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- Peter Lazaroff, co-chief investment officer at Plancorp and author of the book "Making Money Simple," thinks young people are shooting themselves in the foot with two main financial follies.
- He also shares the most important distinction to look for when vetting a potential financial advisor.
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Financially speaking, it's not easy being a millennial these days.
Burgeoning student-loan debt, low wages, inflated college tuition, and increasing housing prices aren't helping the cause. In fact, a recent Deloitte survey said millennials are "dramatically financially worse off" than previous generations at similar ages - a dismal outlook for largest demographic in the US.
That's why Peter Lazaroff - co-chief investment officer at Plancorp, which oversees $4.1 billion - thinks the cohort desperately needs to cut down on two common financial follies he sees with recurring frequency.
"Two things came to mind real quickly,"
Those two things are purchasing a starter home and buying permanent life insurance too early - and Lazaroff sees these mistakes upending individuals sense of financial security.
Purchasing a starter home
"When you buy a starter home, if you're only going to live there for three or four or five years, you're probably going to end up losing money on that transaction even if the home appreciates in price," Lazaroff said on the Millennial Investing podcast. "When you take out a mortgage, most of your payments - the first seven years - are just interest, so you're not really building up any equity."
He continued: "Ultimately, there are a ton of costs that go into it."
Lazaroff notes that, in the past, wealth was commonly built through the purchase of a starter home. However, he says that inflation was responsible for the majority of the increase in net worth.
He also points out that things like home improvements and the purchasing of furniture - two types of expenditures that are common and can cost thousands - tend to dig a starter home buyer deeper into a hole, and are sometimes not accounted for during the planning process.
"If you can't envision living in a house for ten years - usually not a good move," he said. "I get that paying rent feels like throwing money away, but in reality if you aren't going to live there beyond seven years you're just going to be paying money in interest anyways."
Buying permanent life insurance too early
"The other big thing I think is that young people often buy some form of permanent life insurance too early in life," Lazaroff said. "That can be expensive and hard to get out of."
He understands that some individuals get caught in a sales pitch, but says that if you don't have any kids or a house, there's not much need for insurance at this stage in your life.
"To get into something like a whole life insurance or permanent life insurance definitely limits your options as you get older," he said. "And if you decide that you want to back out, it's not particularly cheap to do so on the tax front."
The most important thing to look for in an advisor
With all of that under consideration, Lazaroff shares the most important attribute he looks for in a financial advisor.
"The most important thing is that you work with someone who's a fiduciary," he said. "Which means that, by law, they have to put the client's interests above everyone else's, including their own."
In order to ensure that your advisor is held to a fiduciary standard, Lazaroff recommends getting that distinction delivered in writing. Without that, clients can be peddled products with high fees that pay large commissions to the advisor, an outcome that's not in the investor's best interest.
"If they won't put it in writing, they're not going to act as a fiduciary for you," he concluded.