Much of the discussion around financial advice tends to be around asset allocation, product selection, and fund structures. These are all worthy conversations and topics we’ve enjoyed discussing previously on this show. But one topic that feels underexplored: how do advisors deliver financial advice to clients across generations? A retired client in their 70s needs a much different advice offering than a 40-year-old client in their prime work years. In this episode, we are diving into the fascinating intergenerational dynamics of financial advice.
Nicholas VanDerSchie: When discussing financial advice, the conversation usually centers around concepts like asset allocation, product selection, and technology stacks. These are all topics we've enjoyed discussing previously on this podcast. But on today's episode, we're going to explore a topic that often gets less attention – how financial advisors are uniquely serving clients across different generations? Advisors have books of business that span the demographic spectrum, from millennials to baby boomers. The type of advice advisors are delivering and the drivers of the client conversation can almost look night and day between these groups. This means an advisor's skill set must cast a wide net, encompassing elements of investments, planning, and emotional IQ. We're excited to explore these topics through a generational lens with our guests today.
Hello, and welcome to Simple But Not Easy, a podcast from Morningstar's Wealth Group, where we turn complicated financial developments into actionable ideas. I'm Nick VanDerSchie, Head of Strategy and Execution for Morningstar Wealth, and I'm delighted to be joined by two great guests today, Mike Laughlin, Head of Morningstar's Wealth Portfolio Specialist team, and Mac OBrien, Head of Investment Distribution for Morningstar Wealth.
Before we get into the conversation, if you'd like to know more about how we support advisors, we welcome you to email us at simple@morningstar.com or me directly at Nicholas.VanDerSchie@morningstar.com.
Now let's get started. Mike, Mac, welcome to Simple But Not Easy.
Michael Laughlin: Great to be here, Nick.
Mac OBrien: Hey, Nick. Good to see you.
VanDerSchie: So, Mike, I guess I should say welcome back to Simple But Not Easy. For our newer listeners, can you share a bit about your background and current role at Morningstar?
Laughlin: Yeah, you bet. So, I'm thrilled to be here again. This is great. I lead what's called the Portfolio Specialist team here at Morningstar. So, we are responsible for essentially being an extension of the portfolio management organization that is client-facing. So, we work across all of the portfolios here at Morningstar. We partner with our advisor clients and end clients to help ensure that they understand our market views, share our insights, and understand the positioning of their portfolios. I've been with the firm for about two years, and prior to this, I was with a different large asset manager for about 12.
VanDerSchie: Thanks, Mike. And Mac, welcome to the podcast as a first-timer. Now, you lead a relatively newer distribution team within Morningstar Wealth. Can you talk a little bit about why we created that team and the types of advisors you're working with?
OBrien: Yeah, sure. It's great to be here. I'm excited for my debut performance on the podcast. I manage what we call the investment distribution sales team. And so, for a little bit of background, Morningstar, for the better part of 20-plus years, have had an industry-leading platform or TAMP, as we call it, and within the TAMP, advisors can use our investment strategies. And over the time, the business is more for where we have our investment strategies, our separately managed accounts, our asset allocation strategies that are available other places than our proprietary Morningstar platform, like other broker-dealers' proprietary platforms. So, my team is responsible for selling Morningstar's investment strategies to financial advisors that use their own broker-dealers' platforms, essentially.
VanDerSchie: Great. Thanks, Mac. So, as we know, advisors work with many client age groups, and they all have different preferences. One size never fits all. The goals and priorities of a millennial are different than those of Gen X, and arguably the same can be said of baby boomers. So, on today's episode, we're going to go generation by generation and have Mac and Mike help us identify the points of emphasis for each. So, guys, why don't we start with millennials, okay?
So, just to level set, millennials are the group of individuals born between 1981 and 1996. That would make them between the ages of about 28 to 43. That represents a total population here in the U.S. of about 72 million people. Millennials are the largest part of the labor force, and they also are the most heavily indebted generation in history. When we look at data from the Federal Reserve, the average millennial carries more than $27,000 in non-home mortgage-related debt, mostly comprised of student loans. So maybe, Mike, I'll go to you first. As we consider the goals and priorities of this generation, what are some of the major considerations that advisors have to account for?
