It’s a common misconception that financial advisers are only for wealthy or older people. The value of sound advice can benefit everyone, regardless of their financial circumstances or age.
Benefits of advice at a younger age
Lifetime of good habits
Just as cashflow is the lifeblood of any business, it’s also vitally important for maintaining a healthy personal or household budget. Putting in place good cashflow practices at any early age, for example knowing what you spend, living within your means and saving small amounts regularly, can set individuals and families up for a lifetime of financial security.
Financial education
While efforts are being made to improve the financial literacy of our young people, it remains an issue that our financial system is complex. Superannuation and taxation rules apply differently in different situations and it’s very important for individuals to understand how the rules relate to them particularly if they are self employed or starting a business. Getting good advice early can make a lasting difference.
Compounding returns
Starting an investment strategy sooner, rather than later, presents a significant opportunity for younger investors, by harnessing the power of compounding returns over a longer time period. Compounding returns are when an investment’s returns are reinvested and those profits in turn start to generate their own profits. This can lead to exponential growth, but the important factor is time; the longer the investment is held the greater the compounding effect.
For example, say $100,000 was invested and earned a 5.00% net return each year. Let’s assume no further funds were contributed but all returns were reinvested. By reinvesting the profits each year the investor is able to generate an average return higher than that of the underlying investment itself.
| Initial $100,000 investment | After 1 year | After 5 years | After 10 years | After 15 years | After 20 years |
| Closing investment balance | $105,000 | $127,628 | $162,889 | $207,893 | $265,330 |
| Cumulative profits | $5,000 | $27,628 | $62,889 | $107,893 | $165,330 |
| Investment return p/a | 5.00% | 5.00% | 5.00% | 5.00% | 5.00% |
| Average compound portfolio return p/a | 5.00% | 5.53% | 6.29% | 7.19% | 8.27% |
Lower insurance costs
Personal insurance cover is often based on the life insured’s age and is significantly cheaper for younger people. This is great news for families with young children and / or high debt levels, who typically have the highest insurance needs.
Most insurance providers offer the choice of locking in the annual insurance premium based on the age of the life insured when they first take out the policy, which is known as level premium. While level premiums do initially cost more than stepped premiums, which increase each year as the life insured gets older, they can result in significant long-term cost savings for people who establish their insurance cover at a younger age.
Understanding younger clients
When it comes to money, everyone’s situation is unique and just because someone is younger or still early in their career, doesn’t mean their finances are any less important. Generational stereotypes are not helpful and it’s important to understand each individual’s own circumstances and financial experience.
However, differences do exist compared older generations when it comes to finances, as a result of the vast information and investment choice that investors now have access to. It is common for younger people to have conducted their own financial investigations and research before seeing an adviser. Also the range of investment options available now is staggering. For example, US fund manager Legg Mason surveyed 16,000 investors and found 66% of millennials chose funds according to environmental, social or governance considerations, compared to 32% of baby boomers. It’s therefore important for younger investors to work with an adviser who understands the rapidly changing investment landscape and can tailor the advice to suit their client’s preferences.
Generational wealth
We’re about to see the largest transfer of wealth in Australia’s history. Research by Griffith University estimates Australians over 60 will transfer $3.5 trillion over the next 20 years. Receiving financial assistance from family, or being the beneficiary of an inheritance, can be a significant, and sometimes daunting, financial event for younger people. When deciding how to access and apply these funds there is seldom one “right” answer, however a good financial adviser will help to work through the various options and tax implications to help make an informed and confident decision.
Never before has it been more important for younger Australians to start looking at their financial situation. Working with a financial adviser can be a great way to get information specific to their own circumstances and guidance on how to set themselves up for a secure and successful financial future.
If you have any questions regarding the above, please contact Director and Financial Adviser Hamish Landreth at hlandreth@prosperity.com.au. Alternatively, contact your principal adviser.
This communication contains information that is general in nature. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider your financial situation and needs before making any decisions based on this information. Prosperity Wealth Advisers (ABN 32 141 396 376) is an authorised representative of Prosperity Wealth Advisory Services Pty Ltd, Australian Financial Services Licensee (533675).
