Investors are Changing… Is the Industry Keeping Up?

January 12, 2022

5-7 minutes reading time

The new year has started, and you know what that means: traditional wealth management companies are starting to pump out the same old messaging: 

“Investing is complicated/risky! You need advice!” or “5 things investors need to do to be successful!” 

Or, more recently - as we have seen, financial advisors giving their “#1 piece of advice for millennials and Gen Z for 2022”.

The audacity… 

Far too often, these pieces of advice completely miss the mark. Why? Because today’s generation of investors are not the same demographic as they were 20 years ago, and traditional wealth managers’ strategies haven’t kept up. So what exactly is changing? 

The Bank of Mom & Dad

First, we’re in the middle of the largest intergenerational wealth transfer in Canadian history. By 2026, approximately $700 billion in financial assets will have been passed down from one generation to the next (1). Two of the largest beneficiaries of this wealth transfer will be women and millennials, who have very different preferences and expectations than your typical boomer/Gen X male.

As we noted in a previous article, the rise of retail investors has also shifted the balance of power amongst market participants. Contrary to public perception, the increase in market participation spans across all demographics, and not just the stereotypical “Gen Z meme stock trader”. In a survey by Charles Schwab, more than 50% of [new retail investors] are millennials, 22% are Gen X, 16% are Gen Z, and 11% are baby boomers.

These massive shifts mean that the average investor profile has fundamentally changed. So today, we’re going to flip the script. Instead of telling investors what to do this year, below we highlight 5 things that traditional wealth managers need to do to accommodate the modern investor.

Change #1 - The need to go (truly) digital

In a survey by Ernst & Young LLP, 44% of Canadian baby boomer investors desired some form of digital relationship with their financial advisor, compared to a whopping 82% for Canadian millennial investors. And why not? As we embrace technology in almost every aspect of our lives, why shouldn’t wealth management be one of them? 

Digital enablement is table stakes for the successful wealth managers of the future. And this means more than just a snazzy website - it means true end-to-end technology integration: from digital onboarding (electronic ID verification/Anti-Money Laundering (AML), digital signatures) to reporting (digital delivery of documents and client statements) to client management (investor app, support across multiple communication channels). Not to mention, entire back offices today can be replaced by technology - where batch files and manual spreadsheet entries are currently ripe with room for error.

A digital-first, or even hybrid advice model creates a truly client-centric experience. Clients have access to the information they need at their fingertips, instead of waiting for their usual quarterly statement to come through. Clients can make changes to their own accounts on-demand and have everything seamlessly consolidated in one place, instead of having to decide between making the trek to someone’s office or being put on hold for 2 hours and get passed around from rep to rep. Real-time, on-demand interactions happen on their schedule: instead of waiting for their advisor to reach out once a year. 

By equipping investors with the tools they need to succeed, wealth managers ensure their clients grow with them.

Change #2 - The need for more than just returns

2021 was a monumental year for Responsible Investing (RI), with a record $649 billion poured into this space. No wonder - according to the Responsible Investment Association of Canada, 77% of investors are interested in RI. Across the different generations, millennials are more than twice as likely as baby boomers to be interested in investments that address environmental, social, and governance (ESG) issues.

The reasons for considering ESG factors are plentiful, just look at the world around us: from climate change, to diversity, equity and inclusion, to executive compensation and wealth inequality. Our world is filled with environmental, social, and governance issues that can be partly addressed by aligning our investment dollars.

While it’s encouraging to see Responsible Investing become mainstream, it’s disappointing to see many wealth managers reduce this value proposition to a single check box. You may have seen what we’re referring to: “Do you want ESG? Yes/No”. Some even still use the decades-old terminology of calling this “Socially-Responsible Investing (SRI)”. Yikes.

There are many layers to RI: from values-based screens, to integration, to impact investing, to active ownership. ESG is not a checkbox - it’s a framework, and most wealth managers across the country are not equipped with the proficiency to have a meaningful conversation with clients on these important issues. While 77% of investors have expressed interest in RI, only 27% have actually had that conversation initiated by their financial advisor.

