Zurich’s recent Intergenerational Advice Masterclasses not only brought to advisers deep research, practical solutions and a process to the challenge of becoming the “family adviser”, but also created a forum where advisers shared their endeavours, successes and failures in the quest to become the central hub in a client’s tribe.

In part two of a four part series the dialogue of these Masterclasses is shared to drive an increase in the number of Australians seeking financial advice by tapping into the most powerful institution an adviser can have a positive influence on: the family.

Whether you’re an advice business that offers retirement planning advice to boomer clients and has a desire to tap into the generation X children of your existing clients, or whether you are a business that is deliberately focusing on X and Y clients, a tailored offering is the key ingredient for success.

The opportunity is great with data highlighting that only one out of every two wealth management clients in the 30-49 age group, (which stands to inherit from the boomers) is satisfied with their primary wealth provider.[1 ]However a traditional service model and traditional offerings do not resonate with this type of client. Unlike their boomer parents (who like their senior parents have been comfortable with the adviser led model), this new breed of client is looking for more. They desire efficient, valued based advice that taps into basic human drives: to learn, to acquire, to bond and to defend[2] . They are also more likely to socialize the advice messages they receive with peers.

The services that advice firms offer and the way these offers are positioned with these clients are keys to success in forging, intergenerational advice relationships and a valued proposition to the X and Y clients, that will drive future business growth for financial advisers.

During the Zurich Intergenerational Advice Masterclasses (May 2014) advice businesses shared the techniques, process and capabilities that have seen them become leading differentiated businesses in the quest for not only engaging X and Y clients but also doing it profitably.

The services these businesses had industrialised included[3] :

• Complete risk insurance offers encompassing small and medium enterprise business succession solutions as well as a well defined insurance philosophy (tailored insurance policy matching to client needs);
• Mortgage solutions;
• Debt recycling strategies;
• Cashflow management solutions and advice; using cashflow software and by deliberating collaborating with clients on cashflow management often using this as a centerpiece of the relationship;
• Property advocacy services.

These businesses positioned these services in the context of an all-encompassing relationship. In other words they’d been positioned in ways that demonstrated that these businesses understood what was important to these clients[4] .

Commons issues these clients face include:

• X gen families are under increasing time and financing pressure;
• Their major concerns are housing, family, schooling, career, self-development; • Consequently they also seek advice about issues such as parenting, self-fulfillment, health, lifestyle and dealing with daily life stressors.

By using engagement techniques such as[5] :

• Mind maps;
• Psychological profiling;
• Engagement apps;
• Visual white boards;
• Lifestyle questionnaires.

These businesses intertwined the advice solutions in an illustration of how the solutions connected what was at the forefront of importance in the client’s world.

Services such as divorce, career, and lifestyle counseling were not only offered but promoted as “the why” the advice relationship deserved its rightful place at the centre of the client’s family and social circle.

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[1] Accenture Wealth and Asset Management Services, 2012, The Greater Wealth Transfer.

[2] Nohria and Lawrence, 2002, Driven: How Human Nature Shapes Our Choices.

[3] Insights from Intergenerational Masterclasses, May 2014, Zurich Australia.

[4] Zurich Australia, 2014, Becoming the Central Force in Your Clients Tribe.

[5] Insights from Intergenerational Masterclasses, May 2014, Zurich Australia

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Click here to view Video: The intergenerational advice challenge and solution – Part 1

Click here to view Video: The intergenerational advice challenge and solution – Part 3

Click here to view Video: The intergenerational advice challenge and solution – Part 4

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Risk tolerance difference between Millennials and Gen Xers.

Millennials have been thought to behave more conservatively when it comes to finances than older generations. But new research from FinaMetrica, a company that helps financial advisers properly assess client risk tolerance, found similar risk tolerance levels between millennials and people of older generations.

The research, culled from data in the FinaMetrica Risk Profiling System between January 2012 and July 2014, found that individuals born between the 1980s and early 2000s, known as millennials, do not have a material difference in risk tolerance compared to Generation X individuals, who were born between the early 1960s and early 1980s. There is a 50% chance of a 30-year-old being less risk tolerant than the average 45-year-old.

There is, however, a more significant difference between millennials and baby boomers. FinaMetrica’s data reveals 69% of millennials are more risk tolerant than the average 60 year old, countering general opinion on millennial behaviour.

