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Young professionals take charge, get smart about money

The financial crash of 2001 took James Traylor’s college savings. Then in 2007, after he graduated from SUNY College at Geneseo, he launched his business as the market collapsed again.
 
With two bear markets fresh in his mind, Traylor, 28, sales manager and director of Financial Architects-MassMutual, is a young professional who like many peers has taken ownership of his financial future and challenged traditional thinking.
 
"I see a lot of people that are expecting someone else to take care of them, whether it’s a big company that will give them a pension or the government to pay them Social Security or another family member to help them out. No one wants to take responsibility," Traylor says.
 
His company, Financial Architects, focuses on informing and guiding clients as they develop financial plans. As a special care planner, Traylor helps families of children with disabilities to make sure their children have the care and resources they need.
 
He has a personal connection to his work: His sister is a special-needs child. Traylor says he recognizes how difficult it was for his parents to make financial choices that provided the best care for his sister and made the most sense for his family. Now he helps his clients through the same process, achieving their financial goals while also tracking his own money.
 
"We’re a family that, over different generations, everyone kind of looked at themselves in the mirror and said, ‘I’m going to have to do this for my own family at some point,’" he says. "Hopefully (that mentality) is coming back, but it has been kind of the backbone of most Americans for a long time. They’ve lost sight of that, and it’s really sad."
 
Wealth management firms in Rochester have found that young professionals such as Traylor are setting a new standard for how to view and grow their wealth. The number of affluent people in their 20s, 30s and 40s is not large, money managers say. Professionals like Traylor are working to build personal wealth, and others in the age range have received wealth through inheritance. Money managers rarely work with this demographic, but they have noticed a growing trend of financial literacy among younger generations in the professional world.
 
"I think part of it is their formal education; those who have been through business school have a better understanding of what modern portfolio theory is about," says James Gould, president of Alesco Advisors LLC. "As a result, they have a better appreciation for the benefits of diversification. I think the financial media have done a good job over the last 10 years of emphasizing the importance of cost control."
 
Traditional expectations about personal finance, such as investing in a 401(k) and relying on one company to carry an employee to retirement, are no longer considered relevant for younger generations.
 
"My sense is that they are not factoring in enough saving up front," says Dennis Lohouse, principal and portfolio manager at Forte Capital LLC. "When you sit down with a young professional and say, ‘I think you should put 15 to 20 percent of your pretax income away,’ they will say, ‘You’re nuts; I’ve got all this stuff I’ve got to have.’ Their sense of a legitimate expense far exceeds what I would have thought."
 
The perspective on long-term saving may be different for younger generations.
 
"I try and max out my Roth 401(k)," Traylor says. "As a young person, you can choose to pay taxes on the seeds or pay taxes on the harvest. That flies in the face of a lot of the traditional things our parents did. Everyone says, ‘Put it in your 401(k).’ I think people go through the motions."
 
Younger people may be too focused on the short term at the expense of long-term planning for retirement.
 
"My observation is they don’t allocate enough because they are really focused on the near term or they are unwilling to give up consumption today for consumption tomorrow-the definition of savings," Lohouse says. "They want it now, and maybe they’ll make a contribution (to retirement savings). If there’s a match, they are more likely to, but I’ve had a lot of people say, ‘I don’t get a match; I’m not going to contribute.’"
 
Some young professionals seek advice, but many are self-reliant.
 
"(It) could be they don’t want to pay for it," Lohouse says. "(It) could be they think they can get everything they need off the Internet. There’s all these big firms that put lots of stuff up on the Internet so you can go there, but I think it’s different when somebody with some experience says to you, ‘You need to save this much money a year for the next 30 years or you will be living on cat food.’ There’s nobody to say that."
 
Companies such as Forte Capital are advising younger clients to be adaptable to the changing nature of employment.
 
"Our standard advice to young professionals is to pretend like Social Security isn’t going to be there when you are 65 or 70 years old," Lohouse says. "You are probably going to have to work longer than you did. We know you are going to work a lot more different jobs than we did."
 
