Save, Insure and Manage your Tax – sooner rather than later.

For over 20 years our organisation has continued to champion the opportunity for young people to enter the financial services industry as a life time career. Few University Graduates have been introduced to or investigated this opportunity, yet the average age of independent advisors in NZ is over 55, the professional arm of the industry has only 2000 qualified members and within 4 years the purchasing power of generation Y will account for 24% of the consumer market in New Zealand.

2.3 million New Zealanders are in KiwiSaver, 750,000 currently hold term deposits and 300,000 own an investment property (50% own 1-3 properties). Kiwis need advice. Whilst we are a nation of DIY, getting it wrong will be of more significance in the future because the dual safety nets of government Super and Medical assistance will inevitably be diluted by – less tax payers (it will halve in 20 years) and more retirees (the Baby Boomer generation retiring over the next 20 years). Generation Y (the millennials) is the biggest generation since the Baby Boomers – these are the generation born between 1980 and 2000 – they are tech dependant, have a high education rate (they’re used to research) and have grown up with the world wide web at their fingertips.

This is a confluence made in Heaven, however the perception from without is hardly as divine in reputation. Unfortunately, perception is reality and the financial advice industry has some bridges to cross before the public proclaims a mantle of professionalism. But, Gen Y’s do their own research and more and more of them are knocking on our door. People joining now will inherit the existing clients and create new ways of marketing, selling, servicing and building their career within the twin freedoms of time and income.

A major roadblock however, for all new entrants is belief – especially young new entrants – i.e. Gen Y. Without belief (needs for people to save, invest, insure) there is a lack of purpose. Unlike other professions where educators, engineers, legal or accounting advisors are seen as specialists and value is seldom in question – financial advisers especially fee based financial advisers need to promote their services to people who either – don’t trust them, or trust but don’t believe they need advice, or know they need advice but don’t want to pay for it, or simply object to be being proffered advice by someone they don’t know who has called ‘out of the blue’. Marketing and prospecting is tough in any new business that is why 50% of small businesses fail in New Zealand under 5 years and nearly all inside 10 years.

But there in lies the opportunity for tech savvy young advisers to bring research and rationale to the table – to show why and how planning for things financial are critical early in ones life. Not just for the twin elephants in the room of retirement income and medical care (and these are critically important areas which will change in the next 20 years) but issues such as the difference saving makes (accumulation and choices) when initiated early, the tax implications of where to save and invest, asset class choices for inheritors, estate management implications for families, insurance awareness of probability (likelihood of occurrence) and consequential loss (the cost in real dollars). These are fundamental issues which any decent professional fee based financial adviser has specialist knowledge and expertise in. Not to mention mortgage lending and structure, how to calculate and minimise risk for investors and business owners, education funding for children or decummulation for retirees.

In summary – some important points of interest which give relevance to some of the highlighted financial issues:

1. Over 40 years in KiwiSaver, someone in the top tax bracket has their earnings cut by 54.7% by the impact of tax – this compares with 7.9% effective tax rate for someone investing in rental property that is 80% debt-funded.

2. The cost of someone investing $100 per month into a diversified international equity fund at age 25 as opposed to age 30 is around $6,000. However, at retirement age the difference is over $70,000 (age 65) – assuming a 3% inflation adjusted accumulation at 6% return.

3. Someone inheriting a $1.0 million at age 40 can turn that capital into over $4.0million at 6.5% - over the next 20 years. Compounding interest really is the height wonder of the world.

4. Jack and Jill are age 35 and 32. Jack earns $7K per month, Jill $5K. They have two children – a home loan of 400Kwith monthly repayments of $2,500

There is a 17% chance that either Jack or Jill will die before age 65.

There is a 9% chance that either Jack or Jill suffers total and permanent disablement.

There is a 25% chance of either Jack or Jill suffering a period of temporary disability – over 6 months.

There is a 99% chance of either Jack or Jill making a major medical claim before age 60.

What might the financial impact be (the consequential loss). The surviving or non suffering partner would have difficulty coping with the home loan and other essential expenses without major changes. What help might be forthcoming from the state (for non accident related reasons).

You could consider – child care grant, sole parent support, funeral grant, supported living, disability allowance, special disability allowance, accommodation supplement. Unfortunately – due to partner income – any payments would be minimal – i.e. $32.28 per month for total disability allowance – none of the others would be considered in most instances due to income.

So when young trainee advisers tell me their prospective clients do not see the need for planning whilst in their mid 20’s, I understand the impulse to accept the soft option, but do not countenance the ongoing rationale once the reality of life and death, and the compelling evidence is explained. The time to start saving is now and the time to insure is now – neither action is disadvantaged by initiation at a younger age – the opposite is very much the case. By the way, tax will be the largest expense over a lifetime of earning and investing. Wealth and superior lifestyle does not come to people who hope for the best and react to the rest.