The U.S. population hit a significant milestone, this year, when the number of 65-year-olds reached its highest point in history. Dubbed the “silver tsunami” by AARP, the trend is important because 65 has historically represented the average retirement age, and in the case of the 4.1 million Baby Boomers who celebrated the event this year, the transition represents a major wealth planning moment. It also has big implications for the wealth management industry, which has helped make the Boomers the wealthiest generation ever and must now start thinking about their children and grandchildren.
Much has been written about the financial implications of the so-called Great Wealth Transfer as aging Boomers pass their estimated $90 trillion in assets on to the their Millennial and Gen Z offspring, but the issue is about more than just the money. The transition represents a complex inflection point where demographics, technology, and investor psychology are changing rapidly, and many conventional methods of doing business are going to need to adjust to keep pace. For the wealth managers at the center of this transformation, making those changes will not be as simple as just investing in technology or recruiting younger advisors. The process will require a nuanced approach that embraces the future without abandoning what’s currently working.
Generational Wealth By-the-Numbers
The latest update to the Broadridge U.S. Investor Study puts the generational challenge confronting wealth managers into stark terms with its finding that members of the Boomer and Silent Generations retain 69% of all assets currently held in wealth management accounts, while the Millennial and Gen Z cohorts account for just 8%. However, it is also clear from the data that these ratios are shifting rapidly. In 2018, the Boomer and Silent Generations retained 79% of all wealth management assets and the younger generation held just 3%. But the scale of the current gap helps illustrate why many wealth management firms would be reluctant to completely shift their strategies to focus on the growth segment of the market.
A similar phenomenon exists when comparing investors’ use of self-directed channels with full-service advisory channels. While there is a trend developing toward more widespread use of low-cost, self-directed accounts—particularly among younger investors—the bulk of total assets (77%) is still held in full-service advisory accounts.
That’s an issue the wealth management industry is going to need to address sooner than later. While it may be hard to argue the economics of focusing on where the lion’s share of assets is held today, it’s impossible to ignore the speed with which that trend is shifting.
So far, the industry has not kept pace. In fact, when we recently conducted a survey of 175 investment managers and wealth managers in partnership with the Money Management Institute, we found that although 85% agree that younger generations will require different products and service models, just 34% say they’ve re-oriented their growth strategies to target those younger investors.”
Know Your Customer – Like, Really, Get to Know Them
The secret to striking the right balance between the old-fashioned way of doing things and newer, largely untested growth strategies focused on courting younger generations is personalization. For all the generational market research and persona analyses that have been conducted to better understand the different generational groups, the one thing we’ve found as we’ve studied the real investment behavior of individuals is that there are no absolutes. Millennials are not synonymous with self-directed accounts any more than Boomers are locked into their advisor relationships. The opportunities are in the details and nuances of each investor’s lived experience and wealth managers need to be tuned in and flexible enough to adapt their approaches accordingly.
For example, we recently conducted a survey of 1,000 retail investors across all age groups, and when we asked if they would rather manage all of their assets with a financial advisor or manage all of their assets through a self-directed account, 74% of investors indicated a preference for working with an advisor. Reasons given included lack of confidence in their own abilities (23%), desire for guidance from an expert (21%) and convenience/simplicity (6%). Moreover, when we asked investors who are not currently using an advisor—the majority of whom are members of the Millennial and Gen-X—whether they’d use one in the future, we found that nearly half (47%) said they are “very likely” or “somewhat likely” to start using one within the next two years.
Have it Your Way
Consistently, as we probe deeper into the data and speak with advisors and investors, we see a clear pattern play out in which investors are looking for different horses for different courses and each scenario—whether it’s a life stage, an asset class preference, or just plain fun with investing—presents an opportunity for wealth managers to demonstrate their value.
For the full-service wealth management industry, that may mean finding a way to peacefully co-exist with things like gameification and self-directed side hustles, and perhaps even adding value to those pursuits. Interestingly, our data shows that 44% of investors with full-service accounts also maintain a self-directed account. Nearly half (45%) of them said they keep these accounts simply because they enjoy investing.
There was a time not so long ago when the full-service wealth management industry would have frowned upon clients dabbling on their own, let alone doing it for fun. The goal was quite simply to transition self-service accounts to full-service accounts. But the real opportunity today is not in trying to own every aspect of a client’s investment portfolio. It’s in becoming a trusted advisor to a much larger potential audience of clients who will have a wide range of different types of accounts and preferences. To get there, the wealth management industry will need to fine tune its radar, and its approach, to the details of their clients’ and prospective clients’ lives.
Read the full article here
