The headlines about millennials are all about student debt, earning less and not buying homes. This, on an overall basis may be true, however if you make a quick Google search for financial blogs, you may find that there are some pretty savvy and sophisticated young investors on sites like Financial Samurai and Making Sense of Cents.

As I have mentioned in previous posts it is an amazing time in terms of earnings potential, finding meaningful work and the democratization of investment options. There is a growing community of young people who are taking advantage of these options and are often getting rich using the tools.

However, it seems that the big players in the financial world have taken scant notice. Robo-advisors for wealth management which are much more popular with the younger generation, remain a tiny part of the market.

Source: Cornell Johnson School of Business

When the average billionaire is around 62, the big fish of the wealth management world are likely going to be looking to do things more of the old school way rather than use the new fangled tools that millennials are comfortable with.

It’s All Relative

In reality, it all really depends on what your target market is. There is a general breakdown when it comes to wealth management that usually goes something like this:

• The Mass Affluent – Those with investable assets under $1 million but more than a few hundred thousand. These are the folks that will likely eventually reach the next level which is;
• High Net Worth – Those with $1 million to $5 million in investable assets.
• Very High Net Worth – These folks have broken away from the masses and have $5 million to $25 million in investable assets.
• Ultra High Bet Worth – These are the big fish with investable assets of $25 million and above.

Many large financial firms actively court just the top levels in terms of net worth. Until recently, Goldman Sachs only targeted those with a net worth of $25 million or more. With the purchase of United Capital announced a few weeks ago though, Goldman has shown a willingness to go down market since the firm specializes in those with $1 million to $5 million in net worth.

Morgan Stanley has a different approach, they have been targeting those with $200 thousand or more in investable assets for many years now in a bid to catch the mass affluent before they become high net worth.

Other firms such as UBS, specifically focus on high net worth individuals above a $30 million threshold and billionaires.

For those firms focused on billionaires and ultra high net worth, the rules are more familiar: know every detail of the client and their family’s life and provide an exceptional level of hands-on service.

If you are looking further down market to the high net worth or mass affluent though, where there are a large amount of internet savvy millennials, the tastes and preferences are very different.

What The New Breed Want

The younger generations are much more comfortable with rules based automation that you would find through ETFs and even with so called robo-advisors. They don’t need so much hands on person to person interaction to make their investment decisions and they like the speed and convenience of software as opposed to a phone call. This can be seen in the proportion of millennials that plan to increase their ETF investments compared to other generations.

Source: Schwab

In addition, I think that the new generation of wealthy is very conscious of the democratization of financial products and will start to demand ever more sophisticated products that currently may only be the purvey of the ultra rich.

The reason being is, as I have stated before, the financial world has not caught up to the internet age yet in the sense that information is distributed for free but the brand and the high quality service is what keeps the customer.

Due to the more complex risks involved in higher yielding, less liquid investments, I think there has been a general hesitation of advisors to offer these to less wealthy, but increasingly well versed and sophisticated investors are being created at lower net worth thresholds and becoming younger.

What the Government Deems “Sophisticated”

There are those pesky rules as well that get in the way. Hedge funds likely started the trend of just dealing with what the government calls an “accredited investor” which is defined as those that make over $200 thousand for the last 2 years or those with a net worth above $1 million. The government here being the SEC, which sets and enforced the rules regulating the securities sector in the US.

If you achieve this feat through income or money stashed away, it opens the door to invest in hedge funds, angel investor funds, and private equity among others. Many of these opportunities were once only for the purvey of those ultra high net worth investors but I think we are going to see more of a demand in the merely high net worth individuals to also gain access to the types of high returns that these risky and illiquid investments can offer.

A Trickle Becomes a Flood

This is why there has been a proliferation in the past few years of crowdfunding sites like Yieldstreet, Realtymogul and others, that give smaller investors access to big commercial and residential real estate projects that were once only available to people who could put down much more money.

The ease of access for crowdsourcing will likely continue to push portfolio managers, developers and general partners to increasingly utilize this outlet as a source of funds for larger and larger projects.

At the same time, these investments should be part of a balanced portfolio. I mentioned that robo advisors are becoming increasing common with the younger generations. This means that machines and AI may be used to manage the more traditional investments in one’s portfolio such as stocks and bond ETFs and funds but with the human element of a financial advisor increasingly requiring the expertise needed to manage and explain the more complicated and illiquid products that are coming through accredited investor platforms. Take a look at the expected growth in the robo-advisor market and you can see that, although it is small it is expected to be one of the big growth stories.

Source: Cornell Johnson School of Business

This in addition to the legacy, estate planning and charitable giving that advisors already offer as part of their services.

Advisors Stepping Up

This will require ever more technical product knowledge on the part of financial advisors as opposed to sales. Soft skills for marketing and selling will always be useful and have a place in wealth management but the role of a portfolio advisor in this sense may start to become even more important to winning the trust and confidence of clients.

Rather than replace advisors, the software will likely be able to aid in traditional portfolio adjustment recommendations. Judging the viability of say, a private equity deal is not as easily captured in software currently (well not yet) and will still need the help of a human advisor.

In addition, I think that the up and coming high net worth individuals have become very accustomed to the notion of cheap funds and razor thin margins for the privilege to invest, putting cost pressure on wealth advisors. The pressure will be on them to utilize the software already available as well as prove their value added through other investment products in the face of so much automation.

Conclusion

Tastes of consumers change with demographics and how those changes affect financial services is no different. The next generation of wealth manager may start to look a lot different in the near future than the golf playing, back slapping advisor, in the minds of many currently.

What will not change is honesty, trust and knowledge. At the end of the day people take advice from those that they trust, and it’s not a thing that’s easily won. This is why the banks love the wealth advisor business because it’s such “sticky” revenue for them. People don’t often switch wealth advisors even when they move between companies. The star advisors of the future though will have to prove their trust through greater sophistication.

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