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X Marks the Spot

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Like it or not, we’ve all been assigned our respective generational pigeonholes, from the Pilgrims to the latest American timeline iteration, Generation Y. Groucho Marx once said that he wouldn’t want to be part of any group that would accept him as a member. But Groucho himself, born in 1890, was a member of the 900,000-strong Lost Generation, spanning people born between 1883 and 1901. Definitely not lost are the Baby Boomers, all 70-plus million of them, born between 1946 and 1964. It’s a demographic the minutiae of which have been force-fed ad nauseum to financial professionals nationwide–and mined deeply for its wealth of clients.

While hip Boomers can readily identify the rock band behind the lyrics, “War…uh-huh, huh…yea; what is it good for?” their immediate successors, Generation X, remain, like, clueless. It’s a shortcoming worthy of forgiveness when considering that some experts are touting GenX as a frontier market for financial advisors–a market that at least one recent study claims is seriously overlooked. Why? With an surfeit of Boomers, no one’s needed them as clients–yet.

In general, though, there appears to be a lack of understanding of this segment, compounded by a closed-mindedness on the part of some financial professionals who hold fast to GenX stereotypes portraying them as motivationally challenged, instead of the skeptical, politically and socially aware, well-schooled and oftentimes wealthy do-it-yourselfers that many of them are. One advisor calls GenXers the “perfect client,” adding that she is “delighted with their mindset.” Are there many with six-figure incomes? “More than I ever imagined,” she says.

The GenX potential hasn’t escaped the notice of New York Life Investment Management LLC. The money management and investment services firm conducted a survey in March 2001 through its MainStay division to see exactly how deep this potential ran. Previous research, the survey states, showed that roughly one-third of millionaire households in the U.S. are headed by someone between 18 and 39 years of age, though this figure may have changed due to the lackluster economy. Nonetheless, the New York Life researchers concluded that, in the words of a press release trumpeting their findings, “financial advisors are missing an enormous untapped opportunity.” Few investment pros have thus far focused on Generation X, affirms Beverly Moore, head of retail marketing and managing director at NYLIM. “It’s a huge untapped market.”

Fools’ Gold?

But there are some financial advisors who have little interest in reaching these GenXers as a market segment per se. “I think the marketplace is getting carried away with labeling demographics,” maintains Morris Armstrong, of Armstrong Financial Strategies in New Milford, Connecticut. “The question can be asked, ‘Who works with the middle market,’ since obviously a large number of GenXers are not ‘wealthy’ but rather middle class.” He makes the point that when one refers to the GenX High-Net-Worth faction, one will find there issues not far removed from those pertaining to HNW clients of virtually any other demographic.

That logic notwithstanding, GenX proponents would use Beverly Moore’s argument that GenXers have needs not shared by other HNWs and exhibit certain attitudes towards their finances which, when met and understood by advisors, afford the latter “access to a whole new group of clients.” (We’ll explore these unique characteristics later.) It’s a group, proponents are quick to argue, that holds within its ranks much wealth indeed. Forrester Research data show that over two million GenX households are classified as HNWs, with over $708 billion in total to invest.

Like the viability of the demographic itself, this figure is quick to draw fire. Scott Kays, of Kays Financial Advisory Corp. in Atlanta, has a hard time believing the number is so high. He wonders, too, how much of that money is actually investable and not paper wealth dependent on future market events. But believers in the GenX potential take these figures to heart. They’re cognizant of those GenXers whose assets were decimated last year by a flagging technology market (where many but not all wealthy GenXers made their money) and backfiring company stock options. They count among wealthy GenX clients those in a variety of professions unrelated to technology, and not enriched (or impoverished) by company options.

“They have great jobs, great incomes, great career paths, and are often a lot more frugal than their parents,” says Sheryl Garrett of the Overland Park, Kansas-based Garrett Planning Network, a national network of advisors who eschew asset management fees, retainers, and long-term contracts or commissions in favor of as-needed financial planning services and advice billed by the hour. It’s an approach that resonates with GenXers and works extremely well for Garrett and others with similar business models.

GenX proponents believe they have a few other aces as well. First, while some GenX client portfolios may be of modest proportions today, many of these people are scarcely 25 years old. They haven’t had time to accumulate impressive portfolio assets–but many undoubtedly will. Garrett sees this as the perfect time to “nurture and invite” this demographic into advisor practices. The fact that not all GenXers have high net worth isn’t seen as a deterrent by Andrea Spatz, either. A CFP with Louis Wallensky Associates in Los Angeles, Spatz doesn’t target any particular demographic, and most clients come to the 33-year-old firm through referrals. But as “comprehensive planners” who bill through a combination of fee and commission, they are able to serve the basic life and disability needs of less affluent GenXers.

