What Millennials Want (Or, How You Can Win Their Business)

Millennials are still in the very early stages of market participation: those under 35 own just 4% of mutual fund assets, but the 80-90 million millennials will soar in importance to everyone in the wealth/asset management business before too long. Through inheritance alone, millennials stand to receive $30 trillion in the next few decades. Where they start will often be where they grow. Some, like Wealthfront and forward thinking financial advisors, are tapping into this young potential already. So, if you are in the financial services business, how can you do the same?

I’ve learned a lot about young people and what they want since publishing Millennial Money late last year, and I believe these findings are relevant for financial advisors, millennial investors, and all those trying to win their business. The book has given me great access. Here’s what I’ve learned.

Young People Don’t Trust You

Millennials have a big issue with trust. In a very recent survey of wealthier millennials, just 19% agreed that advisors in general have their clients’ best interests at heart. 40% actively disagreed with this notion. Millennials are selfish (in a good way): with everything they buy, they want to know they are getting the most value possible for the price. In this same survey, 72% of them responded that they are “self-directed” investors and 41% said they’d received no financial advice.

Most of the millennials in this survey had more than $3M to invest and more than a quarter of them had more than $10M. They equated advisors with salesmen.

The solution is to educate them, rather than sell them. I like the idea that “when you sell, you break rapport, but when you educate, you build it.” [i]

This education can come in many forms. Regular white papers, commentary, blog posts, even twitter messages that teach investors why your style of investing/way of doing business makes sense and will work. If you are a financial advisor, do an event with your clients AND their children. The single most effective event I’ve done was a night at a club in LA, hosted by one of the best advisor teams we work with. I made a short presentation to 50 or so young people, many of whom were the children of the advisor’s top clients. These people were extremely hungry to learn, but just hadn’t had the chance or the time. I’ve heard from many of them since that night and two things stand out. One, they want to hear more about investing strategies, and two they want to build a relationship with an advisor who can help them learn.

Education is key. It builds trust and can secure multi-generational relationships.

Young People Like Three Key Attributes In Investing Strategies

A specific style of investing strategy resonates with millennials. Three criteria stand out: these strategies are rules-based, transparent, and mindful of fees and costs. Millennials have thus far liked index funds because they meet these criteria so well. I am naturally a bit biased given that O’Shaughnessy Asset Management manages quantitative/systematic strategies. We like to think that we are marrying the best aspects of active and passive investing: the disciplined, consistent, rules based approach of an index with a much more effective strategy based on principles like valuation, quality, momentum, and total yield.

Millennials like index funds, but they also like systematic strategies. I won’t explore Smart Beta here, because it means so many things, but the idea of a rules-based, systematic strategy has resonated well with young investors. They can understand it because they understand the rules. They are transparent. They tend to charge reasonable fees. Only 20% of wealthy millennials though that fees in our business were reasonable. Reaching them with these kinds of strategies works. They like index funds, but are also open to active strategies.

Young Investors Will Demand Automation—So Embrace Technology Now

Have you tried signing up for Wealthfront or Acorns? I have. It’s insanely easy. I get physically uncomfortable and annoyed when I want something and I can’t get it easily—in under 10 minutes, from my iPhone, sitting on my couch. And I am probably on the patient end of my generation. We are spoiled rotten by technology, so financial services solutions need to be easy, accessible, and fast as possible. Obviously there will be limitations depending on your line of business, but the smoother and easier and more automated you can make the experience the better your chances with millennials now and in the future.

If you run a business and don’t have a programmer, hire one. If you have one, hire more. At O’Shaughnessy Asset Management, our large programming team has become the lifeblood of our firm. We are quantitative investors who test myriad different strategies on historical data. Back in 2007, when I had an idea that I wanted to test, it took me roughly 36 hours to set up the test, run the historical simulation, collect the results, and perform the analysis. That same sequence takes me about 10-15 minutes today. I can answer just about any question about market history in minutes because of the technology at my fingertips. Doing the same in your business by automating as much as possible can make a huge difference. Imagine if all the repetitive tasks associated with your business went away, and imagine the time that would free up to focus on the areas where you are really skilled. These kinds of tasks are a hassle, removing them is good for you.

I am no proponent of modern portfolio theory or the efficient market hypothesis, yet I still send tons of people to Wealthfront. I do so because it is so easy that I know people will actually get started, and because friends who have $10,000 to invest will appreciate the very solid service. It’s not perfect, but it’s infinitely better than doing nothing. In ten years, those same people might have $1,000,000 with the same company.

