Millennials have the potential to significantly alter the way the financial services industry caters to individual investors. The newest generation of workers, the first to grow up entirely in the age of smart phones and the internet, don’t view investments as stocks and bonds run by Wall Street. They are increasingly looking at the investment process as a do-it-yourself project using technology and social networking to invest in ideas, not asset classes. Uber in, taxis out. Airbnb in, hotels out. Slowly but surely the financial services industry will need to change how it approaches and services this market segment if it wants to remain relevant.
For decades, the standard money management model has been the “Talk to Chuck” approach. You walk downtown to your local advisor who invests your money in stocks and bonds in return for your unwavering trust that he or she will make the right calls. You receive a brokerage statement every month which details your account balance, but the rest is somewhat of a mystery. Investors have never been entirely comfortable trusting an industry ripe with conflicts of interest, high fees, and way too many salespeople. However, other options haven’t always existed if you are looking for a customized approach.
The new generation of investors, empowered by easily accessible information at their fingertips, have begun to select investments based on ideas and sentiments rather than cash flow and income statements. Crowdfunding and idea-based investing are two cases of how millennials are blazing their own path.
Crowdfunding Gaining Steam
The crowdfunding concept revolves around individuals investing in projects, causes, or ideas that they believe to be intriguing and worthwhile ventures. Although the idea of crowdfunding is not new, better technology and expanded options have given everyday people access to thousands of potential vehicles to invest in via websites such as Kickstarter and Indiegogo. Crowdfunding also provides entrepreneurs who normally would be shut out from traditional institutional fund sources access to a broad online capital base. In 2012 alone, the crowdfunding industry raised $2.7 billion through over 1 million successfully funded campaigns, which was an 80% increase from the amount raised in 2011. The industry can expect to maintain this exponential growth in the coming years as the crowdfunding concept, fueled by ingenuity and fiscal encouragement, continues to gain worldwide popularity.
Investing in a Feeling?
Millennials are not only renovating old investment avenues but they are also disrupting traditional investment fund models with new “idea-based” investment portfolios. Motif Investing, a recent addition to the financial services space, is leading the charge by allowing customers to easily and cost-effectively create and share portfolios that reflect an individual’s personal interests and sentiments.
For just $9.95, an investor can buy a motif that is composed of up to 30 stocks/ETFs that can be either pre-chosen or personally selected. Each motif has a theme and associated investment track record that is completely customized to a specific investment philosophy, sector, or individual worldview.
Environmentalists can invest in a motif that holds only clean companies, while tech savvy individuals can invest in a motif built around cloud computing. Platforms like Motif Investing enable millennials to easily share their ideas with the world and, in turn, also give everyday investors access to a completely new group of investment products created by their peers.
The Crowded Future
The arrival of the crowdfunding and idea-based investing industries are changing the definition of the word “investing”. Instead of parking money in traditional mutual funds or banks, the new generation is combining the availability of mass data with their own personal outlook to customize their investment portfolios on a variety of non-traditional platforms. As demographics shift towards a more technologically savvy investor base, it is logical that the traditional investment advisory model will need to be updated. Long-held beliefs about modern portfolio theory, asset allocation, and risk tolerance will most likely need to be repackaged or modified to remain relevant within the context of these new investment approaches. Although traditional money management techniques will remain a viable option for investors, alternative platforms that cater to the lifestyle and values of the millennials are gaining momentum. If money managers want to stay in the game they must adapt their approach to meet the demands of the new generation of wealth.
Duncan Rolph is a Partner and Managing Director of Miracle Mile Advisors.