Laughlin: Yeah, I am 36, so I am squarely a middle of the millennial generation. And I think the consideration that you just pointed out, Nick, is probably the most important. Student loans and debt in general, but specifically student loans are something that collectively as a generation, millennials carry $1.6 trillion just in student debt. And over half of millennials out there have some form of student debt with an average interest rate of 7%. To me, though, the most important statistic related to millennials and student debt is that a third of millennials have delayed saving for retirement, specifically due to their student debt. And I think as a financial advisor, A, you want to be really tight on how you educate younger generations about debt and how you incorporate that side of an individual's, let's say, balance sheet into their financial plan. Basic financial education is sadly undertaught in our schools. And because money is a highly emotional subject, many people don't end up educating themselves.
In a sense, millennials who do carry that debt can earn that average 7% rate of return by paying that down. But I think as an advisor, this is an opportunity where you can start to develop a niche maybe specializing in graduating physicians or lawyers or just folks with high earning potential, but also high debt loads now. So, it's kind of a take on that HENRY segment, the high earner not rich yet. But if you can capture those folks early on, provide them some really sound advice on how to manage those debt burdens and then grow with them, I think that is a really interesting long-term, especially if you're maybe a younger, you're a millennial financial advisor strategy. I also think it's really important to make sure that advisors are connecting with the millennial age children of their clients. The next decade is about to witness the greatest wealth transfer in human history. And if you don't have that relationship with the kids of your clients, then I think that is an overall risk to an advisory practice.
OBrien: Yeah, Mike, it's a great point. I was reading an article over the weekend. It was on CNBC with some research from Knight Frank. And it says that the Silent Generation, which is 1928 to 1945 birthdays and baby boomers will transfer over $90 trillion of assets over the next 20 years. And it will make the millennial generation the richest generation in history. So, we're going from the most indebted generation to which is expected to be the most richest, most wealthy generation. And so of course, every financial advisor that we meet with is proactively trying to meet an established relationship with the younger generation. But we're coming across more and more financial advisors that part of their onboarding process or part of their annual reviews are discussing potential inheritance – they are discussing potential inheritances with their clients to understand how to properly financial plan for that.
Laughlin: Yeah, I mean, what an amazing opportunity for an advisor to manage the journey that a millennial will be on from that debt to ultimately, maybe being fortunate enough to inherit substantial amount of assets.
The other thing that I think is important with the millennial generation – and I alluded to this a little bit with the notion that basic financial education is undertaught in our current system, is just around forming healthy and robust savings habits. Now, there's a lot of pundits out there that have suggested that the secret to millennial success is if they just start making coffee at home and stop buying avocado toast. I'm certainly not going to suggest that. I think it's far more complicated. But I do think there is a point here kind of implicit around the power of long-term compounding. And I truly think that compounding is the 8th wonder of the world. And it's really important that millennial investors and advisors that serve for millennial investors understand the most valuable money you make is the money you make early because when you save that money, it has the longest time to compound for you.
There was a great book that came out a couple of years ago called The Psychology of Money. It was written by Morgan Housel. It came out in 2020. I think it has a couple of cool illustrations of this. One is that he points out that 96% of Warren Buffett's net worth has come after his 65th birthday. And an interesting expansion on that from the book is, Warren, he's a phenomenal investor. He's earned 22% per year on average. But Buffett started investing when he was 10 and he's never stopped. At the time of publishing of the book, his net worth was $84.5 billion.
But let's assume a world where Warren Buffett earns the exact same return, a phenomenal 22% per year. But instead of starting when he was young, maybe he spent his 20s traveling, he doesn't start investing until he's 30. He earns 22% per year. But he stops when he's 60. He's made a lot of money. He doesn't want to continue. He wants to retire. What would his net worth be in that scenario? And it's astonishing that instead of $84.5 billion, he would actually have $12 million, so 99.9% less, even though he still earned 22% annualized for a period of 30 years. So, it sort of shows the staggering power of time and compounding. And the secret to Buffett is not just that he's a great investor. It's that he's been a great investor for a really long time.
