Not Your Father's Financial Advisor

[This article originally appeared in our August issue of ETF Report.]

Gen Y Planning isn't your typical registered investment advisor. For starters, as the name suggests, the firm focuses on investors between the ages of 25-35, with only a handful of clients over the age of 40. There's also no minimum asset level required. "I can help clients at any asset level," said Sophia Bera, founder.

How does she make it work? By charging a monthly subscription fee for her services, then by partnering with a robo advisor for portfolio construction. "Robo advisors are a really great way to serve younger clients and the middle market profitably," she noted. Her setup also allows her to take on clients from around the country; although Gen Y is based in Minneapolis, Minnesota, most of the work happens online.

It's a next-generation business model for the next-gen investor, says Bera, who worked at several traditional financial advisories before starting her own registered investment advisory service in 2013. And the industry is taking notice: Recently, InvestmentNews named Bera as one of its Top 40 Under 40, while Financial Advisor Magazine named her one of their 10 Young Advisors to Watch.

ETF Report recently caught up with Bera to talk shop about all-ETF portfolios, robo advisors and how best to serve the next generation of wealth-makers.

Why focus specifically on younger investors?
Ever since I became interested in this profession, I'd always wanted to help people like me. But I soon realized that often you had to have $500,000 in your account to get any attention paid to you, or that there was a $1 million minimum for clients, or so on. I really didn't like that. So I wanted to figure out how to work with younger clients in a profitable way.

I launched Gen Y Planning in May 2013 specifically to work with the younger demographic. A lot of my clients are making six figures, but they just don't have those assets built up yet. Instead, they have, say, $10,000 in a rollover IRA.

How does your business model work?
I charge a fee to create an initial financial plan, followed by a monthly subscription fee. The initial plan fee is between $999-1,999 upfront, then the monthly subscription is $99-199 per month to work with clients on an ongoing basis. The subscription fee allows me to be able to help clients at any asset level.

I think I pay more on coffee a month.
Right? I pay $135 a month for my yoga membership. And what I was seeing was that there were a lot of young professionals investing in their health that way—why not invest in their financial health the same way?

I really love working with younger clients. People go through so many major life changes in their mid-20s through mid-40s: graduating from an MBA program or law school; transitioning to a different career; getting a promotion; getting married; having kids; buying or selling a house; getting divorced. I wanted to be able to help people through those transitions.

For many financial planners, the majority of their business is focused on investments and retirement planning. But 80 percent of what I do has nothing to do with investing. Instead, we want to build that financial plan—answer all those important financial questions first—then, with the remaining 20%, we'll make sure we're investing right, building an asset allocation with ETFs and so on.

But you still do some retirement planning, right?
Sure. But we talk much more about creating financial independence than just retirement. I have some clients who are on track to achieve financial independence in their 40s, where they might not need to work after that point, but they can choose to. I also have clients who need to know the ins and outs of student loans, or travel or credit card rewards programs. It's more about aiming for the future, instead of focusing on, "At 66, you're done."

So I focus on my clients' careers, growing their wealth and growing their income, because their income streams are their biggest asset.

You use only ETF portfolios. Why?
Honestly, I haven't really been swayed by the research in terms of the benefit of mutual fund managers. I haven't seen long-term statistics saying there's a huge benefit to paying a mutual fund manager that 1% percent or 1.5% in terms of getting better returns. I'd rather use ETFs so I can just eliminate that from the equation.

I take a passive investment approach. What I can control are costs; what I can't control is the stock market. So if I can keep the costs of owning different asset classes low, then hopefully my clients' long-term returns end up higher, because they're not giving up 1% for the mutual fund manager.

Do you think cost looms much larger for clients without a large starting asset base, in that they feel every percent or half a percent that much more?
Yes and no, but they are concerned with cost. A lot of them don't like hidden costs. They like transparency. So they don't mind paying for a financial planner on a monthly basis. But it's weird if, say, there's a commission, because they don't understand how that works. So they don't see what they're paying for with a mutual fund manager versus just being in an ETF.

The other thing I tell clients is that, in your early years, asset accumulation is more important than asset allocation. We just want to start saving consistently and in the right ways, and investing that money in an asset allocation that makes sense for your age, time horizon and risk tolerance. If you only have $10,000 in an investment account, and you make 10% on your money, you've made $1,000. But if you maxed out your Roth IRA that year, you would have $15,500 instead. Your portfolio would have increased more than 50% versus 10% for the investment returns.