Financial services companies and the folks advisors rely on for advice of their own often dangle generational carrots in front of advisors.
Those being court baby boomers, millennials and Gen Z – often with little advice on the strategies and topics that most resonate with these groups. And don’t let me get on my Gen X soapbox – the one where I excoriate the financial services community for ignoring, nearly completely, an entire generation – the one that will first be on the receiving end of the great wealth transfer.
Saving that soapbox for another day and acknowledging that financial advisors are not credit counselors, one way for advisors to better connect with prospective clients, particularly younger clients, is to discuss debt and strategies for avoiding and getting out of it. And yes, these conversations can and should include going beyond student loan obligations.
Data confirm younger prospects, particularly those in Gen Z, need help with debt. That could signal not only opportunity for advisors to grow their prospects with potential long-term clients, but also the opportunity to do some good for someone that needs financial help.
Inside Gen Z Debt Woes
As mundane as budgeting and credit counseling appear on the surface, these are credible additions to a holistic practice and provide new avenues for advisors to connect with clients, particularly those in younger demographics.
A recent survey by the Urban Institute highlights the opportunity with younger prospects and how dire some of their personal debt situations are. According to the survey, 20% of those ages 18 to 24 have an account in collections.
“Many young adults have limited financial resources to meet their needs and buffer against economic shocks,” notes the Urban Institute. “In turn, young adults ages 18 to 24 may turn to credit cards to finance daily and emergency expenses. Because of their shorter credit histories, young adults are likely to face higher interest rates, and with limited incomes they may struggle to manage debt at this stage of life.”
As advisors and older clients know, collections items are among the worst things that can appear on a personal credit report. Plus, unless the borrower takes action to have the item removed, it will stay on their report up to seven years, according to Equifax. During that time, the borrower could easily be denied credit and if approved for credit, will certainly be subjected to higher interest rates on things like auto loans and credit cards.
For advisors, one of the topics to discuss is not relying on credit. Many younger prospects, due in part to being in entry level jobs, rely on credit to make ends meet – a scenario that’s being exacerbated by high inflation. There are other debt traps advisors can help young adults avoid.
“Similarly, young adults are particularly vulnerable to auto and retail loan delinquencies. The share of young adults with delinquent auto and retail debt (6.2 percent) is larger than older adults in other generations. Increasing auto costs during the COVID-19 pandemic may have increased the auto debt burden for young adults as they try to finance this expense,” adds the Urban Institute. “As inflation continues to outpace wage growth, young adults may struggle to repay auto loans, fall behind on payments, and face financial burdens in other aspects of their lives.”
Other Items of Interest
Advisors with practices in the South, pay attention because the Urban Institute points out the states with the highest percentages of 18 to 24-year olds with at least one account in collections are primarily in the South.
In order by highest percentage, those states are as follows: West Virginia, South Carolina, Oklahoma, Arkansas, Mississippi, Louisiana, Texas, Alabama, Kentucky, Tennessee, Georgia, North Carolina, New Mexico and Missouri.
For advisors, there’s also value in discussing these issues with clients that have Gen Z children, highlighting steps to take to help their kids avoid debt pitfalls.
“. Early investments in children through progressive child development accounts10 and Baby Bonds (Hamilton and Darity Jr. 2010) programs increase young adults’ assets, and Baby Bonds are likely to reduce racial disparities in young adults’ wealth and need for student loans. These programs can reduce the racial disparity (Zewde 2019) in the median net wealth of young adults (Buitrago and Mullany 2017)—enabling young adults of color to better meet their financial needs, respond to economic shocks, and invest in their futures without debt,” concludes the Urban Institute.