October 2016

MILLENNIALS: ‘I want to be different’

Young people’s attitudes and mores are a perennial concern for adults. In its relationship with millennial investors, the funds industry is a baffled grown up. Fiona Rintoul considers the difficulties and importance of how the industry is connecting with them.

Usually happy to keep the end client at arm’s length, the fund management industry often seems bamboozled by the hyper-interactive millennial generation. Not only does Generation Y want to interact like mad online, the 19 to 35-year-olds who make up this broad cohort also want a bespoke experience. Horrors!

Scrambling to respond, fund managers have sometimes seemed out of touch. Deathly dull tweets, bland websites, uninspiring YouTube videos: none of these are likely to float millennials’ boat.

“Fund managers need to start thinking about how they communicate with millennials,” says Suresh Mistry, director of brand engagement at Alquity Investment Management, a social impact fund manager that invests in developing markets. “If you look at 99% of asset management videos, it’s a guy in a suit talking to another guy in a suit.”

It’s a problem that fund managers urgently need to solve. According to Bank of America Merrill Lynch, millennials and centennials (nought to 18-year-olds, or Generation Z) are the world’s most important demographic, accounting for 59% of the global population and set to make up 60% of the global workforce by 2020. If fund managers can’t give them what they want, they’ll be whisked away by someone who can – perhaps one of the technology companies that has them in its thrall. For technology is the defining characteristic of these generations’ daily lives, with smartphone and social network penetration at 90%.

“There is going to be some disruption [in the finance sector], and asset management and wealth management is one of the sectors at the greatest risk of disruption,” warns Sarbjit Nahal, head of the thematic investing at Merrill Lynch International.

Google is the name on everyone’s lips. A couple of years ago, the internet company commissioned research into how it could enter the asset management industry. Martin Gilbert, Aberdeen Asset Management’s chief executive, and Massimo Tosato, executive vice-chairman at Schroders,
went to meet them. However, it remains unclear if Google or another tech giant will ever move into the fund sector.

“It’s certainly a risk, but they don’t internally have the expertise in terms of asset management,” says Denise Voss, chairman of the Association of the Luxembourg Fund Industry (Alfi). “They’ve all said: no, not at the moment.”

The threat could come from a different direction entirely – perhaps the crowdfunding platforms discussed on these pages last month. What is crystal clear is that millennials have expectations of the online experience that have been shaped by those tech giants and that are not currently being fulfilled by the fund sector.

“Millennials tend to want to be treated as unique,” says Voss. “What they are used to and want is information tailored to their circumstances and tastes.”

This requires a individualised approach to retail from fund managers that is not currently the norm. Realistically, of course, retail investors cannot be treated as unique. However, through algorithm-based robo-advisers, fund managers could present them with goal-based advice that appears to be unique.

“Asset managers need to advance in their use of big data,” says Voss.

But getting the technology right is only part of the problem fund managers face in appealing to millennials. They also need to persuade millennials to trust them. While in the past, an established fund management house could rely on its solid reputation to attract new clients, this is no longer the case. Bluntly put, milliennials are a suspicious lot – and finance is one of the sectors they distrust the most. 

“Only 14% of US millennials say they trust Wall Street to do the right thing,” says Nahal.

LOYALTY IN SHORT SUPPLY
Having come of age in relatively tough times, with the recession and low interest rates that resulted from the 2008 financial crisis and growing inequality, millennials cast a cynical eye on financial offerings. Loyalty is also in short supply.

“Millennials are more likely to close all their accounts with their bank than other generations,” says Nahal. “There is also sensitivity to fees, which is crossing into asset management.”

In other words, if the price ain’t right, your millennial investor is gone. Fair pricing and transparency are crucial – though no guarantee millennial investors will stay with you if other aspects of your service do not please them.

“Fees need to be clear and reasonable,” says Nahal. “Different layers of cost are coming under increasing scrutiny.”

Bombarded as they are by online advertising, millennials are also chary of advertising and promotion. Being constantly connected to the internet, they are inclined to undertake their own investigations.

