Why are young investors flocking to robo-advisors? And what is the impact of this automated solution on the traditional financial industry?
I get asked these questions all the time. As a member of Gen Y myself, I can share the reasons why millennial investors are choosing robo-advice.
Despite their age, this generation is far more risk-averse and financially conservative than Gen X and baby boomers. Our formative experience with the financial markets is bookended by the massive collapse of the tech bubble, Bernie Madoff and the Great Recession.
Growing up during that time meant witnessing 50 percent negative-return months, the collapse of Lehman Brothers and rising unemployment. Not only did millennials lose their first paychecks when investing in stocks, but they also lost their first jobs, while also paying off record-high student debt.
Trust and confidence for Gen Y was on shaky ground.
The financial advice industry is built on trust. A personal relationship with a branded, storied financial firm is the way that most wealth planning happened for many generations.
However, things are different for my generation. Because of this formative experience during the 2000s, trust in financial institutions was simply not there.
But there is one "institution" that not only remains a trustworthy companion but has grown and improved over the last 20 years for millennials. And that institution is personal technology.
Gen Y grew up using computers and smartphones. It fed its imagination on games and on-demand content, gaining control over numbers, personalities and relationships in a digital environment.
Many assume that millennials are disconnected from each other, staring at screens in silence. That could not be further from the truth. Millennials are deeply and constantly connected to one another, consuming and processing more emotional and quantitative information than previously possible.
"Now is a unique moment in the wealth-management industry and an incredible opportunity for firms to connect with millennials. Advisors do not have to compete with next-generation technology."
Each individual has a personal brand (Facebook or Instagram) and statistics on usage and engagement ("likes," views, Google analytics). Given this daily practice, millennials are experts in telling the difference between authentic and constructed image.
Robo-advisors are the application of personal technology to the financial advice industry. Though they rely on many of the same core tenets as a traditional financial firm (Modern Portfolio Theory, risk tolerance, efficient exchange-traded funds), these technology-first firms solve three distinctive next-generation challenges.
To date, hundreds of thousands of investors have signed up for online wealth management from firms such as Schwab, Vanguard, Betterment and Wealthfront, among others.
BlackRock just paid a reported $150 million for FutureAdvisor, a robo-technology managing less than $1 billion, and just a few weeks ago Fidelity Investments announced the firm has started testing its own robo service, dubbed Fidelity Go.
It should be noted that by 2020, robo-advisors will control in excess of $2 trillion in assets, according to a recent research report from A.T. Kearney.
Since millennials are financially crunched, account minimums and transaction fees just do not make sense for this customer. The traditional financial industry generally does not have a great solution for smaller accounts.
Financial advisors have a limited amount of time, and it is hard to scale a business model serving a few low-asset clients. So millennials created a technology solution that is personal, customizable and accessible.
Additionally, robo-advisor firms are relatable and empathetic. Even though technology is used to serve thousands of clients, the branding, messaging and vision is human. That means the goal is to have an iPhone app, a friendly design and the ability to chat with an advisor online at any time.
So does that mean that "traditional" financial advisors should give up on millennials?
In my view, that would be destructive for both the investors/clients and advisors. The industry is undergoing a $60 trillion intergenerational wealth transfer, with millennials standing to earn and inherit these assets over the next 20 years.
To continue playing the role of trusted financial counsel to the household, advisors will have to be patient and flexible in embracing change. The key to a successful intergenerational practice is to engage young and mass-affluent clients on their own terms by leveraging the language and tools they use in their daily lives.
These younger clients are simply seeking solutions to the same old problem of achieving personal and financial goals.
The good news for traditional advisors is that there are sophisticated private-label robo-advisors that they can easily adopt in their current practice.
The right solution will include an intuitively designed website, online account opening, proposal generation, trading, performance-reporting, billing and advisor-facing dashboards in a modern package.
Now is a unique moment in the wealth-management industry and an incredible opportunity for firms to connect with millennials. Advisors do not have to compete with next-generation technology, but instead can leverage it and use it in their daily business.
Firms that take the leap will become parts of a millennial's personal technology ecosystem.
Remember this: When millennials are using technology, buried in a phone or tablet, they are interacting with other people. On each side of a text message, chat or mobile game is a person making a real connection.
Therefore, the killer app for personal finance is not an autonomous robot. It is another human being on the other end of the line, solving problems, directing algorithms and creating a relationship that lasts for generations.
— By Alexey Sokolin, partner and COO of Vanare. Sokolin previously founded robo-advisor NestEgg Wealth, where he served as CEO.
