Don’t look now, but a new generation is about to bump the boomers
by Richard Ina, AAMS
Mr. Ina is Managing Director – Wealth Management, for UBS. Visit www.ubs.com.No matter where you are, or what you read, everyone seems to be talking about Millennials these days.
This group – broadly defined as individuals born between the early 1980s and 19991 – is sometimes thought to be controversial, but consistently considered fascinating for many reasons, but mostly because they play by their own set of rules.
Millennials communicate more frequently and through non-traditional channels (social media and apps), their career choices revolve more around obtaining a good work/life balance as opposed to climbing the corporate ladder, and they give generously to causes they believe in2.
As a generation, Millennials buck convention, operating and considering the world around them differently than their predecessors.
Gaining On Boomers
Since they are poised to become – arguably – the most influential generation, soon to surpass Baby Boomers as the largest living generation3, and on track to comprise three-quarters of the American workforce by 20254, it’s no mystery why so many groups of educated professionals (scientists, advertisers, researchers, retailers, etc.) are spending so much time and effort trying to figure out Millennials.
They want to understand their motivations, preferences and current interests, what they are looking to get out of life – all to try and predict what Millennials will do or like next.
Financial advisors, of course, are no different – we too are trying to find the keys to understanding and engaging Millennials. However, we have a distinct disadvantage: Millennials are notoriously distrustful of the financial system5 and are resistant to doing anything the way their parents did in the past. Millennials are scarred by what they saw happen to their families during the financial crisis and that pain lingers on today6.
As a result, they are skeptical of advisors of any kind, preferring to scour the internet for free answers and advice than to sit down and talk to a professional7.
With that perspective in mind, I find the most interesting characteristic of most Millennials to be how much they value and live life in the present, not really caring to plan for anything beyond the near future. To this group, retirement feels like a lifetime away, and as a consequence, Millennials’ attitudes about wealth are focused more on spending to enjoy life now than saving for a future they can’t predict.
Part of this isn’t surprising – the financial crisis taught Millennials to enjoy what they have while they have it. However, some of their behavior is alarming: UBS Wealth Management America’s Q2 Investor Watch report, “The Ties that Bind,” revealed that 25% of Millennials already have dipped into their retirement accounts to help fund large purchases. Not only is that something most of their parents would never have dreamed of doing at such a young age, but it’s also something no financial advisor would recommend.
Millennials are also delaying settling down and reaching traditional adult milestones longer than their Baby Boomer parents did, instead choosing to accumulate life experiences: 28% said they have taken six months or more off to travel the world, compared to 12% of Boomers8.
Given that my primary responsibility with Millennial clients is motivating them to save for retirement, each new experience with Millennials can be an uphill battle, but I have found ways to get them to listen.
Simple Math
The first step to engaging Millennials is exposing them to financial advisory in a comfortable setting, typically accompanied by their parents. I like to organize golf events and invite clients and their children to Broadway shows, for example, as an informal, fun way of introducing my practice and how my team and I can help them.
Once we’ve become acquainted, I focus on getting them to appreciate the value of saving early and how putting in a little effort when they’re young can potentially have an immense impact on their futures.
I like to put it this way to my younger clients: “In the early stages of your career, if you contribute tax deferred savings of $5,000 each year from the ages of 25-34, by the time you turn 65, that $50,000 investment would be worth $833,000 assuming a hypothetical 8% rate of return.”
It’s a simple, but powerful lesson: minimal effort can lead to maximum result. That’s the power of long term compounding interest. Albert Einstein famously put it: “Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.”
By contrast, I warn them, if Millennials do not start saving in earnest until they’re 35 years old, and they then invest $5,000 each year from 35-65 ($150,000 total) their nest would only amount to $620,000 with the same hypothetical 8% return. It’s a significantly lower sum than if they had taken retirement seriously earlier in their lives.
Another important point of context in explaining the rationale for saving early and taking matters into their own hands is that Millennials have a tendency to experiment with their careers and to job hop. Investor Watch found that this generation averages three jobs in eight years, meaning that they are changing positions significantly more frequently than their Baby Boomer parents who averaged four jobs over a 37-year career9.
This constant movement can make saving for retirement challenging, particularly since new employees may not be eligible to participate in a 401(k) plan immediately, delaying savings opportunities.
Early financial education is critical to ingraining in Millennials the importance of thinking about the future. At UBS, we host periodic “Start Smart” seminars for clients’ children to explain how saving and investing early can affect their portfolio over the course of their lifetime. In these sessions, my team and I relay the benefits of creating a financial plan around predetermined goals, and encourage them to remember the three elements of successful investing: quality, diversity and patience.
Parental Support
It is likely that a contributing influence to Millennials’ emphasis on the present is the fact that 75% of Baby Boomer parents provide some form of financial support to their Millennial children and an overwhelming majority (80%) are “happy to do so10.” They provide rent-free housing, make car and insurance payments, help fund vacations or even pay for Netflix. Parents help create a comfortable lifestyle for their Millennial children.
But it can be easy for Millennials to overstay their welcome. Baby Boomers gearing up for retirement may not be all that happy or eager to provide financial support past a certain point. Though willing to help out their children when first starting out after college, it is my view that many Millennials will require some tough love to take the leap to branch out on their own.
If they stick around for too long (in my opinion, two to four years is a reasonable limit), the more entitled Millennial children can become.
For some families, a helpful tactic to preventing this from happening can be writing up an agreement outlining what parents are willing to provide and what they expect from their kids in return. Detail responsibilities, set goals, encourage Millennials to seek advice and plan intelligently.
Redrawing Lines
Though my engagement with Millennials usually begins with an introduction through their parents, that’s where I firmly believe the joint relationship should end. After that – and I’m sure many will agree – financial advisors should meet with parents and children separately.
The primary reasons for this are twofold: for one, parents, while well intentioned, often try to use financial advisors as means of relaying their own beliefs rather than to provide independent advice. This is unhelpful to the financial advisory process and can lead to (further) distrust on the part of Millennial clients, who may feel like they don’t have someone on their side.
Secondly, meeting with Millennials one-on-one can give them confidence and a sense of independence, which can inspire them to take control of their financial lives. I like to get to know each client as an individual, to understand what things and experiences are important to them, so together we can plan for the life and future they want to have.
The “American Dream” used to be about being able to buy your first home, but Millennials don’t embrace this version of success as much as their parents did. For Millennials, it’s more about continuous improvement – their jobs, environment, lifestyle – than something so material. This generation is redefining the “American Dream” and redrawing the path to get there. And as financial advisors, it is our job to help guide them along the way. ◊