I'll share one other fun stat I recently came across. This is actually from Morningstar's February Markets in a Minute article. On a monthly basis, we try to highlight a couple of timely and topical market ideas for advisors. And this one kind of blew my mind a little bit. So, let's just say that a career is 40 years long and you started saving today. Well, today the Dow Jones is at about 39,000. Can anyone imagine a Dow Jones at a million 40 years from now, a million points? Interestingly enough, to get there from 39,000 today to a million and 40 years, it would take a compound rate of return of just under 9%, which is higher than most asset manager capital market assumptions today. But guess what? Over the past 40 years, the Dow Jones has earned about 10.5%. 40 years ago in 1984, the Dow was at about 1,000 points. Today it's at 39,000. That realized compound rate of return is about 10.5%. It's greater than the 9% that would be required to get the Dow to a million 40 years from now. So, I'm not predicting on this podcast that the Dow is going to reach a million, but I am saying 40 years is a really long time. And it's important to remember that the vast majority of the value in compounding comes at the end. So even small dollars that you can save today can become very valuable over a long period of time.
OBrien: Mike, on the concept of trying to get millennials to invest earlier and financial advisors to encourage that and that are in debt and take advantage of the compounding over long periods of time. I saw a stat or maybe it was a meme when I was scrolling social media, but it says if you want to save an extra $10,000 per year, you only need to save $27.39 a day. So, when you think about avocado toast and coffee, if you can kind of peel back those expenses, and there's another study that I read. It was put up by C+R Research that said the average consumer underestimated their monthly subscriptions by $200. And 40% of consumers were paying for subscriptions that they no longer used. We can find a way to script the pennies together and start saving $10,000 a year. $10,000 a year at 7% compounded over 20 years is just under $500,000 and $10,000 return at 10% compounded return, that's over $700,000. So, the idea of getting started earlier certainly is hard with the debt that millennials are carrying now. But if you can kind of pinch back a couple of areas, you potentially can have a 20-year experience of compounding returns.
Laughlin: Yeah, I might be pro avocado toast, but to your point, I actually did just go through and cancel a bunch of subscriptions to streaming services that I was no longer viewing shows for. And it certainly does add up.
VanDerSchie: So, there you have it, either Netflix or avocado toast, but not both.
OBrien: Yeah, that's right.
VanDerSchie: Got it, guys. So, every generation has different experiences that have shaped their investment views and arguably their risk appetite. For millennials, what are some of those events, Mike?
Laughlin: Yeah. So, I think the most formative event for millennials is probably the Great Financial Crisis. And it's interesting because it was experienced, I think, very differently depending on how old a millennial is. The youngest millennials during the financial crisis were only about 12. The oldest though were in their late 20s or early 30s. So, there's a big range in how that time period was internalized. If you were working age millennial at that time, I mean, even for five, six years after 2008, Americans between the ages of 18 and 34 were suffering double-digit unemployment, for example. So, it's a generation that kind of has straddled that financial crisis. And there is some emotional baggage, I think, attached to it.
For an advisor where the rubber meets the road here maybe is, there's the classic when you're thinking about risk – it's ability to take risk and willingness to take risk. And I think millennials may actually end up in a pretty wide spectrum in terms of the willingness. If you were an older millennial, you may actually be more risk averse having really lived the financial crisis in its fullest. If you're a younger millennial, though, you kind of entered the workforce after the crisis ended and your experience has been almost nothing but positive bull markets. So those millennials may actually have an over-willingness to take risk. And I think as advisors become more personalized un the advice that they're giving and the industry itself becomes more personalized relative to an individual's experience during that time period, I think it's an interesting take on how some may be less willing to take risk and others may be more willing.
VanDerSchie: No, I think that makes sense, Mike. The other idea I want to touch on is just this idea of millennials being the most internet native generation out there. What factor does that play when delivering advice to them?
Laughlin: So, yes, I do think millennials relative to other generations are likely to be more tech savvy. And I think there are positive and negatives of that. On the positives, I do think that millennials tend to be more informed about certain parts of the market. But it's still important as an advisor to make sure that you're highlighting the full value proposition that you have. You don't want to have a millennial investor say, oh, I didn't know that you actually did that for me after transferring their account out or just doing it themselves. On the negative side, I do think millennials represent the FOMO, fear of missing out, generation. And how an advisor behaviorally adapts to that is really important. We can look at time periods like the meme stock craze with Robinhood and AMC as examples maybe where that sort of trend chasing FOMO generation can get out of hand in a negative way for the millennials.
I also do think that millennials as a result of being reasonably tech savvy are probably more fee sensitive than previous generations. So again, ensuring that the value proposition is really clear, so millennial investors understand the service that they're getting for their fees that they're paying, that is, I think, more important relative to other potential generations. And then finally, the way that millennials communicate is obviously internet-based, text-based. One thing for an advisor to keep in mind though is, texting with millennial clients is not a good idea. The SEC has been leveling some pretty serious fines recently at both broker-dealers and asset managers related to text violation. So, despite it being probably millennials' preferred method of communication, as an advisor you need to figure out how to work around that one.
