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Millennials and The Great Wealth Transfer – An Inflection Point for Wealth Managers

Updated: Apr 13

By David Espindola and Michael W. Wright

In the Exponential Era, transitions happen gradually, then suddenly. In this environment, it is extremely important that all businesses get ahead of the rise in the curve, also known as the inflection point. This is the period of time when changes are still being made gradually, and when the opportunities are wide open to those who can see ahead and can take advantage of them. At the inflection point, the exponential curve starts to turn and then shoots straight up quickly, passing a point of departure from which there is no return. After the turning point, it is too late to catch up. When the changes are obvious to everyone, you have already become a Flash Boiled Frog.

We are currently about two to five years away from hitting a major turning point in the Financial Services industry — to the tune of 68 trillion dollars — and all of it is up for grabs. Financial Advisors and Wealth Managers that take advantage of this opportunity will be rewarded. Those that wait past the inflection point, will risk losing all of their clients.

What is driving this inflection point is The Great Wealth Transfer. This is the largest wealth transfer in the history of the United States and quite possibly the world. Trillions of dollars in assets are expected to transfer from one generation to the next. Although estimates vary, Cerulli Associates estimates that as much as $68 trillion will move between generations within 25 years.

Baby Boomers, who are now between the ages of 55 and 73, are the lifeblood of the financial industry. They hold an estimated $30 trillion to $40 trillion in assets. Based on current life expectancy, much of this wealth will pass to the next generations over the next one to two decades.

The generation that will most benefit from The Great Wealth Transfer is Millennials. Millennials were born between 1981 and 1999, during the Internet Age, making them digital natives. Some of the wealth transfer has already started. In fact, Millennials already control about $20 trillion in global wealth. Their wealth is expected to multiply two to three-fold as the Great Wealth Transfer progresses, turning them into the most powerful, influential, and richest generation ever.

The biggest threat to Financial Advisors is that, as the assets of their clients get passed on to Millennials unless they can convince their clients’ heirs to stay with their firms, the assets under management may evaporate, creating an unprecedented wave of destruction in the existing Wealth Management community.

Studies have shown that only a small percentage of heirs keep their parent’s financial advisors. Estimates vary again, but most studies show that at least 80% of heirs will fire their parents’ financial advisors after inheriting their parents’ wealth. Some studies suggest that the retention rate may be as low as 2%.

Ric Edelman, of Edelman Financial Engines, estimates that half of the financial advisors will be gone in the next 10 to 15 years. This promises to hollow out an industry that has benefitted from the growth of an ever-increasing asset base driven by several bull markets in recent decades. Financial advisors that are not taking action right now to engage the next generation and adopt digital capabilities to communicate and collaborate with Millennials, will be part of this unfortunate statistic.

In the last few years, we have seen the emergence of high-speed trading, algorithm-based robo-trading, automated advisors, and online trading accessible to anyone, anytime, anywhere in an increasingly mobile world. The emergence of companies like Robinhood, which offers a free-trading app, is creating more choices and alternatives to the traditional Wealth Management space. This type of app is ideal for investors who want to trade stocks, options, exchange-traded funds, and cryptocurrency without paying commissions or fees. These innovative services leverage new technological capabilities, cutting out nearly all costs that are typically associated with investing platforms.

It is not so much that Millennials want to do their own trading but rather that they want and expect digital solutions they can access on their terms — anytime, anywhere — because they are all about working smarter, not harder. But they also want the added value of insights from experts and reassurance that they are doing the right things. Millennials are more likely than any other generation to say having a Financial Advisor they trust is important to their financial confidence. According to ThinkAdvisors, 82% of Millennials clients say they would appreciate more personal meetings with their Investment Advisor. But how those meetings are conducted are not the same ‘personal’ meetings of the past that usually took place in a nondescript office building conference room, or at a family’s dining room table. This is a generation of digital natives who extract meaning, comfort, and a degree of unexpected intimacy through online interactions.