“These people are prime for that,” she says, adding that most of the basics of financial planning are best done at that age. “Get ‘em while they’re young and just starting out. You can build lifelong savings habits and dollar-cost averaging because, frankly, a client can do more for themselves than we can do for them. If they learn to live beneath their means and save, that’s far more valuable than any kind of investment portfolio we could put together.” As an added benefit, the advisor is liable to have clients like these for life. And according to Sheryl Garrett, they’re especially good clients for planners just starting out in business.

Anatomy of Generation

Who exactly are these GenXers? How do you go about finding them? How do you service them once you’ve found them? According to the U.S. Census Bureau, this generation, born between 1961 and 1981 (and which the bureau counts as those 22 to 35 years of age), numbers 51,976,339, or 19% of the total United States population of 274,634,000. In her report, “Generation X and Investing,” Forrester Research analyst Ekaterina Walsh notes that with a 47%/53% male/female makeup, this group is relatively well educated, and has a median annual household income of $40,000. Of the 64% of GenXers who are “online,” 23% bank there, and 7% trade stocks or mutual funds there.

GenXers boast an average net worth of $117,000; 2% of GenX households have $1,000,000 or more; 33% have less than $24,999; while 19% have $50,000 to $99,000, and 15% have $100,000 to $199,999. This latter figure is noteworthy because it helps put the New York Life Investment Management survey–and its enthusiastic pronouncement of the GenX demographic as a gold mine of advisor opportunity–into clearer perspective. This survey, conducted by Greenfield Online and released in May, draws upon the responses of GenXers who are 22 to 34 years olds with more than $100,000 in investable assets; that represents some 20% of all GenXers.

In the Forrester report, Walsh found that GenXers are active, independent investors. Of those survey respondents who said they used a brokerage channel, 52% gather their own investment information and make investment decisions on their own, while 45% “always seek advice from experts before making investment decisions and rely heavily on their counsel.” Of GenXers surveyed who own stocks, 41% said they use the Internet to research stocks and conduct transactions. (The NYLIM report notes that 63% of the GenXers they surveyed obtain their financial information from the Internet.) Of these stock holders, 67% said they consider financial advisors to be an important source of information; 63% cited daily business news and newspaper quotes, while 62% and 55% cited the Internet and friends and family, respectively.

Of those GenXers in the Forrester study who own mutual funds that are not in 401(k) or 403(b) plans, 79% found financial advisors to be an important source of information; 70% said magazines; 69%, fund-rating services; 58%, family or friends; 43%, the Internet; and 16%, advertising. As for investment style, 91% said they invest to grow their money, with 84% claiming to be long-term investors; 69% said they were investing primarily for retirement, while 53% said they were investing to provide income for themselves. Twenty-eight percent said they wouldn’t consider investments where they might lose money. Only 13% claimed to be experienced investors.

Who You Gonna Call?

A profile created by Colorado College shows that GenXers have learned from their Boomer parents’ mistakes: they are marrying later, having kids later (which accelerates a couple’s savings through dual incomes), and want to spend more time with their families when they have them. In fact, 46% are still crashing with Mom and Dad. In a generalized nutshell, GenXers are educated, techno-savvy, and independent-minded do-it-yourselfers. They appear more realistic than Boomers about money matters, perhaps even pessimistic: More GenXers believe they will see a UFO than a Social Security check with their name on it. But they are, at heart, validators. As Garrett puts it, while they may be regulars on the Internet, a lot of GenXers would prefer to get their advice “from a financial geek rather than a gadget.”

Besides, as planner Andrea Spatz posits, self-reliant GenXers who may proclaim, “I would never use an advisor” (as did the son of a 50-something Boomer friend of Spatz’s, much to their amusement), may change their tune when beset with life-altering events or time-consuming activities such as raising a family. Steve Thalheimer of Thalheimer Financial Planning, who launched his fee-only practice in Silver Spring, Maryland, just two years ago and has adopted the business model of Garrett Financial Planning, reports that his practice has been picking up with GenXers for these very reasons.

The NYLIM survey notes that a “significant” percentage of HNWs who don’t currently have a financial advisor believe they need one. While 39% of the HNW GenXers surveyed use an advisor, fully two-thirds of the remainder will consider using one in the future, the report states, adding this: 58% said they still need to put together a comprehensive financial plan, and want to do so. A majority said they were concerned about their financial future–86% of GenXers using or expecting to use a financial advisor said that retirement is extremely or very important to them. “GenXers are more focused on trust and an advisor’s willingness to communicate and give them advice,” reports NYLIM’s Moore. The problem is they don’t know whom to turn to for this type of relationship, which is the only one many will accept.

