I’ve written before about whether “Millennials,” born between 1980 and 1995, are attractive clients for independent advisors. Answer: not yet.
Historically, the vast majority of folks between the ages of 21 and 36 just don’t have financial issues complex enough to warrant paying a professional advisor. And it’s my observation that most of today’s “young adults” are no exception.
However, a recently released study conducted by Big Four accounting firm PwC (formerly Price Waterhouse Cooper) and the George Washington University Global Financial Literacy Excellence Center, suggests that the financial situation of most Millennials is far worse than even I thought: raising the larger question of when, if ever, this generation will become viable advisory clients—and what the impact will be on the advisory industry if they don’t.
The PwC/GW study of “over 5,500 young people” is called “Millennials & Financial Literacy—The Struggle with Personal Finance.” And the title is not an overstatement. As the study shows, Millennials’ finances were torpedoed before they even had any finances, by decades of insane student loan programs which encouraged colleges and universities to raise tuitions to ridiculous levels (my words): “2/3 of all Millennials, and a staggering 81% of college-educated Millennials, have at least one long-term debt.”
Moreover, 31% of all Millennials, and 44% of college-educated Millennials, “carry more than one source of outstanding long-term debt.”
Consequently, “more than 54% of Millennials expressed concern about their ability to repay their student loan debt.” Even among Millennial households with annual incomes over $75,000, “34% are concerned they many not be able to repay their student loans.”
What’s more, the Study found that “nearly 30% of Millennials are ‘financially fragile,’ meaning they are currently overdrawing on their checking accounts, and “53% are carrying credit card balances.” At the same time, 42% have used “Alternative Financial Services, such as payday loans, pawnshops, auto title loans, tax refund advances, and rent-to-own products.” And “more than 20% of the Millennials with retirement accounts (36%) had taken loans or hardship withdrawals in the past year.” The bottom line: “Nearly 50% don’t believe they could come up with $2,000 if an unexpected need arose within the next month.”
As if this weren’t a dismal enough picture, the Study went on to detail Millennials’ financial knowledge: Some “24% demonstrated basic financial literacy”; and “only 8% demonstrated high financial literacy.”
The study concluded: “Among the overall population, Millennials are the age group with the lowest level of financial literacy.” (Although, assuming that they aren’t including the under-20 generation, I suspect that when every generation was between 21 and 35 years old, it had the “lowest financial literacy.”)
So this newest generation of potential advisory clients is up to their horn-rimmed glasses in long term-debt, is using high-interest short-term debt and their retirement accounts to make ends meet, and not surprisingly, lacks the financial savvy to sort it all out. At the same time, the prospects for an improvement in Millennials’ economic situation seems iffy at best.
Both the global and U.S. economies are either stagnating or teetering on the brink of disaster (depending on one’s point of view), and the market for jobs (that haven’t been replaced by digital technology) is flooded with legal and illegal immigrants on one end, and by Baby Boomers who can’t afford to retire on the other.
At the risk of appearing insensitive to the plight of Millennials (this is a website for financial advisors, after all), to my mind all of this raises the rather large question that if Milliennials’ economic prospects don’t improve rather dramatically—and unexpectedly—over the next decade, how are independent advisors going to replace their aging Baby Boomer clients, who have reached the “decumulation” stage of their lives?
Yes, the transition from AUM fees to flat fees may prop up firm revenues for a few years. And hopefully, the Gen Xers (between 36 and 50 years old) will step up. But remember, they are feeling the pinch from us non-retiring Boomers, too. After them, the Next Geners, and the Millennials appear to be increasingly polarized: with a small group of ultra-wealthy tech and financial gurus at one end, and at the other, a large group of folks who are struggling to just make ends meet.
Even with the increased capacity created by technology and robo-technology, Generation X and younger owner-advisors may be facing a much smaller market than the advisory world has today.