Who is today's investor?

By Jeren Mametklycheva

For mutual fund firms, being unaware of the impending takeover by millennials in the mutual fund space is akin to not realizing that VHS tapes are out of style. With millennials poised to inherit $30 trillion over the next few decades, learning how to target this group is critical.

At last month’s SunStar Strategic Client Conference, Jonathan Dale (Director of Distribution Solutions at SEI) led a discussion on the characteristics of today’s investor and the transition toward millennials. Paul Franchi (Director of Financial Intermediaries Business at Pinnacle Associates, Ltd.) and Matthew Fronczke (Director of Product Consulting at kasina) also spoke on the panel.

The panelists focused on major trends in the financial advisory industry that address who these investors are and how they are best served. Since 2002, firms managing mutual funds have noticed a downward trend in fund flows. One culprit is the changing needs and goals of this demographic from their predecessors, the baby boomers.

Millennials include those born between 1980 and 2000.  Millennials are now the largest, most diverse segment of the U.S. population. They represented roughly one-third of the total population in 2013 and will continue to be a sizable part of the populace for decades to come.

When it comes to investing, millennials are averse to fees, prefer to communicate with advisors online, seek diversified and conservative investments, and appreciate a financial plan.

Understanding this shifting demographic, market segmentation and strategy is more important now than ever. Blackrock and Vanguard, for example, have already begun to target these upcoming investors and their preference for low cost products. Additionally, these investing characteristics are fueling the robo-advisor revolution.

So how do we add value to the financial advisory business and also incorporate the technology that millennials crave? This question becomes more important when you factor in millennials’ loyalty to the technology they rely on rather than to their parent’s financial advisors. The advisors, then, will have to evolve to provide the tech-centric service that millennials want.

There are three disruptive forces in the industry that advisors should be especially aware of as they contemplate the leap from serving baby boomers to millennials:

• The advent of the digital advisor – Robo-advisor assets under management grew 65% in the last eight months of 2014, reaching $19 billion. These technology companies offer automated services that provide personalized advice that is typically available to the very wealthy. Gen X and Y households see significant value in advice and service that is delivered to them conveniently—through an app on a cell phone, for example. Due to automation and commoditization of investment selection and portfolio management, traditional management models are under pressure to reduce fees, increase transparency, and improve digital interfaces and client experiences.
• The emergence of Active and Passive ETFs – pricing pressures, higher investor adoption, and product innovation are driving robust ETF growth. Fronczke says that every firm should have a long-term ETF strategy to compete in cost, tax, transparency, trading and access considerations.
• The emergence of Non-Transparent ETPs – the structure may welcome active participation. Reasons include new channels of distribution: ETF centric advisors, ETF strategists, robo-advisors and potentially more efficient delivery of active management in alternative pricing vehicle.

When considering today’s investor, it is important to understand the multiple demographics in play, what each group’s needs and preferences are, and how to evolve to make their lives easier, whether through customer experience, cost, or product consideration. Just like we all had to learn how to use a DVD player, fund firms should adjust their status quo to reach this up and coming group on their terms.