VanDerSchie: Great. Thanks, Mike. So, we hit on millennials. Let's transition to Gen X. From a definitional point of view, Generation X encompasses individuals that are born between 1965 and 1981. That would be roughly ages 44 through 59. There's about 65 million Gen Xers in the U.S. They command about a third of the total income and roughly two thirds of home ownership here in the U.S. And when it comes to social media, 75% of Gen Xers are active users, which demonstrates their engagement with digital platforms. And so, Mac, as a Gen X member on the podcast, albeit on the younger end of that spectrum, let's start with you, and maybe start in the same place as we did with the millennial discussion. What are the major considerations that advisors need to account for when serving this generation?
OBrien: Yeah, great question. I am on the younger age of Gen Xers. I was born in 80. So, it's funny with Gen Xers. It's hard to kind of put them into one classification because you have some Gen Xers that are just entering peak income years. And you have some Gen Xers that are actually in retirement, right? We were sitting down with friends the other day and I have friends that are in their mid-40s that have kids that are almost out of college. And I have friends in mid-40s that are about to have their first or second kid. So, it's also known as Gen X as the sandwich generation, kind of, right between boomers and millennials. And many Gen Xers are tasked with the rising costs of both raising kids as well as potentially and currently taking care of aging parents.
And something that's really emerged over the past five years as a focal point amongst financial advisors and advisors are leaning into it is financial planning. And it's not just individual financial advisors. I was at a partners meeting at a major broker-dealer last month and a good portion of the day revolved around the importance of financial plans and the firm setting aggressive goals around the number of plans created for clients as well as revenue produced around financial planning. And generally speaking, Gen X have established or in the beginning phases of establishing sizable balances in non-qualified investment accounts. So, for this group, the need and importance for estate planning, tax planning, investment planning is growing quickly. So many companies are offering different types of retirement benefits in addition to traditional 401(k)s that advisors typically can't manage in-house, but their clients definitely need advice in planning and how to maximize those benefits from Roth conversions, post-tax contribution options, et cetera.
Laughlin: Yeah, Mac, I think the point around 401(k) is an interesting one. Gen X is really the first generation that have had to rely on themselves for funding their retirement, right? Previous generations had much greater access to pension plans, whereas today only about 14% of Gen Xers have a pension. The rest are on the hook for saving on their retirement on their own, many through obviously 401(k) plans, but it goes right back to ensuring that there is a robust financial plan and that, as investors, they're paying themselves first.
OBrien: Right. And obviously, compared to millennials, investment decision-making has a larger emphasis on risk management. There's far less time for Gen Xers to make up for any type of financial mistakes. Just from my team talking to financial advisors every day and all day, there's certainly more emphasis on downside protection and just general diversification, not just between stocks and bonds, but a lot of our conversations we're having with financial advisors are regarding Gen X's diversification within equities. Advisors are asking for ideas around small cap, international, dividend, value strategies, and even alternatives.
And the last thing that I'll mention on this question, Nick, is I was talking to a couple of friends who are financial advisors about this podcast, and I asked them if there are any specific ways they approach Gen X versus millennials or boomers. And it was three separate conversations, and each friend or financial advisor had the similar comment on Gen Xers that they want to be more involved in the investment decision process. Not that they want to make decisions, but they know the advisors, they know they need to take more time educating Gen Xers on their process to make them feel comfortable and sometimes even create maybe a discretionary account that they manage with the client. So, they just want more ownership. Gen X feels like they want more ownership in the investments and what's going on.
VanDerSchie: Yeah, that's interesting because I think some advisors would welcome that level of engagement from their clients and others probably say, hey, get out of my way. I just want to do what's best for you, right?
OBrien: That's right. It's just for the advice, where they need to lean in and take that time to educate and then where boomers are more like set it and forget it. Just do your job, I trust you.
VanDerSchie: Yeah, interesting. So, we talked about the great financial crisis being etched into the memory for millennial investors, but every generation really felt the impact of it. What are some of the formative experiences that have shaped Gen X?
