More financial firms in the retirement space are considering the lifetime value of consumerscurrently 55%, up from 43% in 2010 are showing an increased focus on younger investors, according to a new study by research firm Hearts & Wallets.
The survey included nearly two dozen leading distributors, employer-sponsored plans, insurers, asset managers and intermediary platform solution providers serving more than 50 million retail customers.
When thinking of lifetime value, that means a focus on investors in the accumulation phase of saving. "Traditional firms are becoming more interested in younger investors. They realize that acquisition should be a priority and they have to think about acquiring investors when they are a little younger generally in their late 30s and 40s," said Chris Brown, principal Hearts & Wallets. That's when people form those lasting relationships," he added.
Brown indicated that increased competition for the larger accounts of older investors could be driving this newfound interest. "There was more of a thought in the past that it was cheaper to acquire accounts later when the balances are larger rather than trying to bring people with smaller balances along," he noted.
"Now that's shifting, possibly because of increased competition for people in their 50s and 60s. Firms are realizing that it's expensive to get the assets when people are at that point and maybe it is a better strategy to take in smaller accounts and build the relationships," he stated.
Messaging for investors in the accumulation phase is a big piece of the puzzle. "Part of the study is that we went out and looked at the homepages of the leading online BDs and enrollment kits for 401(k) providers. A lot of the goals and messaging are not aligned with the needs of younger investors. We've had comments from people in our focus groups about the "typical old white guy" who is seen in the commercials for the brokerage firms," Brown said.
Preparing not only for retirement but also for life's financial challenges is important to younger investors. "Some of the things we saw were that both the enrollment kits and the websites tended to leave out a lot of the needs and goals of younger investors. The focus is so much on retirement that they forget about the things younger investors are looking for," said Brown.
"This includes building an emergency fund, saving for college, children they don't have yet and a home," he noted.
Pricing is another consideration when it comes to the younger demographic. "The fees are another issue. Younger people are looking for clear pricing, they want to comparison shop. They want to know the cost and how it compares to other firms. There are some firms that do a nice job of laying out the costs. They say here is what it costs to use our platform versus our competitors," Brown stated. "We think if these firms changed the revenue model a little bit it could be profitable. The margins won't be as high as most of these firms are public companies and they have quarterly earnings to meet. They have concerns about keeping margins where they are and it's tough to change the business model," he added.
To increase participation among investors in the accumulation phase, providers are working with plan sponsors to target specific demographics, making use of technology and utilizing behavioral driven innovations.
"We have a comprehensive plan review report broken up by age bands and the age bands are 30 and younger, 30-39, 40-49, 50-59 and 60 plus," said John Prescott, vice president of relationship management and strategic initiatives for CPI Qualified Plan Consultants. "It reports to the employer and the advisors the participation rates and the deferral percentages on each bracket. If the employer and the advisors select a bracket that is not participating as much as it should, we put together PowerPoint presentations that they can use in specific employee education meetings," he notes.
Using technology that younger investors are familiar with is another part of the strategy, Prescott said. "We have 60 iPads that we use in enrollments for the younger generation and they really relate to that. 'This is my generation's equipment.' We hand out 20 of these in a classroom setting. We let them use the iPad to access their participant account.
"Another tool is auto enrollment, which we are pushing hard. It's a proven fact that people do not 'un-enroll.' This is a great tool for all age brackets and probably more effective for the under 40 crowd," said Prescott.