Don’t Be Evil, Be Human

I am repentant for my former skepticism of blogs and twitter. For a long time I thought they were unprofessional. I couldn’t have been more wrong. These venues sync up with the millennial audience so well. They are transparent, they build trust, they help you educate your audience, and to connect with them in a way that is human, not just professional.

I think that is all young people (or maybe just people) really want: helpful services, charging fair prices, offered by people who are fundamentally good and honest.

It is amazing how different the world of finance is. Here is a passage from Tragedy and Hope (an amazing history of the early 20th century), about banking and the bankers that more or less ran the world:

“they remained as private unincorporated firms, usually partnerships, until relatively recently, offering no shares, no reports, and usually no advertising to the public…This period, 1884-1933, was the period of financial capitalism in which investment bankers moving into commercial banking and insurance on one side and into railroading and heavy industry on the other were able to mobilize enormous wealth and wield enormous economic, political, and social power. Popularly known as “Society,” or the “400,” they lived a life of dazzling splendor. Sailing the ocean in great private yachts or traveling on land by private trains, they moved in a ceremonious round between their spectacular estates and town houses in Palm Beach, Long Island, the Berkshires, Newport, and Bar Harbor; assembling from their fortress-like New York residences to attend the Metropolitan Opera under the critical eye of Mrs. Astor; or gathering for business meetings of the highest strategic level in the awesome presence of J. P. Morgan himself.”

Some might argue that this still happens to some extent today. But remember that when millennials were asked to identify their ten most hated brands, the four big banks all made the list.

Google’s motto “don’t be evil” is a great starting point for the financial services industry today.

Getting Them to Act Is the Hardest Part

Usually we need to be discontent or frustrated to take action. The further away a problem is in time, the less motivated we are to do something about it. The problem should be clear: millennials have decades before retirement.

The philosopher Eric Hoffer wrote an amazing book on mass movements called The True Believer, which I recommend to everyone. In the book he says, it is not the distant kind of hope, but the “around-the-corner brand of hope that prompts people to act.” It is so hard to envision a period 40-50 years in the future, and even harder to get people to act for a reward so distant. I’ve learned this firsthand the hard way. I spent too much time selling young people on 40-year returns, trying to appeal to their reason. They all nod their heads, agree, and then do nothing.

Instead I should have been appealing to emotions and immediate needs. If you are an advisor, don’t just sell the potential for long term wealth (although that is good), but also the benefits of working with you that they will feel immediately that may be frustrating them now.

Think of Maslow’s pyramid, his hierarchy of human needs. People will act most readily to satisfy their most basic needs. In the case of investing, shelter is key. Millennials need the equivalent of a financial shelter, but with a negative 2% savings rate, they aren’t building financial shelters. I think introducing first the idea of building a financial shelter—to cover short term needs when they arise—is a powerful way to get millennials interested and started saving.

Investing comes next. Again, a 40 year compound growth number sounds great, but it doesn’t precipitate action. So frame it differently. We are twice as sensitive to losses and negative things as gains or positive things. Frame the need to invest negatively. Don’t say invest with me and you’ll be rich in 40 years. Say save and invest more now and you won’t risk being without support now and in the future. You might think this is a slimy sales tactic, but it’s not. Anything that gets young people started sooner is a good thing.

Consider this. Two groups were asked to explore a virtual world using virtual reality goggles. In the virtual world, the members of each group eventually came across a mirror which showed either their current face or a version of their face which had been digitally enhanced to make them look like what they will at age 70. When asked later in the experiment, the group which saw the aged photos said they’d plan to save at twice the rate as those which saw the normal photos. The effect of the aged photo made them emotional but also made old age seem closer, and more immediate. These are useful lessons in motivation.

Playing the Millennial Long Game

Young investors haven’t built up a huge collective fortune—so right now they are not the biggest or most important clients. By time will take care of that. Should robo-advisors—who are counting on riding this millennial wave—be valued at the multiples they are? As a group, probably not. But one or more of them will be huge because they are finely tuned in to the preferences of their current and prospective clients.

I believe that the profile of a firm or strategy that will win millennials’ business and help them succeed is as follows. It will use technology to automate as much as possible and make working with the company easy and efficient, because millennials will demand it. It will be transparent and good. It will focus on rules based asset allocation and selection strategies with low fees. Finally, it will deal with them in a way that educates and builds trust and provides not just solid long term results, but also immediate help in areas that millennials are frustrated.

As Gretzky always said, skate to where the puck is going.














[i] I believe this was from Chet Holmes, but cannot remember for sure.