OBrien: Yeah. So, Mike just outlined the financial events that impacted the psyche of millennials. We talked about the Great Financial Crisis and maybe a little bit about the COVID pullback. And for Gen Xers, we'll throw in 9/11 and the recession that took place thereafter. If you look at 9/11 and the Great Financial Crisis, you'll find the bookends of the lost decade, which took place from January 2000 through December 2009. And during that decade, the Morningstar U.S. Market Index returned negative 0.2% or essentially flat.
But I want to take a look at the other side of the coin when we talk about formative events in investor psyche. And if anything, Gen X was taught that you pay a significant price for panicking during bear markets. Now, following the 2001-2002 bear market, the Morningstar U.S. Total Return Index returned over 130%. The bull market following the Great Financial Crisis returned over 260%. And there was a quick 14% correction around 2015, and the market responded with a 70% bull market over the next several years. So generally speaking, I think Gen X are opportunists. They've been taught to be opportunists. They see some incredible opportunities to buy low, and they stay the course in investments versus panic selling during pullbacks. They were handsomely rewarded.
VanDerSchie: Yeah, and I bet the Gen Xers who work with a financial advisor and get that behavioral coaching stayed the course more than those that didn't.
OBrien: Absolutely, yeah.
VanDerSchie: So, we mentioned this earlier. Gen X is a group that's in their peak earning years, and so delivering advice to them is different than millennials to an extent, who arguably have, you can make the case for, more time to make up for any mistakes in their early years. I guess with that as the backdrop, what are some of the conversation drivers with Gen X on this topic?
OBrien: Yeah, we talked a little bit a second ago about Gen Xers wanting to be involved, and you just had the comment of if you have financial advice and you stay the course versus doing yourself and panicking. There are some jaw-dropping statistics around do-yourself investors versus investors that have professional advice. And along the concept of Gen Xers wanting to do more on their own or being more involved, this is great information for financial advisors.
So, a financial advisor can emphasize to Gen Xers that one of the keys to being good investors is not paying attention to returns every day. And there's an interesting study that shows investors who look at investment statements monthly have an allocation of about 41% to stocks and the rest in bonds. Conversely, investors who look at statements once per year have about 70% stocks and 30% bonds. So, do these groups have widely different goals? No, probably not. The group looking at their statements regularly probably are getting caught up in the day-to-day financial narratives, and they're maybe a little more risk-averse because of that, which in turn causes them to behave more defensively with their investments and ultimately does more harm than good.
And then going back to the idea of financial plan, just making sure the investor or the client knows the value of a complete, robust financial plan. It's understanding the full picture of the client's near-term and long-term obligations. Are they planning on paying for kids' college, weddings? Do they have aging parents? And the other side, is there possible transfer of wealth coming their way?
VanDerSchie: Yeah, got it. Thanks, Mac. All right. So, covered millennials, covered Gen X. Third and final segment, let's tap into the needs of baby boomers. And just to set the stage, baby boomers are the demographic born between 1946 and '64, representing ages 60 to 78. There's about 76 million of them. The Census Bureau data shows there's 12,000 people reaching retirement age every single day. And you could make the case that that is the most important or highest priority demographic for financial advisors. And by 2030, all baby boomers will be age 65 or older. So, let's set the table the same way we did for the first two groups. Maybe I'll start with you, Mike. What are some of the clear goals and priorities for this generation?
Laughlin: Yeah. For the baby boomers, I think it is really about holistic financial advice, which is also, I think, for the listeners of this podcast, because it's a great time to be a great financial advisor. These are areas that are going to be highly personalized. They take real deep expertise, and they take time. So, for example, just even in the notion of retirement planning, evaluating income sources, structuring Social Security benefits effectively, understanding cash flow needs, understanding and helping boomers through the sequence of return risk. Because one of the most vulnerable times that an investor faces is that period right when they first do retire and start to transition to depleting their savings. You layer on top things like estate planning, creating wills and trusts, establishing powers of attorney, maybe healthcare proxies. Even on the notion of healthcare, I think long-term care planning is becoming a critical component to a sound, comprehensive financial strategy. One of the most common reasons for personal bankruptcy in the U.S. is due to unforeseen and uncovered medical expenses. And then even areas like thoughtful charitable giving.
