They’ve shaken off the ‘slacker’ stereotype and have suddenly gotten serious about financial planning
by Craig HawleyMr. Hawley is Head of Nationwide’s Annuity Distribution. Visit www.nationwide.com
As your Boomer clients are retiring at an increasing pace, Millennials have now surpassed Boomers as the largest living generational cohort. Millennials are a significant force in our economy—driving change and leading new trends. They’re the most educated generation of Americans thus far and their numbers dominate the workforce, according to a 2019 study from Pew Research. They are poised to inherit upwards of $30 trillion in the Great Wealth Transfer.
And now, as the first Millennials are turning 40, they are clearly bucking trends and defying the “slacker” stereotype that has trailed them for decades. Even in a year where they’ve been hit hard by the pandemic’s impact, they are looking ahead by focusing on financial planning, setting long-term goals and having a strategy to get there.
Even better news: The number of Millennials who work with an advisor is growing year over year, according to our sixth annual Advisor Authority Study of more than 2,500 individual investors, advisors and financial professionals. In 2016, only 50% of Millennials said they had an advisor. In 2020, a mere four years later, it was 75%, according to our study.
To grow your practice now and invest in the future of your firm, winning the emerging market of Millennial investors is key—and the opportunity is huge. But what do you really need to know to earn Millennials’ trust and win their business? Start by understanding their challenges and top concerns. Realize that they think differently than previous generations when it comes to retirement planning, protecting assets and going digital.
Life and Debt
While your Boomer clients have benefitted from soaring real estate values, a rising stock market and strong job market, Millennials faced a different reality.
Despite all their strengths and untapped potential, Millennials have had more than their fair share of challenges when it comes to their finances. Buying a home or building a portfolio has been a stretch for many Millennials due to mounting factors—overwhelming student loan debt, more limited job prospects, coming of age during the Crash of 2008 and facing a global pandemic in their prime earning years.
As a result, Millennials earn 20% less than Boomers did at the same age, according to a 2019 report by think tank New America. The median net worth of Millennial households was just $12,500, compared with $20,700 for households headed by Boomers when they were the same age, according to Pew Research. And while we would expect younger investor to have less wealth than older investors, a 2019 study based on Federal Reserve data shows that the average Millennial’s net worth is currently just one-twelfth of the average Boomer’s net worth.
Compounding the problem is the mismatch between Millennials risk tolerance and their time horizon. They have a tendency to invest too conservatively, even though they still have two to four decades until they retire. According to Advisor Authority, nearly half of Millennials (49%) felt pressure to revise their investing strategy last year—and the vast majority (93%) said they would take a more conservative approach.
Hit Hard by the Pandemic
Adding to their burden, Millennials have borne the brunt of the COVID-19 pandemic from a financial perspective.
According to Advisor Authority, Millennials were much more likely than Boomers to experience a pay cut due to the pandemic (29% vs 5%), and much more likely to be laid off due to the pandemic (17% vs 2%). Substantially more Millennials than Boomers said that the pandemic has impacted their financial decision making (84% vs 67%).
Being unable to meet financial obligations due to the COVID-19 pandemic was much more likely to be a top financial concern among Millennials than Boomers. In order to meet these financial obligations, Millennials were much more likely than Boomers to liquidate assets from their qualified retirement savings plans (13% vs 2%), and much more likely to liquidate non-qualified investment accounts, such as stocks, bonds and mutual funds (10% vs 2%). It’s clear that Millennials need your help to balance current demands with their long-term plans so that they can stay the course and avoid the urge to sell too quickly, lock in losses or move to cash.
Thinking Differently about Retirement
While Boomers have been retiring for the past decade at a rate of 10,000 per day, most Millennials still have two to four decades to prepare. But while Millennials may not be retiring soon—they are already planning for it.
According to Advisor Authority, Millennials were more likely than Boomers to say that generating reliable income during retirement is currently a top financial concern (21% vs 14%). But they’re not just concerned—they’re making plans and thinking strategically. Millennials were almost as likely as Boomers to have a strategy in place to generate guaranteed income in retirement (78% vs 82%). And Millennials were just as likely as Boomers to have a strategy to help protect themselves against outliving their savings in retirement (81% vs 80%).