“Our research shows that millennials are no less risk tolerant than their Generation X or baby boomer counterparts,” said Geoff Davey, co-founder and director of FinaMetrica. “If it is true that millennials are more financially conservative, risk tolerance is not the reason.”

FinaMetrica believes that millennials’ capacity for and perception of risk may be better indicators of their conservative behaviour.

“Millennials who reached adulthood in 2000 have witnessed two major bear markets. Since then, job insecurity and rising unemployment, the commodity downturn and fears about global and Australian economic growth have forced many millennials to delay certain milestones that have traditionally categorised adulthood, including home ownership and starting a family,” Mr Davey said.

Risk tolerance, according to FinaMetrica, is a psychological trait that reflects how much risk a person is emotionally willing to take. This is different from risk capacity, which is the level of risk an individual can afford to sustain without derailing their short- or long-term goals.

FinaMetrica warns these problems could be compounded if millennials are not receiving proper investment advice. In Australia, a millennial placed into a target date or lifecycle fund would receive a 90% growth asset allocation. However, according to FinaMetrica’s data, this type of investment would be too risky emotionally for 96% of millennials.

“The current line of thinking is that a young investor with a longer time horizon can withstand downturns and regain their losses. But it is likely that many millennials who were emotionally overexposed to risk in 2007-09 feel blindsided and have since retreated to the sidelines, where they may stay for an extended period,” Mr Davey commented. “The downside, of course, is that this reticence crystallised their losses and left them out of the recovery.”

FinaMetrica noted that its data revealed a greater magnitude of risk tolerance variance within age cohorts than between them.

“As such, an individual’s emotional makeup can account for great differences in their appetite for risk compared to another person, regardless of age group,” Mr Davey said.

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The second annual TAL Australian Financial Protection Index has revealed a big jump in the protection levels of Australians, particularly Generation X.

The national Index score leaped 38% from 24.2 out of 100 last year to 33.5 this year, revealing Australians over the past year have taken a keener interest in their life insurance in its various forms: life, illness, disability and income protection.

TAL Chief Customer Service and Operations Officer Penny Coates said although she was pleased the Australian Financial Protection Index has risen over the past year, the overall score was still low indicating there was much work yet to be done to improve financial protection levels.

“While underinsurance is still is big problem in Australia, the  TAL Australian Financial Protection Index scores have increased in their second year indicating progress is being made to improve financial protection and close the nation’s big underinsurance gap,” Ms Coates said.

“Why has the Index score gone up nationally and across all the demographic groups? I think awareness has been improving, consumers are being more active, and in particular younger generations are taking matters into their own hands empowered by the digital world.

“We know that the life insurance industry has been paying more claims in recent times, and for TAL record claims, demonstrating the high value and need of life insurance in protecting customers and their families when they most need it in life.” 

Voice for Life

The 2014 Index results are being released as part of a new initiative developed by TAL, called Voice for Life. This initiative will better inform and educate customers and the broader community about the crucial societal role of financial protection. There has been a lot of commentary around the state of the life insurance industry recently. We believe that life insurance has a sustainable future and key to this is championing better outcomes for consumers.

Of all the demographic groups researched, Generation X (aged 35-49), higher income earners, those with children at home, those with mortgages and those who declare themselves as risk takers scored the highest index results at around 40 out of 100.

The number of people with a score of between 70 and 100 almost doubled to 14% of the population, while the number with a score of zero dropped a third from 30% to 20%.

Australia’s largest life insurer, TAL developed the Australian Financial Protection Index  last year in conjunction with Galaxy Research to track and analyse perceptions of underinsurance across the four major forms of personal life insurance*.

More than 1200 Australians were surveyed on the types of life insurance they held, as well as if they felt they had enough cover if they or their partner could no longer work. The results were modelled to calculate a score from 0 to 100 where 100 indicates that people have each form of life insurance and that they believe they have adequate coverage.

Protection gap is slowly closing

The results of the study suggest that while the majority of Australians still do not believe they have enough financial protection, the gap is slowly closing.

Ms Coates said: “Take-up of life insurance has continued to increase, particularly through superannuation, but the low scores reflect that on the whole there is still a substantial gap between the level of cover that people think they need and the level of cover they actually have.

“The challenge for the industry is to convert awareness of the problem into action to address the issue, and the TAL Australian Financial Protection Index is a tool to help us do that.”