So, I just think there's a tremendous amount of opportunity for really great, personalized, holistic planning when you're talking about the boomer generation. I would also highlight taxes. I mean, taxes are important up and down the age spectrum. But for boomers, who have potentially a significant amount of wealth and are obviously maybe starting to take distributions from that, taxes I think become important. Interestingly, from an investment portfolio sense, taxes are the biggest single source of drag in a non-qualified account. So, if you think about there's sort of three layers of fees an investor faces – there's the advisor fee. Let's put that to the side for a second. Obviously, based on everything I just mentioned, there's a lot that advisors do to earn that. There's the expenses of the portfolios themselves, and then there's taxes. Those are the three layers.
And interestingly enough, tax drag is about four times as large as the expense ratio of the average underlying portfolio. And yet as an industry, we spend very little time talking about it. And on average, tax drag in mutual funds is roughly 2% per annum, which does add up. So, we think that asset location is good financial planning hygiene, and teaching people and baby boomer investors to think about their portfolio holistically rather than account by account, I think is really important. So, yeah, I would say, financial planning, taxes.
And then maybe the last one I would just touch on, given where markets have evolved recently is the notion of income generation. For most of the post-financial crisis period, interest rates have been at sort of rock bottom lows. And those low bond yields created challenges for income-focused investors. I think today, the landscape is so dynamic and so different. Now, there's a delicate balance between how much income you want or need and how much risk it takes to get there. But advisors have a lot more tools in their toolkit today. Even something like bond ladders, helping folks avoid the reinvestment risk that's associated with short-term CDs or other cash instruments. Those are viable for the first time, maybe in 5 or 10 years. So, the notion of income generation and thoughtful income generation I think is a much wider opportunity set than in the past.
VanDerSchie: Thanks, Mike. Those priorities seem pretty clear from where I said. Are there any additional experiences that shape the baby boomers that we haven't already discussed with the other generations?
Laughlin: I mean, baby boomers have seen it all, right? We talked about a few of the crises, but before that, there was the savings and loan crisis, long-term capital management in the 90s. So, baby boomers have really, I think, been through the ups and downs. As human beings, we all experience loss aversion or the notion that losses hurt more than gains feel good. That probably does apply to the boomer generation. But I think they represent more seasoned, if you will, through the potential booms and busts. And they've kind of taken their lumps but as a generation have also had a tremendous amount of investing success over the time period that they've been investors. Just like I mentioned earlier, the Dow 40 years ago was at 1,000; today, it's at 39,000 compounding at 10.5% per year. And boomers who have stuck with it through different crises that they have faced have had tremendous rewards on the back end.
VanDerSchie: Yeah, no doubt on that. We also discussed technology's role in interactions with the first two groups. And I imagine some of that might not hold as true for this group. How do advisors most effectively communicate and interact with baby boomers from your perspective?
Laughlin: Speaking in generalities, I think the in-person element is probably most highly valued when it comes to the baby boomer generation. Maybe one of the silver linings of COVID though, is it sort of forced everyone to get a little bit more comfortable with virtual interaction. And I think for some advisors, being able to structure at least some of their meetings that would have traditionally been in person virtually, it does tend to give them a little bit more scale. Not suggesting that's what you do for all of them, but boomers maybe, I think, a little bit more receptive these days to some of that engagement model as well.
VanDerSchie: Great. All right. So, we've hit all three of the major generations. I want to transition now just to talk about some actions to consider. As everyone knows, I just want to transition to some actions that we should consider. As our listeners know, producing actionable ideas is what we aim to do here at Simple But Not Easy. And we've discussed many of the conversations advisors are having with clients across generations. And the fun part is, what are we going to do about that? What are the actions that advisors can take when serving these generations? And so, Mike, what's the action item for millennials?
Laughlin: I think for millennials, it's, start saving, max out your retirement accounts to the extent that you can. If you do have a 401(k) that your company matches, that's essentially free money. So, you want to at least contribute enough if you can to take advantage of that. But shield that money in retirement accounts from taxes, let it compound over time. Ideally, automate it and don't look at it, don't mess with it.
VanDerSchie: Mac, anything to add from a millennial point of view?
OBrien: Yeah, I mean, as a financial advisor, this isn't something in terms of investment advice. But if you're talking to your clients, encourage your clients to really value the non-cash compensation at their employer, like where they're looking to establish a long-term career. I mean, Morningstar, I can say, not being a (indiscernible) drinking the Kool-Aid, but our benefit package and the matching and the post-tax contributions, it's phenomenal. And it's a great way to build wealth that is aside from your paycheck and your bonus. So, I think a lot of millennials don't really understand how that compounds over time. And that's great advice as a financial advisor you can give to your clients.