Millennials understand that the responsibility rests squarely on their shoulders as the retirement safety net frays, traditional defined benefit pension plans are becoming a thing of the past, and the future of Social Security is coming into question. In fact, Millennials were only half as likely as Boomers to say they would rely on Social Security to protect against outliving their savings in retirement (42% vs 86%).
Instead, younger investors know they need other solutions to generate—and guarantee—income in retirement. Millennials were nearly twice as likely as Boomers to choose an annuity over the next 12 months to protect against outliving their savings as part of their holistic financial plans (75% vs 44%). Millennials were more than twice as likely as Boomers to incorporate in-plan income guarantees (67% vs 28%), a type of annuity now becoming more widely available within workplace defined contribution plans.
Clearly, Millennials realize the benefits of annuities, after maxing out contributions to their qualified plans and IRAs, for more tax-deferred growth and upside potential to help them accumulate more, and downside protection to mitigate market risk. And annuities are the only product that can offer them guaranteed income for life.
Planning Differently to Protect Assets
While markets have been on the rise, the past year has been anything but predictable, and the threat of more volatility looms large in investors’ minds.
Both Millennials and Boomers said that protecting assets was their number-one financial concern, with losses in their portfolio related to the pandemic a close second. Yet Millennials were more likely than Boomers to have a strategy to protect their assets against market risk (71% vs 63%). And there are stark differences between the solutions they use. For one, Millennials were nearly half as likely as Boomers (36% vs 66%) to rely on traditional diversification for risk management.
Instead, they use a range of solutions to protect portfolios against market risk. Millennials were nine times more likely than Boomers to say that Registered Index Linked Annuities (RILAs) were a top solution (36% vs 4%), they were more than twice as likely to use liquid alternatives (36% vs 17%), and exponentially more likely to use Smart Beta ETFs (30% vs 1%). Likewise, Millennials were twice as likely as Boomers to choose an annuity over the next 12 months to protect against market risk as part of their holistic financial plans (72% vs 36%).
Making the Move to Digital
To truly connect with Millennials on their own terms—so you can earn their trust and win their business—you need to create a customer experience that reflects the preferences of these “digital natives.”
Millennials are nearly five times more likely than Boomers to say that mobile technology influenced their decision to work with an advisor (19% vs 4%), six times more likely to say that enhancements to their advisor’s website or client portal is important for doing business with them (19% vs 3%) and seven times more likely to say that social media matters (14% vs 2%).
Likewise, it’s essential for you to establish your own online presence, using LinkedIn, blogs, podcasts and videos. Develop a communication strategy that leverages digital channels—and be sure that it centers on unbiased, educational content. Don’t forget that Millennials will do their own research online. And there is plenty of information out there. You can help them understand what content is accurate and which sources are reliable.
An Asset Now—and an Investment for the Future
The reality is that Millennials have had a tough start. It’s not always easy for them to balance plans for the future with their financial obligations today. It becomes even harder when confronting the complex challenges created by pandemic.
But they are resilient, innovative and full of untapped potential. Many are already on the path to building their own wealth and poised to inherit more. So don’t ignore this emerging market. And don’t ignore the research showing that after a client passes away heirs are highly likely to “fire” that advisor. For example, according to a 2019 report by Cerulli Associates, 87% of affluent investors said that they did not choose to use their parents’ advisor—and the vast majority had never even considered it.
Start working with Millennial clients and working to retain Millennial heirs. Build a multi-generational team that includes younger advisors who speak their language. Reduce fees for younger clients to engage them now so they can graduate into a full-service model over time. Consider retirement planning and asset protection from their point of view. Create a digital client experience, including self-service tools and automated solutions, to serve Millennial clients the way they want to be served—and in a way that is more efficient for you.
Bottom line, with the right approach, the emerging market of Millennial investors can be an asset to your practice now and an investment in the future of your firm.