Hartford Funds : Client Conversations (August 2015)
Today’s young investors are the first generation almost entirely on their own for retirement. Most of them won’t have pensions from employers, and any Social Security benefits they do receive will likely be reduced or delayed relative to today’s retirees. In short, the Millennial cohort faces a unique retirement situation that relies on their own financial savvy.
That’s why it’s more important than ever for Millennials to choose a financial advisor and start investing while they’re young. When young adults begin to invest is arguably just as important as how much they invest, primarily because of compound interest (see chart below). And since the oldest wave of the generation (generally defined as those born between 1980 and 2000) is still decades away from retirement, now is the time to set up a solid financial plan.
Investing Even a Small Amount Early Can Be More Impactful Than Investing More Later in Life
Compounding is the ability of an asset to generate earnings. Essentially, it grows the amount of principal that interest is generated on, increasing the interest earned in turn. In this example, based on 8% annual returns, starting at age 25 with a smaller investment amount would have better results than waiting until age 45 and investing a higher amount. This example is for illustrative purposes only and is not indicative of any investment.
Recently, we made the case for Millennials to work with human advisors for their unique investment needs rather than online wealth managers or robo-advisors. Now, we’d like to offer some suggestions to help Millennials find a human financial advisor they can trust:
1. Ask for recommendations.
Word of mouth is a strong indicator of satisfaction, and can be an easy place to begin building a list of potential candidates. Talk to family members, coworkers, friends, and peers about their experiences with local advisors as you begin your research. You can also consider online reviews as an additional source of feedback.
2. Review potential advisors’ qualifications.
To become a qualified financial advisor, a professional must pass the FINRA Series 7 exam. In addition, there are certifications that require additional commitment and expertise beyond that minimum. These are some of the most common designations to look for: CFP®, which stands for Certified Financial Planner; ChFC®, which stands for Chartered Financial Consultant; and CPA®, which stands for Certified Public Accountant. You can often verify an advisor’s credentials online.
3. Understand the necessary costs.
There are numerous ways financial advisors are compensated for their advice. Some may simply be salaried and receive bonuses. Others receive a commission from the financial-services products they sell. Fee-based advisors may be compensated by charging a percentage of the assets they manage for you. There are also fee-only advisors, who could charge you an hourly rate for their time, a flat fee for their services, or a percentage of the assets they manage for you. Be aware that investments may also have their own fees in addition to your financial advisor’s charges, and that fee-based programs may not be appropriate for all investors.
4. Understand minimum investment requirements.
Many Millennials may think they don’t have enough money saved to work with a financial advisor, but that’s not always the case. Depending on the firm, financial advisors can require minimums from as little as $0 or $500 to as much as $100,000 or more. To avoid any surprises, make sure this is one of your initial questions when you call to set up consultations.
5. Ask questions.
There are plenty of qualified advisors who can help you find appropriate investments. But if you aren’t comfortable with an advisor, will you trust their advice? You want someone who will listen carefully to your goals and situation, then clearly explain their recommendations and why they think it’s a good fit for you. And don’t be afraid to ask questions to determine whether an advisor cares about you as a client. Examples include how they define success: Do they consider success beating a benchmark, or is it sticking to your plan and making progress toward your goals? You can request references from other clients to gauge their experiences, as well.
Once you have names for a few potential advisors, set up initial meetings with at least three of them. Create a common list of questions, and take notes during each meeting to compare later. Include things such as preferred methods of communication—are you both comfortable communicating through email, in person, etc.? Remember, you have every right to be picky with your selection since this should be a long-term relationship. After all, the financial advisor you choose is your partner in building and managing your financial future.