When it comes to investing, millennials adhere to a different approach than their parents. Young investors, who have been through two market crashes, have developed skepticism and mistrust towards banks and traditional advisory services. Many millennials prefer to save and forgo investing all together. For those willing to test the market, technology and social trends play a significant impact on their decision making. With millennials now outnumbering baby boomers in the U.S., many traditional financial services strive to connect with the younger generation. This comes on the heels of a noticeable upward trend in financial technology and online wealth management. Through the use of technology, robo-advisors have built a successful foundation for attracting young investors.
Technology
Given their love of technology, it comes as no surprise that millennials are gravitating towards financial technology. Young investors are accustomed to using technology for every aspect of their lives and investing is no different. Their relationship with technology makes digital asset management more appealing. Young adults are more inclined to make choices via a smartphone over in person interactions. Not only do millennials prefer accessible apps and web based platforms, but automation has played a major factor in the success of robo-advisors. Millennials are accustomed to subscribing to all their services electronically. To them, investing is another service that should be automated. Compared to the older generation, millennials have not subscribed to the mantra “greed is good.” Instead, they prefer to develop careers, relationships and achieve personal goals which technology has afforded them.
Passive Management
When it comes to investing, millennials are far more inclined to choosing passively managed funds. By definition, passive funds follow an investment style tracking the movements of indices and other major benchmarks. Compared to actively managed funds, passive funds do not attempt to beat the market; instead mirror overall movements in the market in a low cost manner. It is an unfortunate situation, but too many millennials lack financial literacy and flock to passive funds for this very reason. While there are numerous types of passively managed funds, exchange-traded funds (ETFs) have drawn a considerable amount of attention.
Following the success of the ETF industry, robo-advisors elect to funnel their client’s investments into various ETFs. Fundamentally, computer software selects the best investment options based on the user’s goals and risk tolerance. The use of ETFs not only enables passive management, but also offers substantial diversification and liquidity at low costs. Regardless of what management style you subscribe to diversification and liquidity are fundamental to building a successful portfolio. Through automation and the use of ETFs, online wealth managers have created a platform catered to millennials.
Humble Fee Structures
With increasing costs of living and insurmountable student debt, investing is not always the number one priority for America’s youth. Often is the case that younger investors don’t have enough money or simply lack financial literacy to begin investing. Traditional advisory services do not make this easy either. It is more beneficial for a financial advisor to service high net worth individuals, and as a result many millennials do not qualify. As a result, young investors and tech savvy millennials are big users of robo-advisors. Instead of sacrificing 1 to 3% in advisory and management fees, robo-advisors provide comparable services and no account minimums at a fraction of the cost. Due to low overhead costs, robo-advisors can charge less than 1% in fees with some services forgoing them all together. At the end of the day, young investors have gravitated to robo-advisors for their affordable costs.
Transparency
Having lived through two financial crises, the younger generation of America no longer believes investing should be strictly based on profitability. According to many millennials, banks and money managers have garnered a negative stigma of trying to sell complex products to make a quick dollar, and when events like the Financial Crisis of 2008 occur, financial institutions face minimal repercussions. Whether or not this is true, young investors are aware they need to save in case of future economic downturns. As a result, many millennials prefer to save more than the prior generation. When they do invest, aspects of social impact, accessibility and transparency are desired. At their core, robo-advisors pride their services on trust, transparency and accessibility. Millennials appreciate 24/7 access and detailed accounts of fees and transactions made on their behalf. Building long lasting relationships, even with your investment accounts, are fundamentally important to younger generations.
In 2015, robo-advisors collectively manage $20 billion in assets, servicing young, and tech savvy millennials. This represents a small fraction of the $16 trillion pie in individual investments. By the numbers, automated investing is far from posing a threat to traditional asset managers. However, the recent launches of Schwab Intelligent Portfolios (SCHW), Vanguard’s automated investment service and Blackrock’s (BLK) acquisition of FutureAdvisor are any indication; a shift in investing preferences may be forthcoming.
