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Advisor Insights

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For millennials, debt is a four-letter word

Young investors are looking for continuing financial advice that goes beyond the transaction, financial advisors say

By: GAIL JOHNSON

Date: November 28,2014

How best can a financial advisor serve millennial clients? Those born roughly between 1982 and the early 2000s will be tomorrow’s leaders – today, they’re young investors.

Two experienced financial advisors were asked for their insights on this fastest-growing segment of the Canadian labour force, who are expected to represent 75 per cent of the global work force by 2025.

“Millennials are becoming famous for being good with budgeting; they’re debt avoiders,” says Sam Brady, a CIBC Wood Gundy portfolio manager and investment advisor with the Knudsen Brady Vaughan Advisory Group in Belleville, Ont.. “They want to be sure they’re earning more than they’re spending.”

When it comes to young investors, he’s found that it’s not the value of the transaction itself but the value of continuing advice that is important to them.

“When I started in this field nearly 20 years ago, the thinking was ‘You’re young; you can afford to make a few mistakes with money,’ ” Mr. Brady says.

“We’ve developed a very different approach here: The younger you are and the younger you start [investing], the more conservative you can afford to be. Why take on a significant amount of risk if you don’t need to? You can build a plan with a personal hurdle rate of 5 or 6 per cent and that’s better than trying to shoot for 9 to 12 per cent while exposing yourself to a lot of volatility risk and teeth-chattering.”

It does appear that millennials are more conservative than boomers when it comes to their retirement savings and planning. According to a recent MFS Investing Sentiment Insights survey, 60 per cent of millennials say their top priorities fall outside growth, 29 per cent being most interested in capital protection.

The survey suggests that millennials, who have witnessed the effects of the 2007-08 financial crisis on their parents’ portfolios and who may be burdened by student debt themselves, are looking to make wise, pragmatic decisions and are seeking sound financial advice that’s communicated effectively. They want to know that their financial advisors’ services go well beyond investments.

Education about investing and about financial planning is key for young investors, says certified financial planner Michael Nisbet who works in Sarnia, Ont.

“Spending time with them when they walk in the door really sets your relationship up well for the long term. They may not be your biggest client, but they’re appreciative of the time spent educating them, helping them set priorities and goals, and helping them develop a financial road map.”

A recent Investor Education Fund survey found that among young people a lack of knowledge is the top barrier to investing. But the report showed that respondents under 30 are more willing than older Canadians to say they don’t understand terms used by financial advisors and experts (64 per cent, versus 49 per cent across all age groups).

“They’re happy when they leave feeling that they’ve learned something,” Mr. Nisbet says. “They can be confident, and they feel good when they know where they’re going, what the next steps are, and that they’re accomplishing something. It’s empowering.”

Both advisors agree that the “sharing” millennials are more willing to speak openly to friends and relatives about finances and to give and get referrals for investment advice.

“What I find with this group is that they seem to be willing to discuss and share what they’re doing financially with friends and colleagues, whereas previous generations didn’t talk about it. Money was a taboo subject,” Mr. Nisbet says.

“With the younger generation, there’s a lot of dialogue. I’ll get calls from colleagues of clients. If you do a good job for one, you build up a reputation within their place of employment. You also end up working with people you like that way.”

While online banking is essential to today’s young adults, and social media plays a role in investment firms’ marketing, the latter isn’t a tool that advisors rely on to attract young clients. Rather, good, old-fashioned word of mouth still reigns. Existing clients may bring in their adult children to get them started on a financial plan or to discuss transfer of wealth via estate planning.

Younger clientele often need help determining where best to direct their money, whether it’s debt repayment, RRSPs, TFSAs or, if they have dependents, RESPs and insurance products.

“When we sit down with young clients for the first time, a lot of the time it’s about the prioritization of cash flow,” Mr. Brady says. “If they have a free dollar to invest, what is the biggest bang for the buck we can provide for them? We walk them through the numbers of each option so they can see where the value is.

But regardless of what might offer the best value in dollar terms, some millennials’ debt aversion means peace of mind is the main priority.

“Some people don’t want to stare at student debt even if they’re watching their RRSP go up; they’re uncomfortable having debt,” he says. “The black-and-white economic answer isn’t always the choice [that millennial] clients can sleep with.”

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