Ms Coates added: “Twenty per cent of people still have no life insurance and acknowledge this is not an adequate situation which is very worrying. Even more concerning is the fact that lower income earners make up a large percentage of those who are most underinsured, yet these are the very people who can least afford the financial pressure which comes with the death, illness or injury of a member of the household.”

Table 1: Age comparisons

The survey found that the Financial Protection Index score peaks in the Gen X age group with scores lowest among those aged under 25 years.

Ms Coates expanded: “We see the highest Index scores among households with dependent children, those with a mortgage and those with higher incomes. The Index scores for all of the various age groups and generations tend to reflect these factors.”

Table 2: Summary of other key demographic findings

In other findings, the Index revealed that for the second year in a row, take up and awareness of life insurance was greatest among those with a mortgage. In addition, mortgagees were significantly more likely to perceive themselves as having adequate protection.

Highest protection characteristics

Ms Coates said it is not surprising that Australians with mortgaged homes see a greater need for financial protection via life insurance products*.

“Life insurance is an important way of protecting assets, like the family home, as well as ensuring that financial commitments will be met in the event that an earning member of the household is no longer able to contribute,” she explained.

The results of the Index also shed light on how attitudes to risk can impact take up and awareness of the need for life insurance.   The Index found that those who claim to take the most risks actually record a higher Index score.

Ms Coates concluded by saying that in positive news for all Australians, the 2014 Index score for every demographic group looked at has increased year-on-year.

“Clearly, awareness of the need for life insurance is improving. Claims have risen over the past 12 months, highlighting the very real benefits of life insurance, and greater consumer activism has also helped reinforce an understanding of the financial protection that life insurance can offer.

“We hope that an increasing awareness and understanding of the benefits of life insurance will continue to help close the financial protection gap in Australia.

Notes

1. This survey was undertaken online by Galaxy Research with 1,266 Australians, from the ages of 18–69 years old. Age, gender and region quotas were applied to the same and the dataset was weighted to national proportions.
2. The model didn’t require stay at home parents, the retired and those over 65 to have income protection.
3. *Definition of the four main forms of life insurance: Life – lump sum upon death; Illness – lump sum for defined illnesses; Disability – lump sum upon permanent and total disability; and Income Protection – regular income payment upon defined illness/disability.

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Saving for Christmas starts early and budgets expected to be lean.

It may be a common gripe that Christmas comes earlier each year but new research has revealed that Christmas budgeting has already been underway in around one in five households since October.

The research comes from the 2013 RaboDirect National Savings and Debt Barometer (NSDB), an extensive study of Australians’ attitudes towards money and savings. The findings of the latest NSDB point to a lean Christmas for many with budgeting, bargain present shopping and agreeing a giving and receiving strategy between family members a key part of the planning process.

The survey found that Gen X were most likely to be planning for Christmas in October (22%), followed by Gen Y (16%) and Baby Boomers (15%).

The most common way of planning for the festive season was to set a budget ahead of time (58%). Additionally, 42% of people who started their planning early have already made a start on their Christmas shopping. For one third of people (32%) already planning Christmas, agreeing the giving and receiving strategy between family members had already been addressed back in October.

With Australians already expected to spend an estimated $42 billion this Christmas[1], planning ahead will be crucial to avoid a last minute impulse overspend during the holidays, says RaboDirect Executive General Manager, Greg McAweeney:

“As a nation, we will be spending upwards of $40 billion this Christmas. That is a vast amount of money – in fact; it would be enough to end world hunger for 12 months if it was instead donated to charity. Or if you break it down further, this estimate amounts to about $1,800 per person – which could buy 20 Christmas turkeys; or an overseas airfare; or 90 trips to the cinema. With that in mind, it is heartening to see that one in five Australians are proactively planning to spend consciously and avoid impulse purchases during the festive season.”

Mr McAweeney commented that this trend reflects a change in sentiment that has been observed through many facets of the RaboDirect NSDB research. “This year we have seen a trend for Australians to be more engaged with their money – whether that means planning a budget or knowing their rates on accounts. A lot of people have been lacking confidence in the economy and as a result, their own financial circumstances. This has led to people taking greater financial control, and having a plan for Christmas is one such example of how people are becoming more engaged with their finances.”