If it’s true that, as Moore says, “most financial advisors have demonstrated little understanding or interest in reaching these investors,” it could be said of GenXers that they in turn have demonstrated little understanding and much mistrust of financial services professionals. Garrett maintains that GenXers have been turned away by many traditional planning firms with high minimums and turned off by the prospect of relationships with asset management or brokerage firms–firms that primarily have busied themselves with understanding and implementing the needs of Boomers, not GenXers. What GenXers want, Garrett says, and what’s not readily available to them, are validation and professional advice without ongoing asset management fees, retainers, and long-term contracts or commissions. They wish to be consulted with, not sold to, and want to be very involved in the process.

Thus, Garrett says, while many GenXers are hesitant to work with a commissioned sales person and often find the prospect of paying a percentage of their worth for “asset management” a vague and ludicrous concept, they are not uncomfortable spending money on advice–as long as they know what it is going to cost up front and what exactly it is they are paying for. Enter the retainer and hourly-fee billing structures.

Paying the Piper

Much of the controversy over the hourly-fee structure stems from the fact that many advisors want little to do with Middle Americans of modest means and much do to with the high net worth. Historically, the latter has lent itself nicely to the fee-based management of hefty portfolios, and not at all to the charging of hourly fees. As F. Dennis De Stefano of De Stefano Wealth Management in Maui, Hawaii, puts it: “I simply don’t understand how anyone can charge by the hour for asset management unless they are not actually managing investments.” Whether or not the fee-based system works at all by the time GenXers sign up for AARP remains to be seen.

Some planners, like Garrett, find asset management fees grossly inappropriate for many GenXers to begin with, which leaves the flat or hourly fee as the only viable alternatives. Garrett holds to the notion that most GenXers should be investing in long-term, buy-and-hold, mostly growth-oriented stocks, in a good allocation of mutual funds, or a combination of the two. The investor can leave this program on autopilot, she says, and touch base with his or her advisor every few years, or sooner for updates, and pay for such services rendered periodically. “Ongoing management is just a way to keep [providing] financial planners with a paycheck,” says Garrett, who doesn’t engage in ongoing client management and supervision, but tells her charges “what I think they ought to have, what changes they should make, and it’s good for that day.” She says fee-based management “serves no real value to a 30-year-old. They see someone as getting 1% or 2% for virtually nothing.” In the face of an ailing economy, advisor Andrea Spatz, whose compensation comes from both fees and commissions, wonders how long clients will continue to “pay through the nose” for the former. “For a lot of people, frankly, paying a [yearly percentage fee] is an outrageous amount of money if you have a big portfolio.” Her firm has clients who pay that way by choice. “But the reality is that they are spending more than some other clients who don’t have a bias against commissions.”

Such monetary and ethical considerations notwithstanding, the hourly-fee structure by itself is not for everyone. Most planning firms, such as Morris Armstrong’s fee-only practice, accept hourly clients as well as task-specific (e.g., a comprehensive financial plan) and asset management clients. But he believes the hourly-fee model will become more popular in the future since it will be demand driven. “You can envision a large or mid-size planning firm perhaps with planners ‘trained’ in this specific segment,” he says.

High Incomes, Low Assets

Marnie Aznar of Aznar Financial Advisors in Morris Plains, New Jersey, agrees that the GenX market is overlooked by fee-only planners like herself, and she targets young professionals. Regarding fees she makes this point: “As more and more advisors charge a fee based on assets under management, it becomes difficult to make a living working with clients who, although they may have very high incomes, have not yet accumulated the kind of assets that are necessary to make a living charging a percentage of assets under management.” Thus to Aznar, in order to work with a young professional with a solid income who has not yet accumulated significant assets, a fixed fee for a comprehensive plan and hourly fees for continuing service makes the most sense.

Peg Downey of Money Plans, a 19-year-old firm in Silver Spring, Maryland, goes after the middle income market. She does mostly hourly work, but when it comes to investment management, “then, like our colleagues, we charge a fee.” She believes there is a “substantial market of folks who see themselves as middle income and who prefer to pay on an hourly basis. These are the folks we aim at.” Andy Claybrook, of Fee-Only Solutions in Franklin, Tennessee, agrees that there is a substantial unmet need in the marketplace for “unbiased, experienced financial advice” for those who don’t want or need asset management in the traditional sense. “This applies to GenX, Baby Boomers, retirees, and any other demographic group one chooses to define.” His firm also offers an annual flat fee/retainer schedule for ongoing planning and assistance after initial services are rendered. The flat fee is based on portfolio size but is not a percentage of assets.