Fortunately, credentials such as the RIA’s Responsible Investment Specialist (RIS) designation or the CFA’s Certificate in ESG Investing will help bridge the knowledge gap. Successful wealth managers must be able to have meaningful client conversations around RI or they risk the appearance of being ignorant and outdated, or worse - greenwashers.

Change #3 - The need to consider different prospect utility curves

Behavioural finance textbooks teach us about prospect theory: that monetary losses psychologically affect us twice as much as gains of the same amount. This would imply that investors are generally risk averse. Why then, are we increasingly seeing retail investors YOLO on speculative assets? 

This behaviour is not new - it’s somewhat analogous to playing the lottery, where the probability of loss is high but the potential payout is even higher. If we only take the “rational textbook” lens and look at the probability weighted monetary outcomes, these investment decisions don’t always make sense. But if we look at the utility (the TOTAL satisfaction received from consuming a good or service) of the win/loss scenarios, it paints a very different picture.

Consider the following example: an investor purchases $1,000 of a meme stock based on views from an internet forum. There’s a high chance they could lose some - if not most - of it in the short-term. Let’s say they end up losing $800 - their life doesn’t really change. But, if that $1,000 turns into $10,000, suddenly their life might change rather significantly. That money could be used to pay off loans or maybe for a much-needed purchase. While the utility of potential losses from these types of investment decisions are often monetary in nature, the utility of potential large gains, even if it’s less likely, transcends beyond just monetary benefits. 

While we’re obviously not advocating that investors should treat the financial markets as a casino, we must be cognizant of different investor profiles and their motivations. Successful wealth managers need to incorporate this as part of their KYC - as risk tolerance is only part of the story. Investment objectives should always be centered around the client’s unique goals, and believe it or not, not everyone wants a diversified portfolio!

Change #4 - The need to demonstrate real value proposition

Retail investor participation is at an all-time-high and investors are more empowered today than ever. At the palm of their hands, investors have easy access to a plethora of news and financial market information. 

As investors become more knowledgeable, they’re also increasingly more fee-conscious, and many are turning to discount brokerages where they can buy/sell stocks and basic investment products such as index funds on their own. After all, why would someone pay high fees for something they think they could do themselves?

The reality is that while everyone has access to information, most investors still need guidance, and we believe the role of a wealth manager/financial advisor is as important as ever. However, we must also acknowledge that availability of information has made the average person more capable of making basic investment decisions on their own than ever before.

Picking a bunch of mutual funds that charge 2.5% and forwarding clients a monthly newsletter recapping what happened in the markets last month… well, that just isn’t going to cut it anymore. 

Instead, successful wealth managers need to demonstrate their value proposition by complementing what investors can do on their own and/or providing products and services that go above and beyond. This means sophisticated investment strategies and products, personalized financial planning, as well as regular financial/investment coaching.

Change #5 - The need for accessibility

The emergence of fintechs (including OneVest) have begun to democratize access to investment opportunities that were previously only accessible by high-net-worth and institutional investors. Whether it’s access to more exotic investment products such as alternative investments (hedge funds, private credit, private equity), or just simply allowing investors to participate in the markets with a fully managed portfolio for as little as $1.

Many barriers to entry at traditional wealth managers are now being questioned - after all, why on earth does someone need $500,000+ just to get access to a portfolio of index funds? Often, part of the need for high minimums is traditional wealth managers’ inability to scale due to their legacy technology platforms.

Successful wealth managers need to rethink how they position themselves in the market, and learn to be inclusive rather than exclusive. If they only cater to the wealthy - they would do well to remember that all wealth gets passed on eventually. The 99% of today may become the 1% of tomorrow, and the next generation won’t appreciate these artificial barriers to entry.

According to a study published by Ernst & Young LLP, 1 in 5 (20%) of Canadians plan to switch wealth management firms in the next three years. Don’t get left behind. 

OneVest is a financial technology company on a mission to reinvent wealth management. We have developed an end-to-end embedded wealth management platform. Through this omni-channel platform consumers can get access to personalized portfolios, including diversification through broader asset classes, while large enterprises can expand their product capabilities to include wealth management via a simple API. 

Contact us today and see how we can help bring traditional wealth managers to the 21st century.