Starved of financial education but drowning in online resources, most Millennials just need a push in the right direction, says Max Rofagha, founder of Finimize, as reported in the Financial Times. To this end, Finimize sends cheeky, emoji-packed emails every day to more than 300,000 subscribers, explaining what is going on in world markets in a way that is engaging and fun. A typical subject line reads: ‘How do you spell recession?’ Finimize threatens what Mr. Rofagha calls the ‘information asymmetry’ that has sustained the financial advice industry for decades — namely, that financial matters are so complex you must pay a middleman to explain them to you. However, he also reckons young people will outgrow the mysterious ‘black box’ of robo-advice. “The financial industry has been clinging to this model of complexity and opacity,” he says. “Millennials want to have a clear understanding of what’s happening with their money.”

All of these intercepting horizons converge and form new ecosystems that will disrupt the Wealth Management business model currently serving Millennials’ parents. Without adopting Millennials’ preferred methods of interaction — communicating and collaborating on smartphones — the current industry will lose them as heirs, missing an opportunity to benefit from an entire generation of customers. And not just any generation, but the richest ever.

But it is not all doom and gloom. Wealth Managers that are capable of attracting and retaining Millennials will see their businesses explode, growing assets under management to levels previously considered unachievable. This is an unprecedented opportunity for those that are actively preparing for this major shift.

But how exactly do you capture the heart, souls, and wallets of Millennials?

Millennials primarily want two things: 1) To interact with a brand they trust; 2) Direct communications on their smartphones. These are the keys to their hearts, souls, and wallets. To build the kind of trust Millennials expect from a Wealth Manager’s brand, old habits will have to go. First of all, Financial Advisors will have to be completely transparent about fees. Second, they will have to prove that they are true fiduciaries, looking after their clients’ best interests, and not just wanting to make a quick buck on commissions and fees. Most importantly, they will have to establish a mobile presence to show Millennials that they ‘get’ them. If Wealth Management firms don’t bother to at least have their own branded mobile app on the Apple App Store or Google Play, they are out of the game before it even starts.

Mobile technology has completely transformed the way this generation builds relationships and communicates with others. Studies have shown that 90% of Millennials check their mobile devices within 15 minutes of waking up. Wealth Managers need to pay attention to this.

With Millennials’ propensity to constantly stay connected to others digitally, it’s no surprise that a study by the Pew Research Center found that 92 percent of millennials own smartphones. The ease of texting or messaging others through online apps on smartphones, as opposed to calling over the phone, has had a huge impact on Millennials’ communication preferences.

A separate study of Millennials by BankMyCell found the majority of respondents didn’t answer phone calls because it was ‘time-consuming.’ Similarly, in workplace settings, a survey by management consulting firm Korn Ferry found that Millennials also often avoid face-to-face interactions, instead preferring to use online messaging software to communicate with bosses or co-workers. Therefore, the best way to communicate with Millennials employees is to reach them through digital messaging apps, whether over the phone or computer.

A report by Millennials and Money by Accenture shows that most millennials want a mobile platform that connects directly to Financial Advisors. It is unacceptable to a Millennial to receive an email with a link to a website to retrieve a document — in fact, many don’t even use email anymore. Worse yet would be asking Millennials to fill out a form and sign a piece of paper that needs to be sent via snail mail or fax. Most don’t even know what a fax is.

Millennials want to chat via text message directly from their mobile phones. They want to access documents immediately on the go. If absolutely necessary, they will do a voice or video call, but they expect the conversation to be efficient. If advisors have something to show them, then they need to share their screen so clients can see what they are talking about. And if Wealth Managers expect Millennials to sign something, it better be electronically. The old days of signing papers are long gone.

Every generation wants the ability to selectively parse information to multiple recipients with permissions and encryption that can assure a secure private transfer of information for specific use by family members and advisors (legal, medical, wealth, etc.). Until the advent of the internet, and continuous mobile connectivity enabling synchronous communication, that want went unfilled. But in the Exponential Era, those technologies and functions are not only readily available but are becoming more pervasive, innovative, and faster.

Many Wealth Management firms understand the enormous opportunity in front of them, and therefore, are investing heavily in technology. Large firms typically have a software development organization and are capable of developing their own apps. But the small to mid-size firms cannot afford to hire developers to build their own app. A secure, compliant, well-designed mobile app could cost hundreds of thousands of dollars to build, if not more. A few solution providers are seeking the opportunity to address this gap by offering small to mid-size Wealth Management firms their own compliant apps.

Now is the time for Wealth Managers and their firms to take action. Failing to engage with Millennials now, ahead of the rapidly approaching inflection point, could render them boiled in a flash.

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