“You can definitely make a living doing just hourly or hourly and retainer,” says Sherry Hazan-Cohen of Dream Archive Planners Network in Plano, Texas. At a time when asset management earnings have dwindled somewhat due to a struggling economy, Hazan-Cohen, like Steve Thalheimer mentioned earlier, is doing better than ever. “My business has exploded,” she says, forcing her to hire additional staff.

Hazan-Cohen recently developed a network similar to the Garrett network, with one member in Virginia, but hasn’t advertised this because she’s too busy: Having broadcast her hourly compensation method through her Web site, she has been deluged with calls. Hazan-Cohen charges either by the hour or by retainer. Her minimum fee is $3,600 for comprehensive retainer clients and $125 per hour for hourly engagements.

Scott Leonard, of Leonard Wealth Management in El Segundo, California, has taken a unique approach to the billing issue (which brings in certain clientele, including, but not limited to, GenXers) by creating a special program, which he has dubbed the Emerging Millionaire Program. Designed for middle-income individuals who don’t meet the firm’s standard $1 million minimum, the initiative takes a cafeteria approach to financial planning and investment management by combining set fees for projects, hourly fees, and very low percentage fees for assets under supervision. “We have yet to see if it will be profitable,” Leonard says. He created the program not only so that he wouldn’t have to turn away prospects unable to meet the firm’s minimum asset requirement, but to help advisors who are “just starting out” build their businesses by outsourcing to them.

Plenty of Clients, Yes,

But a Living?

The hourly-fee approach does have its drawbacks, however. Michael Helffrich of PFP Advisors in Minneapolis reports he has been charging by the hour for a long time. “Sure it makes sense, as long as you don’t want to grow too quickly,” he says. Jamie Milne of Milne Financial Planning in Barre, Vermont, though bereft of GenX clients, charges a one-meeting fee of $595. He calls it a “financial physical” (he doesn’t consider it “comprehensive”), and it can last three hours or longer. After the meeting, clients are on their own in terms of implementing his recommendations. He has some clients that he charges a retainer fee for two scheduled meetings per year. Milne believes his method can be profitable, though not so easy, perhaps, in a non-metropolitan such as the one in which he lives.

Advisor Scott Kays thinks that in terms of a demographic like GenX, fee-based planning and charging on an hourly basis are probably a “great way to get your foot in the door,” but that down the road, when these clients become wealthier, charging a fee on assets under management makes the most sense. His firm does offer an hourly rate for advice of $175, but Kays stresses that “99.9%” of his revenue comes from assets under management. “I think most financial planners are going to have a hard time making a good living on a fee basis working with Middle America,” Kays says. “You’ll have a hard time building clientele big enough that’s willing to pay recurring fees who make an income of $50,000 to $75,000 a year.”

Striking It Rich

It’s clear that some billing systems work better for advisors than others, vis-?-vis their respective clientele and the training and professional experience the advisors have received, coupled with underlying philosophies that fuel their business sensibilities. For new advisors and those willing (or who insist upon) billing clients by the hour or by retainer, the GenX market would appear custom made. But how do you land these skeptical GenX validators, and earn and keep their trust?

They’re comfortable foraging Web sites like Smart Money, Quicken, Morningstar, Motley Fool, but not with “suits,” explains Garrett.

Part of it is attitude. GenXers aren’t impressed by mahogany and pinstripes, and are not particularly materialistic. Dress casual. Garrett wears Dockers and a golf shirt. Package GenX services in a way that is attractive to them. Garrett’s bias is fee-only-hourly, and it works for her. Her success in reaching this group has been primarily word of mouth, through circles of a GenX client’s friends and co-workers.

Then there are more “technologically savvy” ways of communicating to GenXers, namely online. Have a decent Web site. Garrett’s potential clients often find her in the Yellow Pages, and go directly to her Web site, “Where they can check me out behind the scenes.” GenXers like doing this. Before meeting in person, they can get a “full flavor of my philosophies” and learn that she actually wants to work with them, instead of treating them as their Boomer-parents’ leftovers. As one GenXer told Garrett, “You were the first [planner] we could come to and say, ‘Here’s what we’ve got going on. What should we do?’”

GenXers are out there, and they’re looking for you. Meeting them, at least halfway, is something to consider.


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