Key findings amongst those who have started planning for Christmas:

• Gen Y was more likely than Gen X or Baby Boomers to set expectations with family members about gift giving (40% versus 28% for Gen Y and Baby Boomers).
• Gen X was most likely to have started their shopping early (46%) compared to Gen Y (40%) and Baby Boomers (38%)

Mr McAweeney concluded, “Having a plan in place helps people to keep their finances on track, whether this is a savings goal or setting spending limits. This is particularly important at a time like Christmas where it is very easy to fall victim to impulse spending. If you haven’t started thinking about your Christmas gift buying yet, it’s never too late to start. The cost of entertainment, presents and hosting Christmas quickly mounts up so establishing spending plan will help ensure that Santa is the only one in the red on Christmas day.”

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While the report, called The SMSF Generations Report, reveals SMSFs are popular with every generation of Australians, it has highlighted that there is no such thing as a typical SMSF investor. There are significant differences in the attitudes, investment priorities and lifestyle aspirations of each age group.

With SMSFs already the largest and fastest growing sector of the Australian superannuation industry, the report emphasises that advisers need to take into account these generational differences when delivering advice to help better meet the needs of investors.

Macquarie Banking and Financial Services Group Analytics Research Manager, Gary Lembit, said that investors across the generations recognise the value of advice when managing their SMSFs, but that advisers should tailor their approach according to life stage to have the greatest impact.

“It is clear that one of the main reasons investors opt for an SMSF is to have greater control and choice over their investments. However, this does not mean they want to be entirely self-directed,” Mr Lembit said.

“As the insights in this report show, SMSF investors across the generations recognise the role financial advisers have to play in providing valuable guidance on their investments. However, through better understanding their clients’ state of mind, advisers can adapt their advice models and learn to communicate in a way that better meets their needs, while articulating the value they can add.”

Despite investors sharing the common reasons for choosing an SMSF, more control and choice over their investments, there is a significant difference between how receptive each generation is to receiving financial advice.

Generation Y, not surprisingly, is generally highly confident about many aspects of their lives, but when it comes to long-term investment decisions, they are less confident than other generations. They are very receptive to advice, but do not seek it, meaning it is important for advisers to develop ways to proactively communicate with this group and help them understand the value of advice.

Generation X is a lot more sceptical about financial advice, but being extremely time poor, they are willing to pay for advice in certain situations, particularly if it helps save time.

The Baby Boomers are increasingly seeking advice, perhaps because of the higher amount in their funds and being closest to retirement, while the Silent Generation (those in retirement) is by far the most likely generation to seek advice.

Andrea Slattery, CEO of SPAA, said that as the number of investors using SMSFs grows, the industry needs to respond by focusing more on what they can do to best service this distinct group.

“We have found time and time again that investors who use SMSFs are the most engaged people in superannuation. They want to make sure their funds perform well and are interested in understanding what is involved to help make this happen,” Ms Slattery said.

“This includes accessing financial advice, which these investors show a continuing appetite for, but as this report has shown, the advice industry can make their role even more effective by tailoring their approach to the stage of life the investor is in. We think that through reporting insights like these we can continue to support the advice industry in its aim of demonstrating its value to investors and helping investors make the most out of their retirement savings through their SMSF.”

In addition to highlighting the differing attitudes towards advice, the report provides a snapshot of the SMSF asset allocation preferences among the generations. As a general trend, cash/near cash holdings and direct shares in SMSFs have increased in recent years, while managed fund holdings have decreased.

“We have always known that the cash holdings in SMSFs as at 30 June each year is not a true indication of the cash that is held throughout the year. This report highlights what trustees really do when they have control and flexibility and how they choose their assets to hold, including cash/near cash assets.”

Generation Y has lower cash balances and a higher proportion of their portfolios in equities than others, and a greater focus on achieving capital growth. They have been the most active during the past 12 months in changing the asset allocation of their funds.

Reflecting the ‘Great Australian Dream’, Generation X has 30 per cent of their SMSF capital in direct property, but with relatively illiquid portfolios, is less likely to have substantially changed their SMSF’s asset allocation in the past year.

The Baby Boomers have recently taken a more defensive stance towards their SMSF asset allocation. While still largely focused on capital growth, half have sought out franked dividends as a source of regular income. They still have among the highest allocations to direct equities, second only to the Silent Generation. Surprisingly, despite ongoing market volatility and the flight to safety among some investors, the Silent Generation have actually increased their SMSF allocation to direct equities in the past six years.

Summarising the key learning from the report, Mr Lembit said: “The overall message is clear: by tailoring advice to the different investment styles and decision-making processes of each generation, advisers can build stronger and more fruitful client relationships.”

25 July 2012

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