Millennials to financial advisers: #DoingitWrong

As a millennial who works in the financial services industry, I can tell you with complete certainty that financial advisers need to comprehensively change their business models and practices if they want to gain and hold individuals in my generation as customers. The dated cost-structures, investment approaches and means of communicating won’t work for us like it did for our parents. Our generation has a distinct set of experiences and expectations when it comes to money management; we want a Tesla, and most of you are trying to sell us Pontiacs. And yes, I know they don’t make those any more — that’s the point.
(More: Millennials don’t feel like top priorities for advisers)
In order to win business from millennials, financial advisers need to better understand our psyche, our beliefs, our fears and our values. My cohort includes those born between the early 1980s and early 2000s, so we are in our 20s and early 30s. With this demographic backdrop in mind, consider these points:
• College graduates are significantly indebted with student loans. The average person from the Class of 2014 owes $33,000, the most on record. A greater number of students is also borrowing to pay for college – about 70% of bachelor’s degrees for last year’s graduating class. Educated millennials are focused on paying off student debt and meeting other current financial responsibilities like rent. Persuading them to delay short-term gratification with the little spending money they have for future gains is a tough sell. Google Autofill says it all: type “financial” into Google’s search engine, and it autofill’s to “aid”… you won’t find “adviser” in the top four.

• Millennials are more entrepreneurially focused than prior generations. Steve Jobs and Mark Zuckerberg are our Henry Ford and Thomas Edison. The success of startups launched by millennials has inspired us to find and take similar risks. Consequently, we’re typically more interested in investing in our own talents, intelligence or creativity — whether it be buying equipment to create and upload YouTube videos, developing an app or starting our own tech-enabled businesses. Financial advisers need to sell the merits of investing in companies and not just oneself. That’s not an easy sale.

• After living through the dot com bubble and 2008 financial crisis, millennials are wary of the capital markets. They witnessed their parents, relatives, friend’s parents and friends lose a lot of money — perhaps they even saw the value of their “Bar mitzvah/confirmation money” plummet. I still hear friends lament about how much money their parents lost in the market in 2008. Millennials were also turned off by the greed of money managers that contributed to both crises at the expense of their clients. Additionally, the ensuing Great Recession bred a difficult labor market for graduates and millennials in the early stages of their careers, leaving an overall bad taste in their mouths when it comes to Wall Street in general.

In reality, my friends are more willing to bet on sports than stocks. They’re familiar with fantasy sports and think it’s fun. Yet when it comes to stocks, they’re unwilling to take this risk. Gaining our trust and getting us comfortable and excited about investing in financial securities again or for the first time will be a process.

