The Rise of the Millennial Investor
The inter-generational transfer of wealth is a fascinating trend that has taken many analysts by surprise.
With the wealthier and asset-rich baby boomer generation slowly approaching retirement, their children and grandchildren are set to inherit an unprecedented amount of wealth. Research from EY suggests that those born between 1981 and 1996 could receive $30 trillion in the US alone over the next 20 years––equivalent to almost half of the current worth of the world economy––in the US alone.
According to Alpa Bhakta, CEO at mortgage experts Butterfield Mortgages Limited, it looks as though this prediction is already being realised.
By 2020, the total net-worth of millennials worldwide will be more than double what it was in 2015. For those working in finance, this means their services will be required by a different kind of client. In practicality, what does the growth of the millennial investor mean for those in the financial service industry?
Some things are likely to stay the same. The ultimate aim for the investors of tomorrow will be a healthy return over the long term, whilst minimising risk. Furthermore, millennials still have many of the same client management needs as their parents and grandparents; research conducted by Deloitte suggests the overwhelming majority (82%) prefer face-to-face or more traditional means of finding out about financial options. For example, 50% base their decisions on word-of-mouth and personal recommendations.
However, the type of asset class millennial investors will be seeking to pool their capital into could be significantly different from the preferences of previous generations. This is due to the attitudes and beliefs of millennials, who tend to be more concerned about the incorporation of environmental, social and governance (ESG) factors when making financial decisions. Indeed, EY suggests that almost a fifth of assets under management are now sustainable investments.
The type of asset class millennial investors will be seeking to pool their capital into could be significantly different from the preferences of previous generations. This is due to the attitudes and beliefs of millennials.
Furthermore, they are unlikely to compromise these values in the pursuit of larger gains, according to research from Deloitte––75% of millennials are unlikely to compromise on their personal values. The aforementioned research also revealed that two-thirds of them feel “obliged” to change the state of the world. As such, the proportion of ESG-based investments is set to rise considerably over the medium and long term.
So, what does the rise of millennial investors mean for financial advisers and wealth advisers? In short, the finance industry needs to accept that the values that traditionally informed a good investment are changing––it is no longer simple calculation of risk and return, but a need to incorporate ESG factors into the equation.
Being aware of this trend will be crucial for advisers across the board, not least because millennials have been shown to have a negative perception of the financial service industry. The research conducted by Deloitte shows that millennials have a weaker understanding of finance generally but think that not enough emphasis is placed on the real-world impact that investments have.
It might be easy to think that younger generations are still being led by their parents when it comes to investment. However, research from JPMorgan shows the opposite is the case; younger people speak more about money than their parents did, approximately half of them discuss it for more than four hours a week―, allowing them to be front-and-centre of the decision making process. This generation of high net worth individuals and ultra high net worth individuals are therefore not only more inclined to consider ESG and impact investing, but they are also more likely to make their preference clear publicly.
This generation of high net worth individuals and ultra high net worth individuals are therefore not only more inclined to consider ESG and impact investing, but they are also more likely to make their preference clear publicly.
Financial advisers might be concerned the attitudes of younger investors could mean a more restricted roster of potential investments, leading to reduced returns. It’s certainly the case that many tried and tested assets may not be available, but high yields are still achievable. Impact investor Ron Cordes, of Maryland, presents a notable case-study. After making the decision to invest for purpose, not necessarily profits, he restructured his finances so that by 2017, 100% of his assets were in ESG investments via his family foundation.
In these ways, financial advisers need to have a good understanding of how the market is changing. While most of us who work in the finance sector appreciate that the number of younger investors is growing, the pace of change over the medium term may not be fully realised by all. Furthermore, their preferences should be treated with respect, as there is ample evidence to show that impact investments, can provide impressive returns while also positive contributions to society and the wider environment. The challenge is now to ensure we are catering to the needs of the next generation of investors.