The ticking bomb of Generation Y
Young people, even high-earning professionals, suffer the most from a financial advice gap. Danielle Levy reports
Saturday 15 February 2014
At first glance the much-vaunted young professional seems to have everything, but the reality can be very different. Stagnant wages, high levels of debt, with the kicker of rising rents and property prices in London and the South-east in particular. Throw in a lack of financial education and a broad mistrust of banks and it is easy to see that generation Y is struggling to save, invest or contemplate putting together a financial plan for the long term.
Even high-earning young professionals are seemingly unlikely to consider actively investing due to a lack of knowledge or difficulties accessing financial advice. This has been made worse by rules that ban advisers from taking commission on the products they recommend. They must now charge a transparent and often ongoing fee direct to the customer for the advice.
The net effect has been that both high-street banks and a growing number of financial advisers have withdrawn services for those with less than £100,000 to invest.
Some have gone as far as describing the situation for the younger generations as a ticking demographic bomb. "My younger clients are finding rents and property prices very expensive, even with low mortgage rates. They are under pressure so it is difficult for them to find savings." explains Lee Robertson, chief executive of financial advice firm Investment Quorum.
Typical of generation Y is Jeremy Dresner, 28. He works for the local authority in Brighton, is currently saving for a wedding and poised to buy his first property through the Government's Help to Buy scheme.
He started investing for the first time a year ago through online low-cost investment manager Nutmeg, putting money to work that was given to him by his grandparents. He invests £100 per month and describes himself as an exception among his friends as one of the few who invests.
"Most of my friends don't invest and get by month by month. They are not generally at the bottom of their overdraft, but are struggling as they have still got university debts to pay off. They could maybe save for a holiday or a festival. I know I am fortunate to have a bit of extra money from my grandparents so I can invest," he explains.
Sadly, figures from the Money Advice Service (MAS), an organisation that was set up by the Government to provide free advice, suggest that debt remains an acute problem amongst young people. A recent MAS study found that first-time workers aged 18-24 accounted for 10 per cent of those over-indebted in the UK, or rather 900,000 people. Those between the ages of 25 and 34 in full-time employment represented 12.5 per cent of the over-indebted camp, equating to 1.1 million.
"This age group faces major financial decisions, like buying their first home and having kids. What we have found is they have a lot of aspiration but there is a lot of confusion about how to go about that," says Kirsty Bowman-Vaughan, young people policy manager at MAS. She believes a reluctance to talk openly with friends and family about money is at the core of the problem.
Likewise, the Citizens Advice Bureau reports a 53 per cent rise in the number of young people who have approached it for help since the start of the economic crisis in 2007.
"Current and future generations of young people will have to foot the bill for eye-watering pensions and social-care bills," Citizens Advice Bureau chief executive Gillian Guy says. "Investing in young people's futures by making sure our state safety net is geared towards helping them to live independently and contribute to the public purse is vital."
Nick Hungerford, chief executive of Nutmeg, highlights a reluctance to address this issue. "Policymakers are geared towards baby boomers. If politically there are simply more baby boomers, why would you not build policy around them? And historically young people are less likely to vote. Baby boomers have benefited from rising asset prices and policy- makers are less likely to do anything that changes that," he explains.
He expects generation Y could suffer shortfalls in retirement income and believes the financial services industry should do more to explain the benefits of investing in riskier assets, such as stocks and shares, for the longer term. Younger people, he adds, feel priced out of investments in a way their parents never were.
It isn't all bad news, however. There are a number of options available for young people seeking help or someone to invest on their behalf.
For those simply looking for initial guidance, MAS offers a range of tools. They include a budget planner; a "cutback calculator" which suggests changes to daily spending habits to free up money; a "money stretcher" to make your cash last longer; alongside a "health check! to provide a solid starting point. There is even a tool to assist in working out the potential costs associated with having a baby.
For those looking to play the markets who don't have the time to do it themselves, Nutmeg offers investment management for a minimum of £1,000 through a range of portfolios. Charges start at 1 per cent up to £25,000 and are then tiered.
The proposition appears to have gained traction since the company launched in 2012, with 60 per cent of its client base between the ages of 30 and 45.
Understanding the investment psyches associated with generation Y is crucial, Mr Hungerford says. In his experience, this tends to equate to a greater appetite to take on risk and a desire to invest with a social bias.
"Generation Y are social investors. They are interested in investing in companies they feel a part of, like Twitter and Facebook. They are interested in crowdfunding and have strong biases towards companies that do the right thing and are transparent," he explains.
There are also the do-it-yourself stockbrokers, such as Hargreaves Lansdown and AJ Bell, for those who want complete control of their investments. There are, though, no specialist financial advisers targeting the young professional market in the UK. Whether that is a reflection of the financial health of generation Y or simply a missed opportunity is unclear.
Danielle Levy is news editor at Citywire
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