• Millennials grew up with the shift from active to passive management. They are used to cheap, passive products such as exchange-traded funds, and for the last 6+ years, it’s worked. So why pay a high premium for portfolio management? In college, the foundations of my finance courses were rooted in the Efficient Market Hypothesis, which basically suggests that systematically beating the market is impossible. Granted, not every millennial pursues an economics degree, and this theory is by no means bullet proof. But there is academic work supporting either argument. So why pay someone to pick stocks or funds if you can possibly achieve the same results from “a blindfolded monkey throwing darts at a newspaper’s financial pages,” to quote Burton Malkiel’s “A Random Walk Down Wall Street.”
Those are just a few of the important factors that shape the way millennials think about investing in the capital markets. But don’t worry, we aren’t a losing battle. Here are five areas of focus that can help advisers capture business from millennials:
1) Education: While baby boomers enjoyed long periods of bull markets in the 80s and 90s, millennials are used to seeing more volatility from the dot-com bubble bursting in 2000 and financial crisis in 2008. As a result, we need more assurance from financial advisers during market downturns. This requires education on diversification to help us mitigate behavioral biases and withstand market volatility. In this way, financial advisers can help millennials stay invested and focus on long-term growth, rather than bailing at cycle lows and hurting their chances of achieving another stream of income.
Advisers should also clearly explain their role, which isn’t to time or beat the market, but rather meet short-term and long-term financial goals. Advisers should first focus on millennials’ current needs, like learning how to budget and pay off student loans. Then they can offer the prospect of achieving other future hopes, such as saving for a vacation or one day a house. Millennials need something positive to work toward and a guide to tell them how much they should start investing or saving for retirement, for example, but first they need to get out of debt.
2) Transparency: The dot-com bubble and the 2008 financial crisis made millennials timid about investing in the capital markets and skeptical of financial advisers. Hollywood certainly hasn’t helped with producing movies from the 1980s classic “Wall Street” to its recent portrayal of greed and deceit in “The Wolf of Wall Street.” Entertainment is a powerful influence over millennials since we can consume so much of it relative to prior generations. Big banks and money managers have garnered a stigma of trying to sell complex products, some of which ultimately proved faulty. At the same time, millennials know they need to save for the future, especially to protect themselves from another crisis or recession.
Millennials share pictures and stories about personal events on Facebook, tweet their thoughts and interests daily and follow the lives of friends and celebrities on social media. We are the most transparent generation ever due to technology, and we’d appreciate similar levels of transparency from financial advisers about their business model and investment products. Respecting millennials’ intelligence by conducting honest conversations about suitable investment vehicles that are in our best interest will go a long way.
3) Convenience: A smart phone or mobile device makes almost everything accessible in real time from information to entertainment to communication. Want a date? Swipe right. Want to order food? We have an app for that. Want to know what a short sale is? Just type “what is a”… No, really, just those three words. Google will autofill the rest (it’s the fourth one down). Similar to these services, an adviser should foster relationships with millennials that are as convenient as possible. Unlike previous generations, millennials are used to on-demand service. Connect with us through our modes of communication, i.e., online or through social media. Also package material and advice in digestible bites with fun, yet informative visuals. Create a friendly website and useful app so we always have access to all our information. Lastly, gamifying our account by showing how close we are to meeting certain goals is even better — we like games and respond to encouragement and incentives. We are the generation in which every player wins a ribbon, after all.

4) Technology: Financial advisers’ adoption of new technology signals to millennials they aren’t complacent and demonstrates their efforts to reach out to us on our turf. Most individuals from my generation don’t want to meet advisers in their stuffy offices — it’s intimidating, too structured and requires too much time and energy. Advisers can reach out to millennials on social media platforms like Facebook, Twitter and LinkedIn. Blogging is an efficient way to educate us since we are used to that format — sort of like BuzzFeed, our generation’s New York Times. And using Skype/FaceTime/screen sharing tools for appointments also helps us avoid an experience similar to going to a dentist or doctor’s appointment.
(More: Don’t ignore estate planning for millennial clients)
Here’s a simple tip: If you host millennials at your office, don’t sit behind a desk. Meet with us at a round table — it’s more conversational and less like an interview — with a computer and large screen nearby to aid the discussion by way of software tools and visuals. Meeting in familiar territory like a Starbucks is another option — we’re less private and more casual than previous generations. Remember, we express ourselves through emojis for everyone to see on social media … These are all just a few examples, but here is the overall message: if advisers fail to explore new ways of evolving their businesses, how do we know if they stay up on new investment trends and products? Are we paying an adviser to just hit “rebalance” every quarter?

5) Fee-based: Millennials are strapped with student debt. It’s difficult enough for us to pay our bills, let alone pay for someone to manage the little money we may hold in a bank account — the opportunity cost is rent. When our parents were our age, money managers held physical reports on companies and access to a broad array of stocks was through mutual funds. Now, millennials can purchase cheap ETFs and access free investment information online, so we’re not going to pay steep costs for an adviser. We’d rather seek council from a trusted parent or friend — we just don’t have the money. Therefore, advisers may find success by charging millennials on an hourly basis for investment advice, and a low percentage on assets under management. Above all, we expect to understand all costs and fees involved upfront.
In sum, here is the pitch: financial advisers can be trustworthy and convenient guides to money management for millennials. This generation wants advisers who can adapt to the needs and constraints that exist at each stage of our lives, while helping prepare us for the future. It’s as much the adviser’s job to develop suitable cash flow planning and portfolio models as it is to manage our behavioral tendencies. Both require clear explanations and technology.
Just remember #Education #Transparency #Convenience #Technology #Fee-based.
Jessica Lynn Rabe is a market strategist at ConvergEx, a global brokerage company based in New York, and co-author of “Alts Democratized: A Practical Guide to Alternative Mutual Funds and ETFs for Financial Advisors” with Robert J. Martorana.
This blog originally appeared on The Share, ConvergEx’s blog.