Millennials and Generation Xers who need advice on retirement and tax planning should conduct research before choosing a financial advisor and not hire the one who worked with their parents.
The financial goals of Gen X and Gen Y do not always mirror what their parents faced, says Michael Solari, principal of Solari Financial Planning in Bedford, New Hampshire. Both generations are dealing with larger amounts of debt while also saving money for a down payment to buy their first home and accumulating money for retirement.
“It’s hard for clients to envision how to save for retirement, pay down student loans and pay for child care and afford a home, all while trying to enjoy life,” he says. “When many advisors only focus on investments, they’re really not servicing those clients’ needs.”
Financial Planning for Younger Clients
The amount of debt that some millennials — those born between 1981 and 1996, according to the Pew Research Center — have from student loans or credit cards needs to be prioritized by financial advisors when they are conducting financial planning. They can’t solely focus on retirement savings.
“The amount of student loan debt that some millennials are carrying can weigh them down,” Solari says. “In some cases, it’s more than their housing expense. Paying down debt quickly can encourage some people to continue good money habits. When it comes to your personal plan, it’s not always about making the most money.”
Millennials and Gen Xers — who were born between 1965 and 1980 — are seeking more virtual services from their advisors and expect them to be more tech savvy, especially when it comes to budgeting, says Alex Chalekian, CEO of Lake Avenue Financial in Pasadena, California.
“Unfortunately, a huge number of financial advisors focus on the investments, but not on the financial planning, which many of these younger clients need,” he says. Financial planning may include tracking real-time expenses, he says, and seeing if they are within their budgets.
Adopting New Fee Structures and Assets
Since many millennials and Gen Xers are still accumulating savings or have some of their retirement money tied up in a 401(k) plan, they may not get the attention they need from an advisor charging a percentage of assets, Solari says.
“They should really be looking for someone who is a fiduciary and charges a flat fee or hourly fee, so they can feel confident they’re getting objective advice,” he says.
Many veteran advisors also tend to charge higher management fees and don’t offer a flat or hourly fee, Chalekian says.
“They find that it might not be worth their time,” he says. “If you’re an advisor that has been around for 20 to 30 years charging a specific fee and not had any issue bringing on new assets, it would be very unlikely that you would be open to lowering your management fees.”
While the age of an advisor can be a concern if they’re nearing retirement, the more pressing issue is the age of the business model, says Charles Sizemore, chief investment officer of Sizemore Capital Management in Dallas. Investors should work with an independent registered investment advisor as opposed to a broker-dealer representative.
“This is the modern advisory model, and an independent RIA is more likely to have lower and more transparent fees, which is really important in a long-term planning relationship,” he says. “There are great broker-dealer reps out there, but this older model itself is less transparent.”
Financial advisors typically charge 1% of your assets under management. Question ones that charge a higher amount.
Longer tenured advisors are more likely to be broker-dealer representatives of investment banks that work under convoluted compensation structures, says Daren Blonski, managing principal of Sonoma Wealth Advisors in California.
“We are pretty transparent about the fees we charge,” he says. “The telltale sign you are being overcharged is if you don’t know how much you are paying. Likely, that advisor grew up being a stock jock and sold investments.”
Some seasoned advisors are also still sticking to recommending mutual funds that have higher minimum contribution amounts and expense ratios. Investing in exchange-traded funds is a lot cheaper than mutual funds with fees that can add up quickly over 30 years, Blonski says.
Many people in the baby-boom generation had retirement portfolios that invested in traditional blue-chip stocks, such as GE (ticker: GE) and Exxon Mobil ( XOM), which were once profitable companies in the Dow. Those stocks have been replaced by tech companies such as Microsoft ( MSFT), Apple ( AAPL) and Amazon.com ( AMZN).
“The sectors that got your parents to retirement probably won’t get you to retirement,” Blonski says. “You want an advisor who is not committed to the way it was and is open to shifting gears and learning.”
Investors under 40 do not want a “nice age-appropriate allocation” of mutual funds and instead want a core ETF allocation bundled with stocks in electric vehicles or ones that meet environmental social corporate governance (ESG) standards or have exposure to blockchain or bitcoin, says Joshua Austin Scheinker, executive vice president of Scheinker Legacy Wealth Advisors in Baltimore.
“This generation is much smarter and much more aware of cost, and they are willing to take on much more risk than the 60-year-old,” he says. “I am not saying that this generation doesn’t need or seek out advice, but they want to be treated as equals. They want to know why you are making allocation changes, and they want to be allowed to ‘roll the dice’ with a small portion of their portfolio.”
A Long-Term Relationship
One of the biggest reasons investors should consider hiring a younger advisor is the mere fact that most advisors don’t have a succession plan in place, Chalekian says. They might end up retiring or being forced into retirement because of health reasons and do not have someone ready to take over.
Another reason is that their financial advisory practice can go up for sale, and “you might be stuck working with a new advisor that you don’t have a relationship with,” he says. “Ironically, advisors who spend most of their time planning for others do a poor job planning for themselves or their business.”
Young investors should remember that hiring an advisor could be a long-term relationship.
“If you want to closely work with someone for the next 20 to 30 years to get you through retirement and beyond, it might behoove you to find a planner closer to your age,” Chalekian says. “Just imagine that you are 35 years old, and your parent’s advisor is 65. Chances are they will be retiring before you, and you will have to look for another person to help you.”
There is a “sweet spot” age for a financial advisor, Sizemore says.
“You want someone experienced enough to have handled a few bear markets, but not so old as to be ossified in their thinking and processes,” he says. “What is that sweet spot? It’s hard to say exactly, but I would say 40 to 60 is the ideal age range.”
Even though your parents could have worked with the same advisor for many years, the factors they considered could be very different from yours.
“Your parents may or may not have chosen the advisor for the right reasons,” Sizemore says.
“Is he your dad’s drinking buddy? Is she your mom’s friend from church? Those reasons might not be relevant to you. You should always do your own research and be willing to ask questions. Pick an advisor that listens to you and wants to invest your way.”
Getting a second opinion is always a good idea, says Phillip Ramsey, co-founder of Uncommon Wealth Partners in Ankeny, Iowa. Finding an advisor who is willing to understand new assets such as cryptocurrency as well as educate you on his or her investing strategy is crucial.
“Taking ownership of your own finances can be a daunting task, but it also can be helpful to interview a couple different advisors to get a feel of how each one interacts with you,” he says.
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Why You Shouldn’t Hire Your Parents’ Financial Advisor originally appeared on usnews.com