“The power of what friends, family and peers are doing is important to millennials,” says Voss. “They might be sceptical about a lot of promotion and so listen to family and friends.”

This creates risks and opportunities. If a company could offer funds to this generation through an easy-to-use robo-advice website that facilitates self-directed research and indulges millennials’ desire to share – for example by showing what other people are investing in – then potentially it could clean up. But there is the obvious danger of this younger generation of investors making bad decisions.

Research from Schroders shows that millennial investors are both more overconfident and less knowledgeable than older (aged 36 and over) investors. Sixty-one percent of millennials believe they have a greater understanding of investments than the average investor, compared with 51% of older investors holding the same belief. However, fully 68% of millennials did not correctly identify what an investment company does, compared with (an already alarming) 59% of older investors. 

Opinion is divided as to the future role of independent financial advisers (IFAs) within this generation. Face-to-face contact isn’t really the millennial way, but Schroders research shows that 51% of millennials would consult a financial adviser the next time they make an investment decision and that 94% would like to improve their understanding of investments.

SOCIAL IMPACT INVESTING
Perhaps it’s a question of Muhammad coming to the mountain. IFAs – and asset managers – need to offer advice to millennials in a format that works for them. That means chat facilities, interaction on social media, a slick user experience and investments that are aligned with personal beliefs. For a belief in ethical and environmental investing is another defining characteristic of millennial investors.

“Younger investors are taking on board environmental and social impact,” says Nahal. “Over 90% of younger investors indicate that a company’s impact in these areas is an important consideration when they make investment decisions, and 85% of millennials say they consider their investment decisions as a way to express their social, political and environmental values.’

Millennial investors are also more likely than older investors to believe that impact investing is compatible with market-rate returns. IFAs, however, don’t always share this belief – a disjunct that may discourage millennials from seeking their advice.

“Many IFAs are 30-40 years into their career,” says Mistry. “They don’t understand socially responsible investing as it is today. They still have the view that responsible investing and returns don’t go hand in hand. When millennials talk to them about it they run scared.”

This is a challenge not just for IFAs but for the asset management industry itself. “The industry needs to find a way of circumventing this channel,” says Mistry. “IFAs will have to evolve into a different type of model.”

For this tech-savvy generation, direct channels are the obvious solution. But that still leaves an advice gap. All the evidence suggests that, left to their own devices, millennial investors don’t make the right decisions; in fact, they make all the wrong decisions. Encumbered by student debt and unable to afford to get on the housing ladder, they are, for example, often conservative and risk-averse at an age when riskier investments are recommended for them.

“Only 26% of under-30s own stock and only 19% allocate to equities,” says Nahal.

When they do invest in equities, they don’t hold them for long enough. According to research from Legg Mason, only 21% of global investors aged 18 to 39 are willing to hold an underperforming fund for more than 12 months.

Millennials are also embarking later in life on different life stages, such as buying a house, getting married and having children – and that includes saving for retirement. New research conducted by YouGov on behalf of Old Mutual Wealth into the overlap Generation X (aged 30-45) shows that 90% of this age group has yet to plan for retirement. There is no reason to believe Generation Y will be quicker off the mark.

“While much of the current retirement focus is on Boomers and Generation X not putting enough into their pension pots, many millennials are doing far less,” says Nahal.

How can asset managers respond to this situation?

“The imperative for asset managers and the real opportunity is to use the occasion to interact,” says Voss. “The first priority on a robo-advice platform should be education.”

Whether asset managers themselves can create the kinds of platforms that will appeal to millennials and make education enjoyable is another matter. Voss suggests it may be a question of companies outside the industry selling the platform and experience to a traditional asset manager.

Mistry likewise believes the asset management industry is “too unwieldy and regimented” to pluck this particular cherry. “What a fantastic opportunity for someone,” he says. “Someone will come in and shake it up. But it won’t come from the asset management industry; it will come from left field.”

©2016 funds europe