Young professionals are aware of the importance of diversifying their assets.
 
"Fifteen to 20 years ago, there were a lot of individuals and even institutions that would chase the ‘hot’ money manager," Gould says. "They would put all their money with that particular manager, and now they’ve learned that’s really a very poor approach for wealth management."
 
According to George Karpus, co-founder of Karpus Management Inc., the first years of investing can have a lifelong influence on one’s financial outlook.
 
"I think that people have a tendency to invest where they have done well for the last 15 to 20 years," Karpus says. "You form an opinion of investing when you first start investing. Then they get a little wiser and they realize that investing money is like trying to operate on yourself-that the pros can do a better job."
 
Pessimistic attitudes about investing in the stock market are common among some young professionals. Others realize the market will always have volatility. The recent market crashes are reminders of how quickly money can vanish if not invested properly.
 
Still, the idea of trying to outsmart the market no longer has much credibility, Gould says.
 
"I think that Wall Street had people convinced that it was about stock picking," he says. "That’s a very difficult thing to do, and I think people realize that now. That’s why you’re seeing so much money flow into index funds and passive investment vehicles and less emphasis being put on the utilization of trying to identify some hotshot security analyst."
 
With markets in flux, an individual’s investment patterns should remain constant, he says. Knee-jerk reactions to day-to-day changes in the market will not be sustainable.
 
"You can’t time the market," Gould says. "People I think can understand that a lot of folks made bad decisions during the financial crisis. When the pain is the greatest, it is most important to stay the course with your asset allocation."
 
One advantage for younger generations is familiarity with technology, which has helped them understand and adapt to change in the world of finance. Technology can also be damaging, however, if an instant-gratification mindset creates financial mistakes.
 
"I think technology is hurting people from the standpoint that they look at things too frequently," Karpus says. "Investments change day to day, week to week, at least the investments in securities, and there are markets readily seen and available. They get antsy when the markets are going down. A 5 percent, a 10 percent or even a 20 percent decline, although it’s painful, it happens in the markets, and they have to take a long-term viewpoint."
 
Advising people to take a long-term perspective can be extremely difficult if technology has trained them to be impatient.
 
"There is almost a sense of entitlement that is in the mix: There is a willingness to spend money on technology and a willingness to spend on things that previous generations didn’t-didn’t think to, didn’t need to, didn’t want to," Lohouse says.
 
The instant-gratification mentality does not apply to finance, Karpus says.
 
"You’ve got to stay the course," he says. "Technology, it forces you to look at moment-to-moment, and unfortunately with investing you need to stay the course and look long-term. Investment doesn’t work that way."
 
The lack of education on finance also plays a significant role in how young professionals make investments.
 
"One of the sad things is I think that we do a horrible job preparing people in school for personal financial accountability," Traylor says. "Through high school, you’ve never taken one class on personal money management. You make it all the way through college-no classes on personal money management."
 
Younger people may have been shielded from the reality of hard choices about money matters.
 
"I think our generation has not done a very good job of reinforcing attitudes that would be helpful for our children," Lohouse says. "I think part of it is we collectively gave our kids too much, and … we scrimped and scraped to give it to them, but they didn’t see that. (They) didn’t see the early years of saving."
 
Money managers advise young professionals like Traylor to take control of personal finances now, save and live within their means. For Traylor, having control of his finances gives him confidence about his future.
 
"Taking ownership of your life is so important because I don’t feel that we can turn to anyone else," Traylor says. "In this community especially, we had Kodak, who said, ‘We will take care of you forever,’ Xerox, who said, ‘We will take care of you forever,’… and they can’t.
 
"The people that said, ‘That’s nice; you can take care of me, but I’m going to take care of me first,’ are way better off. It’s got to be on you, and I’m OK with that."
 
Kerry Feltner is a Rochester Business Journal intern.

9/27/13 (c) 2013 Rochester Business Journal. To obtain permission to reprint this article, call 585-546-8303 or email [email protected].

 

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