them. And many investment advisers have traditionally focused on tasks that a computer actually may now be able to do better.
But that doesn’t mean holistic financial advisers should go away. It’s very much the opposite—good technology can automate key parts of the relationship and help advisers serve clients more effectively.
How is the vision of retirement different for millennial and Gen X investors?
No millennial is worrying about what life is going to be like when they’ve got gray hair and they’re walking on the beach toward the lighthouse. It’s too far in the future. When your biggest problem is a five- or six-figure student debt, how you’re going to retire in 40 years does not feel like a relevant financial planning issue. In fact, the mere focus on traditional retirement in the first place screams irrelevance to a young person.
I find that the discussion of “financial independence” is much more relevant for them.
Financial independence is a goal of saving and accumulating to the point where the decisions you make about what work you do and how you spend your time are no longer tied to how much money you earn from that work. When you reach the point of financial independence, you can spend your time doing whatever it is you want to do, regardless of how much you’re going to earn from it. Notably, that means you may well continue to choose to work and earn because you enjoy the work. But again, you’ll choose a job based on purpose and fulfillment, not money and the ability to put food on your table. The whole financial independence approach is completely different than the message that when you earn enough, you can stop working and go out walking on the beach toward the lighthouse.
If you’re having a retirement conversation with a millennial, you probably made yourself irrelevant just by introducing the conversation. That’s not where they are. They have a whole bunch of other goals they need to hit in the next five, 10, 15 years. Even then, the conversation will be far more powerful if it presents the idea of a goal that’s less about retirement in the traditional sense and more about how to achieve financial independence to live the life they want from that point forward.
