It’s no secret that younger investors approach investing differently than older investors do, but the industry overall is still squarely aimed at addressing the needs of more affluent, older investors. And while digital is playing a role in enhancing the traditional models of delivering investment advice, few are taking the digital-first approach that would resonate best with millennial investors.
Given millennials’ share of the available retirement market and the fact that they represent the future of the wealth management franchise, understanding what is important to them can help retirement service providers not only capture more of the mass affluent retirement market, but also establish a strong foundation for building relationships with the next generation of investors.
According to A.T. Kearney’s 2017 Future of Advice study, millennials account for only 6% of mass affluent retirement-related financial assets but represent a quarter of the available mass affluent retirement market. This opportunity is driven by two main factors: Millennials’ freely expressed willingness to change investment providers in search of better options, and their high incidence of 'orphan' 401(k)s left behind after they leave a job.
According to the study, millennials are more likely to switch investment advice providers to find a better fit than older investors are. In 2017, 53% of mass affluent investors ages 18 to 24 switched primary investment firms, while 30% of investors ages 25 to 34 switched. These figures compare with 21% for consumers ages 35 to 44 and single-digit rates for those over 45.
Orphan 401(k)s are another area of interest. The Future of Advice study found that 62% of 18- to 24-year-old investors had at least one orphan 401(k) account in 2017. Among investors ages 25 to 34, 59% had at least one orphan 401(k). By comparison, 41% of investors of all ages had at least one orphan 401(k) account.
Importantly, millennials are more likely than older consumers to roll over these orphan 401(k)s into IRAs in an effort to consolidate their assets and gain investment flexibility. In the past year, 27% of mass affluent consumers ages 18 to 24 and 23% of those ages 25 to 34 rolled over a 401(k) into an IRA.
Millennials are the first generation to have grown up with readily available digital consumer technology. As a result, these digital natives are much more willing to adopt digital tools for investing and prefer to use technological tools from their investment firms.
For example, the study found that millennials are much more open than older consumers are to using robo advice to address their investment needs: 90% of mass affluent investors ages 18 to 24 expressed at least some interest in such services — including 53% who said they were “extremely interested” or “very interested” — compared with 37% of those 55 to 64 who expressed some level of interest. Among those interested in robo advice, younger consumers indicated high interest in using such services to manage their IRA or retirement assets.
Digital has also played a key role in millennials’ switching decisions. Learning about superior digital capabilities from another firm or having to put up with technology issues were cited as key triggers for millennials’ decision to shop for a new provider, and digital capabilities were an important feature considered in the assessment of potential providers.
The study also found a significant gap between younger and older investors citing a lack of helpful digital and mobile tools with their old 401(k) platform in their decisions to roll over 401(k) assets into IRAs in the previous year.
As millennial investors learn more about how to manage their assets effectively, they will be looking for investment advisors who can give them the help they need through the channels they prefer. It is clear that having robust and relevant digital capabilities is a key driver for the successful capture of retirement assets of millennials.
For investment firms that are looking to capture younger mass affluent retirement customers and turn them into loyal long-term investors, offering a digital first experience — from the delivery of advice, analytics and communications to providing relevant value-added services — will be critical to future success.