According to a 2015 report from the Federal Reserve Bank of Cleveland, the share of people between 26 and 32 years old who have student loan balances increased from 23% to 37% from 2007 to 2015. The total amount of student debt has ballooned to $1.2 trillion, while the average account balance is $27,000. However, the Federal Reserve Bank’s analysis also found that the higher a millennial’s student loan debt, the more upwardly mobile he or she became.
Advisors focused on serving millennials are reporting that their clients have come to them with higher levels of student debt than previous generations, a fact borne out in a 2015 study by the nonprofit Institute for College Access and Success, which found that 69% of students who graduated from college in 2014 carried debt, at an average amount of $28,950.
“I have advised more on debt, time- and dollar-amount-wise, than I do assets,” Wrenne says. “I work with younger doctors; they’re more apt to carry six figures of educational debt. Student loans are among their top priorities.”
Research from the 2015 “National Financial Capability Study” (commissioned by Finra) shows that more than 65% of millennials have at least one source of long-term debt—among the college-educated, that number balloons to 81%. Their lack of advice on cash-flow management is taking a toll: Almost one in three millennials reports occasionally overdrawing from his or her bank account, and almost one in five reports taking loans or hardship withdrawals from retirement accounts in the past year.
Debt keeps millennials from accumulating assets, which in turn makes them undesirable to advisors. Yet student debt can also signal earnings potential for younger clients, which means millennials may emerge from educational debt with higher incomes and better prospects. According to the U.S. Census Bureau, in 2014 the median per capita money income for millennials was $33,883, while the population as a whole saw income of only $28,155.
“As a young advisor building a practice, there are people like doctors and lawyers who come out with lots of student debt,” says Trace Tisler, a partner at Hudson, Ohio-based Epic Financial. “You can build a lot of trust with these people moving forward by helping them make savings and debt-management decisions.
“Anyone who has student debt right now is at the beginning of accumulation and building wealth,” he continues. “They need some debt before they get to accumulation, but they can still accumulate wealth as they pay down debt. I think that these people are going to become accumulators no matter what.”
Advisors like Tisler, Marcott, Wrenne and Landes aren’t deterred by the low asset levels or high levels of debt because they’ve adopted a subscription-fee revenue model that charges clients up-front fees for a financial plan and a flat subscription fee for ongoing advice. The simple and clear fee structure is attractive to wary millennial clients, says Wrenne.
After growing up during the tech bubble and coming of age in the financial crisis, many are skeptical of the financial industry and investing. “I would say this generation is more risk-averse to investing their money,” says Wrenne. “You don’t see a lot of individuals raising their hands to invest in stocks. There’s a lack of trust and lack of confidence because of what they witnessed—their parents lost their retirement twice in the past 15 years, so there’s this assumption that there’s not a lot of value of saving in equity markets.”
Millennials are also wary of how advisors receive their compensation. “We’re distrustful of high fees in investing,” says Landes. “The focus in the media has been on the high advisory fees; robo-advisors have changed that conversation and I think we’re taking notice.”
Millennials are the most diverse generation in American history. In 2014, according to the U.S. Census Bureau, more than 42% of Americans between 18 and 34 years old were non-Caucasian, twice as many as in 1980.
Tisler says that millennials may prefer advisors who look and behave more like themselves. “I think younger people don’t like the suit-and-tie, mahogany-desk, Italian-leather persona,” he says. “They’re looking for something more earthy and real.
“There’s intimidation in finding an advisor,” he adds, “because they haven’t worked with one and don’t know what to expect. If they walk into somewhere that’s not comfortable, if someone is older and only works with affluent people, that doesn’t work very well for millennials. It helps to know the generation you’re serving.”
Tisler, whose firm derives over half of its revenues from millennial clients, says saving challenges are exacerbated by behavioral norms. In general, millennials are more independent and outcome-oriented than their predecessors. “They seem to be more in the driver’s seat,” Tisler says. “As an advisor, I think it makes it easier because they have a defined purpose and established goals. They’re not going to work for a company for 30 to 40 years; they’re going to live the life they want and want advice on how to make that happen. They derive purpose from how they live, not in what they do for a living.”
Millennials are more likely to own businesses or work as freelancers than previous generations. According to “The 2015 Millennial Majority Workforce,” a study by generational consulting firm Millennial Branding, 38% of millennials currently freelance, while only 32% of workers over 35 do. In another study, “The Millennial Mind Goes To Work,” published by Bentley University in 2014, 60% of millennials expressed an interest in starting their own business.
Also according to the Bentley study, millennials move more frequently between jobs and careers. That’s because they value personal independence, says Pam Capalad, principal of New York-based Brunch & Budget.
“The traditional route of working for an employer and sticking with them doesn’t make sense anymore,” says Capalad. “Millennials who have jobs don’t plan on sticking around because it’s become easier to work for yourself. Millennials want to see the world while they’re young, so the question becomes one of how we travel and work at the same time. The work and personal sides of our lives are blurring. We’re less willing to be tied down.”
Other rites of passage, like marriage, childbirth, career changes or interstate moves may be emphasized less by millennials, says Eric Roberge, founder of planning firm Beyond Your Hammock. “This industry has been built on the baby boomers,” Roberge says. “Their questions focused around retirement, Social Security, Medicare, taxes, estate planning and asset allocation. For the most part, young people don’t want to hear about that.”
Andrew Mohrmann, of St. Louis-based Modern Dollar Planning, agrees. “When I’m working with clients in their 30s, having a retirement plan isn’t the focus,” Mohrmann says. “Looking at short-term cash flow is a more meaningful discussion. Running long projections is a waste of time.”
Career Advice Counts
Millennials also want help navigating rising housing costs and stagnant wages. According to the U.S. Census Bureau, the median home value (adjusted for inflation) increased from about $93,000 in 1980 to $175,000 in 2014. A large number of millennials have returned home to live with their parents, according to the U.S. Bureau of Labor Statistics, which found that a little more than 30% of millennials aged 18 to 34 live with their parents. Only around 40% over the age of 25 are married, while more than 65% of 25- to 34-year-olds were married in 1980.
“In the early ’90s, the conversation for young people was should you rent or buy,” Fisher says. “There was this idea that renting was throwing money out the window. All they remembered was how much money their parents made on their primary residence over the past 20 years. Fast-forward to 2007 through today. Kids remember how their parents lost their money in real estate. Memory does influence our investment choices.”
Advisors have an opportunity to engage millennials in holistic financial planning, taking college graduates with few assets and substantial debts and molding them into thrifty savers and savvy investors.
“At least the median and affluent millennials should be on everybody’s radar,” says Morgan. “They’re a difficult group to reach because they’re confident and know how to use digital tools. It’s a difficult audience to show value to because they’re smart and don’t want to be sold; they want to be supported and educated and they want to make sure they’re on the right path. At the end of the day, that’s the biggest value we can provide to people.”
To read part 2 of this article, click here.