What advisor couldn't build a respectable practice just serving the needs of doctors, lawyers and MBAs? Six- (and even seven-) figure incomes, smart, well connected and, most importantly, too busy to handle their own investments. Research suggests there are over four million Americans who have achieved at least one of these levels of education and expertise.
To corner this market, it helps to get to them while they're young. Fresh out of med/law/business school, these promising achievers have scant assets and are mortgaged up to here with student loans. But there are plenty of ways for you to guide these clients through the early years of their career, get paid to do so, and establish a long, lucrative relationship.
These four steps will prioritize their cash flow, and give you some decent business right now. And by the time their income greatly exceeds their outflow, you'll have established yourself as a trusted advisor.
- Don't let them pay off those student loans…
…at least not any faster than they have to. This advice will run counter to your clients' instincts. The interest rate on these loans will likely be lower than most other forms of debt they have (such as car loans and credit cards). Plus, student loans have some loopholes that may allow your clients to delay payment if they get into a financial jam.
Instead, make sure your yuppie clients consolidate all the student loans they can. Not only will they be able to lock in a low fixed rate, but they may be able to extend the payment period up to 30 years. Although borrowers only get one chance to consolidate loans after leaving school, if rates fall further they can always pay off the debt with a home equity loan or line of credit.
- Max out the retirement plans
No sooner do professionals hit their stride than they start talking about retiring “early” — or at least having the option to do so. So they have only a 20-year window to accumulate the millions they need to retire comfortably. Those who qualify for a Roth IRA should eagerly partake, but the most likely solution is to swallow hard and help them slide as much pretax money as possible into their employer retirement plans.
Although this recommendation will cut your clients' income taxes and help turn their net worth from negative to positive, it won't garner you any fees right now. But boning up on their 401(k) options will earn you referrals when your clients' highly paid co-workers have questions about their own respective asset-allocation choices. Plus, pointing out weaknesses in the offering might get you a shot at taking over the entire plan the next time it's up for review.
- Create a “bridge” account
The second step above should leave your degreed clients with a sufficiently escalating retirement plan balance. But since that money can't be touched until they turn 59, they also need to create an account that will pay for early retirement, a second home or other fruits of their labor — while they're still young enough to enjoy them.
The best investment options tilt toward the conservative side, and will add little or nothing to the clients' current tax bill. A laddered portfolio of highly rated zero-coupon bonds maturing in 15 or 20 years will tide them over until they can tap their retirement plan money without a penalty. Saving $1,000 a month into a balanced mutual fund will help accumulate a stash for emergencies, both positive and negative.
- Think of the children
Many of these big earners will have already established a family which will need that future take-home pay. A term life insurance policy must leave millions in death benefits to replace the lost income, should the unthinkable occur. Blending that with a cash-value policy could build some tax-favored savings towards early retirement, as well.
But the most attractive investment you can present to high-income, highly leveraged professionals is a guarantee that their children will never be burdened by hundreds of thousands of dollars in student debt. Aggressively stashing cash in a 529 college-savings plan ensures that the cycle of “borrow-graduate-repay-repeat” ends with the current generation.
Writer's BIO: Kevin McKinley
is a CFP and vice president of investments at a regional brokerage and author of Make Your Kid a Millionaire — 11 Easy Ways Anyone Can Secure a Child's Financial Future. kevinmckinley.com
According to FinAid.org, in 2003-2004 the average student loan balances of graduates of business, law and medical schools were:
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