While Millennials are seen as a vital source to the long-term growth of the investment advisor and advisor business, some in the advisory world continue to be skeptical or unsure how to offset the fact that younger investors are generally less affluent than their peers. fathers or the baby boomer generation. The key question is: how much time and resources should an advisor spend on average to “nurture” a Millennial in order to increase their client base?
Several elements must be considered, but on younger clients in particular, we believe it is necessary to have a complete view of their total wealth. This must include both tangible net wealth (assets minus liabilities) and intangible human capital – i.e. the customer's potential in terms of future income and savings. The total wealth of an investor, in fact, must consider both financial capital and human capital. In many cases, however, human capital is overlooked or trivialised. When working with a younger clientele, we believe such an approach could distort the exact calculation of total wealth and consequently distort the definition of proper asset allocation.
Human capital: the hidden capital of young people – a trump card
Early in an investor's working life, financial capital is often low — most 25-year-olds haven't earned much yet. At this stage, therefore, human capital is typically the greatest wealth available as the potential for future earnings and savings often vastly exceeds available capital. Over the course of a working life, as an investor saves part of his income, human capital is converted into financial capital. Defining a plan for investing that capital is the key to ensuring that wealth can grow to a level where you can achieve your long-term goals. Over time, financial capital becomes an increasingly larger part of an investor's total wealth than his or her human capital. At retirement then, an individual's human capital is typically at or near zero, while their financial wealth is at its peak.
The value of human capital and the effects on portfolio construction
To ensure that younger clients are able to mature their financial capital, financial advisors and promoters can help them build a portfolio that reflects the volatility and changes over time of their human capital – as well as naturally managing the classic variables related to market volatility and the risks/opportunities of the various types of investment. To estimate the volatility of human capital, it is necessary to consider:
• The volatility of current and projected salaries – for example, whether an individual is paid on a commission basis or has a relatively stable salary;
• Expected or probable career of an investor – have they, for example, embarked on a clear career path with some advancements in terms of promotions? Or is he on a path that involves a more limited career?
• If the salary and its role are linked to the different cycles of the economy and markets or if they are independent of them. To conclude, when a financial advisor or advisor evaluates whether and how to invest resources and time in cultivating relationships with Millennials, he shouldn't forget human capital. Without having a complete picture of the situation, any consideration of an investor's current and future financial resources is distorted or inaccurate. Similarly, any definition and construction of the asset allocation may not be aligned with the investor's overall situation.
