Gen X investors need advisor help

Generation X was hitting its stride—settling down, entering key earning years, turning to financial advisors to design an investment strategy—when the great recession hit.

This generation of cynics had their pessimistic expectations met when they experienced economic shock. Between 2007 and 2010, they lost 45 percent of their wealth, with their median net worth dropping from $75,000 to $42,000

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Adding insult to injury, many have delayed contributing to long-term investments due to job insecurities. What's more, they are taking care of their children, their aging parents, paying off their student debt, their children's student debt ... So, economically, they're having a very stressful life.

Sounds like an audience best left alone. Yet that is exactly what financial advisors cannot afford to do.

Whether they recognize it or not, Generation X desperately needs to get back on track. How can financial advisors help? The answer is: Educate them.

According to a Merrill Lynch behavioral finance study, younger generations have a fairly pervasive misunderstanding of the power of investing. In particular, the power of compounding interest.

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When college students were asked to estimate the total value of a small monthly investment earning 5 percent or 10 percent over 40 years, they skeptically underestimated by anywhere from 60 percent to 800 percent.

It's no wonder many Gen Xers don't see the value in investing small amounts for tomorrow, when finding that small amount already feels like a sacrifice today. A savvy financial advisor will approach the tentative investor with a combination of optimism and caution. Here are six simple ways to encourage risk-averse Gen Xers to explore the world of investing.

1. Go back to basics.

To financial professionals, who work 40-plus hours a week, the basics of investing are second nature. To the rest of the world, compound interest is less than intuitive. Many understand the concept in principle but cannot accurately apply it to a specific situation. As the Merrill Lynch study showed, younger investors are more likely to underestimate than overestimate.

In many ways this is a great opportunity for advisors because it shows even more potential results. It does create a barrier to entry, however, if this misunderstanding means potential investors are not even opening the door to conversation.

2. Provide examples using small contributions.

Ideal scenarios are enticing, but they may seem out of reach. Advisors should instead start out by asking individuals what they think they can contribute first, then show them models based on that. Start small, and demonstrate how incremental increases could impact the long term.

Your typical Gen Xer has a house (with a mortgage) and car payments, as well as childcare or tuition expenses. They may feel that there is no point in investing if they can only contribute $100 a month. Make it palatable by meeting them where they are.

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3. Recognize their skepticism.

You will need to demonstrate that traditional bank savings accounts, while insured, have their own inherent risk. Be prepared to answer the question "Isn't a guaranteed 1.5 percent interest rate better than a possible 15 percent loss?"

Investing is inherently risky, and Gen Xers are risk-averse by nature. Remember, this is the generation that during its youth was failed by most major institutions. Further, their parents' retirement plans were likely impacted by the recession. They simply may not believe in the long-term investing view.

4. Provide options.

As an advisor, you may know that it will take an aggressive strategy to achieve stated goals. And you should present that aggressive approach as one option. Always provide at least two alternative approaches, along with your honest assessment of what the investor is gaining and losing with each model. Then let them make the decision.

There is little Generation X hates more than being painted into a corner. They need to feel in control, yet they are often not the best suited for the job when it comes to their own money.

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5. Use history to predict the future.

Show Gen Xers how the markets have weathered past depressions and recessions, and relate historical recovery timing to their own financial goals. In some cases the truth may be overwhelming and a bit paralyzing. Help them turn that fear into action.

Again, this is a generation of skeptics who were made that way by history. When scared, they will retreat to the position of self-preservation. Financial insecurity can instill big fears, and the recession largely proved them valid.

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6. Think like an Xer.

Create a series of webinars, podcasts or articles that speaks to the Gen X investor. Offer up some of the same tips and strategies you would provide in-person to address the issues listed above. And don't fear that you are giving away the farm. The truth is, if you don't let prospective customers get a feel for your personality and expertise before you meet face-to-face, you will never land that meeting in the first place.

Since financial advisory is a relationship business, Gen Xers may need extra hand-holding, because this group tends to approach new commitments at arm's length. They are avid researchers and will educate themselves about you and your business—online and on their schedule. Help them.

Spending the energy to educate Gen X on the real investment risks—not getting started or being too conservative—will help them understand how and why they should get involved. True, some will likely turn to self-investment strategies, but hopefully a majority will look to the insight of a financial professional to show them the way.

—By Cam Marston, special to Marston is president of Generational Insights and author of "Motivating the 'What's In It for Me?' Workforce" and "Generational Insights."