They’ll soon be two-fifths of consumers, so financial advisers must learn to see the world their way
In today’s world things change fast, and it can be hard to keep up with new trends and the opportunities they bring, especially in the rather traditional world of financial services. Wealth managers and advisers must adapt to how younger generations view the world in order to stay relevant – take note that Generation Z are about to overtake Millennials in number, representing 40% of consumers by 2020 (according to MNI Targeted Media research).
Attitudes to investing have changed. When asked how they would invest a $10,000 gift, a third of Baby Boomers said they would pay off debt – a figure that fell to 25% for Generation X and 22% for Millennials, according to a LendEdu study. When it comes to risk, around half of Baby Boomers and Millennials recognise global economic instability as a concern, although 40% of Millennials say they would invest more in response to a 20% fall in the value of their investment, compared with 23% of Baby Boomers. In practice, however, younger generations prove less patient in times of volatility, with 15% of Millennials and of Generation X having made quicker, potentially less-considered changes to their portfolios in response to political or stock market instability, compared with 7% of Baby Boomers.
These preferences are broadly reflected in portfolio composition. Research by Legg Mason showed that in 2018 Baby Boomers and Millennials held around 30% in cash, while Millennials were less inclined toward equities but heavier on alternatives (11%, as compared with 7% for the previous generation). Newer investments such as cryptocurrency are gaining ground, with 23% of Millennials holding the asset class compared with 19% in the previous generation and only 8% among Baby Boomers. However, research also shows that the younger the generation, the less time investments tend to be held (just under two years for Millennials, according to Schroders). Meanwhile, sustainability is becoming increasingly important: Millennial and Generation Z investors are more selective in this context, but they are also willing to pay above the odds and invest for longer if wealth will ultimately reach responsible companies or achieve environmental, social and governance goals, according to Legg Mason.
There are five generations active in the financial markets, and their diversity of attitudes is influenced by the environment from which each emerged. Baby Boomers have post-Depression and post-war roots – a background that also influenced Generation X, who grew up in a time of transition and then relative prosperity. While Millennials may have been born into this prosperity, they began their careers in the Great Recession of 2007-08, a period that has been formative for Generation Z. The youthful optimism we perceive in recent generations is also likely to be a question of experience and memory: Millennials have never lived in a period of global conflict or in a time before European integration, while most of Generation Z has no memory at all of the 9/11 attacks that launched the War on Terror in 2001.
Differences in investment approach also reflect the amount of time each demographic believes it has left to enjoy life, with older generations often demonstrating a shorter-term outlook designed to preserve accumulated wealth, while younger generations have the benefit of a longer investment horizon during which to create their legacies.
The way in which financial services are accessed has also transformed. As Millennials reach their peak earning age, robo-advice is becoming prevalent. The tech-pioneers of the late 20th century, they predictably embrace automation and control: 67% seek some form of computer-generated advice as a core service and 72% describe themselves as self-directed in relation to their wealth (according to Accenture research). Generation Z have never known a time without mobile phones, advanced computing and the internet. Tech-innate, investors in this bracket can be equally at ease turning to social media contacts and influencers for investment inspiration.
However, technology is unlikely to entirely displace more traditional advisory models. Millennials and Generation Z admit to being less financially knowledgeable than their predecessors, and they continue to value personal contact and sound guidance. Half of Millennials need help assessing risk and nearly as many need tax planning advice; 28% need assistance with basic budgeting and debt management and the same proportion are already in search of estate planning advice (according to Natixis research). In the meantime, individuals are increasingly mobile and invest abroad more readily, while family structures are becoming more colourful and complicated. No level of automation can interpret the intricacies of cross-border planning, help handle the softer issues such as family dynamics or articulate a family’s values and objectives. At least, not yet!
So, where do we go from here? Advisers, wealth managers and product providers must be alive to the identity and attitudes of each slice of the population, recognising how their investment styles and other preferences differ from those in adjacent generations. Innovation, particularly in the digital sphere, will continue to be key if we are to meet client needs and expectations; the solutions likely to have the upper hand are those that offer diversification and control, consolidate investments under a single umbrella, and remain agile and adaptable as client circumstances evolve.
Next stop: Generation Alpha.
