Executive Summary
The members of Generation X and Gen Y have had a unique collective experience, including growing up in the age of computers and (especially for Gen Y) with immersive exposure to the internet and the information resources it provides. Questions that might have required a trip to the library or an Encyclopedia Brittanica can be answered in a 10-second Google search. So if clients can look up a financial question in a few moments on the internet, where does that leave the value of financial planning?
Financial Planning For Gen X And Gen Y
The inspiration for today's blog comes from a recent research study on Gen X and Gen Y investors from MFS Investments that was recently posted on AdvisorOne.com. The study revealed, amongst other interesting details, that most Gen X/Y investors do not have a strong affinity for or with financial advisors. Is this a temporary phenomenon, a circumstance of age, or a sign of how the internet is changing the face of financial planning? Does financial planning need to change its value proposition - or maybe just communicate it better?
When queried about why they don't use an advisor, participants in the study responded (53%) that the primary reason is simply that it's not worth paying for the advice. 33% also reported that they do it themselves or rely on a family member. Notably, only 28% reported that it was because they felt they did not have enough money to warrant an advisor (and in point of fact, the median wealth of this rather affluent Gen X/Y sample was $260,000). And with only 12% reporting that they had never been contacted by an advisor, it certainly wasn't for a lack of opportunity.
Perhaps one notable difference right off the bat, though, from the "traditional" financial planning client, is how Gen X/Y views itself with respect to its assets. The survey results revealed that the younger generations view themselves as savers, not investors; they prefer to generate income to capital appreciation; and 35% agreed with the statement "After what has happened in the markets in the past few years, I'll never feel comfortable investing in the stock market." It sounds like a lot of these young investors took more risk than they wanted or needed - perhaps because they were told that's appropriate when they're young - and carry some hefty investment scars now, as I just warned in yesterday's blog post.
A Financial Planning Future Without Assets Under Management?
So where does this leave financial planning? If Gen X/Y views themselves as savers more than investors and many have been scarred by this decade's stock market doldrums (which, notably, is the only experience that most of this generation has ever had with investing, since they are too young to have participated or possibly even remember the boom of the 80s and 90s), then the classic assets-under-management model may not be promising going forward.
On the other hand, with so much access to information from the internet, it's not clear whether the Garrett Planning Network hourly model will necessarily fair much better; why pay an advisor to tell you answers you can just look up yourself? Notably, generational researchers like Cam Marston have also pointed out that Gen X/Y expects results much faster than other generations as well; simply saying "this will put you on a good path; you'll have a great retirement in 30 years" is far too distant and intangible to feel like there is value for the Gen X/Y client as well; financial planning needs to be translated into more near-term tangible results.
So where does all of this leave planning? The factual information of our advice can be gotten from the internet. Financial services products themselves can be bought via the internet. The Gen X/Y group doesn't have a lot of faith in investing, sees themselves as more saving (and cash flow?) oriented, and doesn't understand where advisors provide value in this equation.
Finding The True Value Of Financial Planning
Personally, I see two significant opportunities in the midst of this difficult path for planning. The first is that while Gen X/Y has access to information, they also appear to suffer from information overload. The excessive amount of choice we think should be liberating, but in fact it is paralyzing - an irrational reality that I have written about previously - and almost 2/3rds of the study participants reported that they are overwhelmed by all of the different choices available. Perhaps a key value proposition for financial planning in the future can be best summarized by an excellent sample commercial I saw from the CFP Board at the FPA Chapter Leadership Conference a few weeks ago (full credit to the CFP Board and their advertising agency for this wording, which I am paraphrasing as best I can remember it): "Your life is busy. Financial planning is not about surrendering your responsibilities; it's about doing right by them." Financial planning isn't about giving you the answers; it's about helping to guide you through them.
Another value proposition that may became even more relevant for financial planning is about the financial planner as an agent that facilitates change for their clients as discussed by Ted Klontz, Rick Kahler, Guy Cumbie, and other thought leaders in our profession. In other words, planning is not about the information that you have and the advice you deliver, but the fact that you help facilitate change in your client's behaviors to act upon that knowledge and advice. In this more coach/trainer oriented model, it's not about telling your clients that they need to save more, and how much, and what goals they can achieve with that saving; it's about helping them actually change their behavior to do the saving. And as the client's account grows quickly with saving, the client receives the short-term positive feedback about their behavior that both reinforces the behavior, and feeds into the Gen X/Y desire for determining success and value over shorter term time horizons than "this will be good for you in 30 years when you retire."
Of course, notwithstanding all of this, it's still important to actually have the technical knowledge. We don't choose to work with a "good" doctor just because they're good at helping to motivate us at losing weight; they also have to have all of the requisite technical knowledge to apply on our behalf. Similarly, these potentially new shifts in the direction of planning and its value (at least from the "traditional" paradigm that most still engage in) are not about abdicating our role as knowledge experts; it's about enhancing them from having the knowledge to applying it in a manner that actually improves the lives of your clients - over tangible and relevant time periods.
So what do you think? Is your relationship with your Gen X/Y clients different than your Baby Boomers and the Silent Generation? Is the existence of the internet and the information that it can provide changing your value proposition from the "knowledge expert" to something else? How else is the internet changing the value of what you deliver to your clients?
Two years ago on 11/11, I wrote:
In less than 5 years, AUM fees will no longer be the main compensation mechanism for independent registered investment advisory firms.
http://bit.ly/951uBw
We have three years to go in my prediction and not much has changed to date. But as you pointed out, the AUM revenue model is under serious pressure from changing demographics of advice seekers and the rise of access to information via the Internet.
What’s the answer? I like the idea of Wealth Complexity Units. I’d like to see that platform gain traction as an alternate revenue model in the industry.
Knowledge: Tomato is a fruit; Wisdom: You don’t put tomato in a fruit salad.
Having information & knowledge are not, as you note, not the same as knowing what to do with them. (Carl Richards, here is a great topic for one of your elegantly simple graphs.)
Just getting to this article now, but glad I did. I can agree with you Mike, that Gen X/Y clients need you to hold their hand and walk them through the process, ultimately changing their habits.