VanDerSchie: Got it. And so, what are the key takeaways now for Gen X?
OBrien: I'm going to echo what Mike said on Gen X. You want to max out your retirement accounts. You want to look into your 529 accounts, make sure those are established and funding since the day your kid has a Social Security number. And start saving for life events now, whether they're weddings or whether they're taking care of aging parents or whatever the case may be down the line, don't wait until those events or a year or two away. Start saving now. I opened up a small account and I put, I think, 50 bucks a week or a month into it for my kids when they turned 16 years old for a car.
Just scratch that.
So, start saving for life events now. And many clients in their 50s are behind on their retirement goals, but start to shorten, counterintuitively, their investment goals and become more conservative ahead of retirement. But it's important to remember that they have decades of investing left. So, I agree with the belief of owning high-quality businesses for the long run. And for clients in their late 50s, consider dividend or value-oriented exposure. And for Gen Xers in their mid to late 40s, start planning around their peak income years. If clients are wary about an election year like this year, remind clients that stocks have returned 11% on average during election years going back to 1933.
VanDerSchie: Mike, anything you'd add on Gen X?
Laughlin: Yeah, Mac hit on earlier that Gen Xers are in their peak earnings years. And I think this is important because it also means they have sort of peak tax bracket. And for the non-qualified portion of their savings, as mentioned, asset location is good financial planning hygiene. I think the industry is evolving and there are new product structures that are coming to market that can really help investors in this regard. Traditionally, I mentioned on average, mutual funds have about 2% tax drag. So, you want to try to shield any mutual fund managers that you have conviction in, in a retirement account so you don't get past those capital gains.
On the back end, though, there are product structures like separately managed accounts or direct indexing where because a client will own all of the underlying individual equities as opposed to shares of a mutual fund, you can actually start to do things like tax loss harvesting in those accounts, where instead of being past tax gains, you can have a situation where you get investment gains, you get return, but you also get something valuable, which is tax losses that can be used to offset gains elsewhere in your portfolio. So, I think, being really tax savvy in your peak earning years is really important.
VanDerSchie: No, it makes good sense. All right. Last but not least, boomers, what should we think about here?
Laughlin: I would double down on the tax. So, for baby boomers, I think, one thing you want to do is anchor your portfolio to your goals. So, if you have short-term income needs or you're drawing down, obviously, that portfolio is going to have one setup and one set of goals. If you're fortunate enough, though, to have legacy money or charitable money or other money that's long term, that bucket might actually have a different timeframe and a different goal in mind. So, I think it could be helpful to anchor parts of a portfolio to goals.
I would also – a year like 2024 might just be a behaviorally dangerous year for investors. Obviously, we have a very emotional election coming up. Half the country is probably going to feel like the world is ending and the other half is probably going to feel like they want to double down on some of their exposures. And I think for advisors and certainly for the baby boomer generation, you just want to make sure that, again, you have clear goals for your portfolio and that you're anchored to those goals and just watch out for any big behavioral mistakes in 2024.
VanDerSchie: No, that's good advice for sure. All right. So, we're at the end of the episode. And as we always do, we just want to get your 10 second takeaways. If our listeners have nodded off over the last half hour or so, what's the one idea you want to leave them with? Mike, I'll start with you.
Laughlin: Yeah, I am fond of a phrase, the best time to plant a tree was 20 years ago; the next best time is today. So, any amount of saving, any amount of investing you can do is better than none. Start now and be patient. Investing is a great way to get rich slowly and it'll work out over the long term.
VanDerSchie: Mac, what do you got for us?
OBrien: I mean, Mike said it so well. If you are not a financial advisor – or if you are a financial advisor and you don't have a financial plan, go get one. Talk to a financial advisor, create the financial plan, and you'll just sleep better at night, and you'll put yourself and your family in a better spot in the future.
VanDerSchie: Great. Thanks guys.
And there you have it. Another episode of Simple But Not Easy. As always, we thank our guests for their time and engagement. And once again, if you'd like to know more about how Morningstar can support you, please drop us a note at
or me directly at
Nicholas.VanDerSchie@Morningstar.com
. That wraps up this month's episode. Before we depart, if you enjoy hearing the insights on our podcast, please consider leaving a 5-Star review on Apple, Spotify, or wherever you get your podcasts