A Clarion Call for Young Investors

You’ve probably heard that wealth-management dictum about the need to save early in life. To wit, that someone who starts saving in the 10 years before turning 30—and then stops those contributions altogether, but earns 6 percent on that investment each year—will still have a larger nest-egg at retirement than someone who starts making identical monthly contributions at age 30 (with that same 6 percent return) and keeps it up until reaching age 65.

Hmmmm . . . save for 10 years, or for 35 years? What to do, what to do . . .

Of course, most of us hear that savings message the day before we turn 30, or too close to it to take advantage of the compounding effect. But for one investor group in particular—Millennials—that guidance is becoming even more bittersweet as traditional retirement goals continue to be more tantalizingly out of reach.

Since the oldest members of that cohort started graduating from college roughly a decade ago and entered the work force, they have shown a collective reluctance—inability, perhaps—to start that long-term saving. More troubling recently has been the news that many who have been able to sock away 401(k) savings are raiding funds to buy their first homes, desperate to get into a house before the skyrocketing market makes their version of the American Dream even hazier.

On the whole, they are getting married later, having kids later and buying homes later than their parents. And, in too many cases, starting their retirement planning later than their parents.

Those shifting conditions that underpin investment strategies are prompting changes in wealth-management practices. BKD Wealth Advisors, for example, set up a separate team to deal specifically with young investors, and it markets heavily to those in professions that will yield greater potential incomes, even if the clients are still, for example, in medical school and burdened with student debt or have lower overall net worth than traditional clients.

“About three years ago, we started looking and asked, do we want to serve that type of investor, and the answer was yes,” says Jeff Lenhart, senior adviser overseeing that initiative. “We thought we’re missing an opportunity to help investors early in their lives.”

That strategy could pay off before long. By some wealth-management estimates, Millennials will control an impressive $24 trillion in assets within just two years—an average of more than $307,000 for each of those 78 million potential investors. Even if you control for the skewing effect from a few of the Mark Zuckerbergs out there, that’s still a respectable figure—one that will only grow in the coming decades as Baby Boomer estates are passed down to heirs.

One distinguishing characteristic of the young-investor class is the way it accesses and applies information to investment decision. “As a group, they are astute, self-learners, motivated to understand what, how and why; they are confident in their own ability,” says Nick Blasi, CEO at Frontier Wealth Management, because of the vast amount of information, often in real-time, that previous generations simply didn’t have.

So the future looks bright for the wealth-management sector. Assuming, of course, that it deals effectively with challenges of its own, such as looming retirements by  many seasoned financial planners, technology/robo advisers, regulations and a range of other game-changing factors.

In some ways, they are just a next cohort of investors. In others …

“Their timing is different today,” says KC Mathews, Chief Investment Officer for UMB Bank. “Back in the 60s, the first Boomers married, started having kids, squirreled away some money. “Now, Millennials are spending on things that interest them, and 10 years later, starting to save.”

There’s anecdotal evidence, he says, that Millennials are so in-the-moment with their finances that they are rejecting eye-popping 401(k) matches designed to compete for skilled workers in a tight labor market. “Many of them are saying that since they have to work for the rest of their lives, they can delay those savings for 10 years.”

Actuarially, they might be right: With the average life spans in that age group roughly 80 for men and 84 for women, more years are likely to be spent in retirement. Without sufficient assets, people could outlive their money, and many Millennials are already being advised to create plans that don’t rely significantly—if at all—on Social Security. 

Executives in wealth management are divided over whether young investors are hamstringing themselves with wishes to be more socially responsible, refusing to invest in companies that produce military weaponry, carbon-based energy, guns, tobacco and the like,.

Creative Planning’s Peter Mallouk says the wealth-generation  mechanism  can be calibrated in various ways to throw off the desired returns.

“There’s no question Millennials are much more socially aware,” Mallouk says. “They ask far more questions about that than any other population. But you can be successful and still avoid anything you want to avoid. To the extent anyone’s conscience is eliminating a small sector of the market, there’s always another way to get there.”

Socially-guided investment decisions, says Scott Boswell of Commerce Trust, have long been around, and have always been a part of the adviser/client discussion.

“With various social-type investing, each client has his own conscience,” Boswell says. “But it’s not specific to age, or to a specific social issue. Our clients are most interested in appropriate diversification.”

The bigger concern many advisers cite with that group is a greater reluctance overall to invest in stocks, in many cases because they saw the dramatic effect on their parents’ portfolios during the Great Recession. And that reluctance in itself is a bit of a paradox, as most investor-age members of that same generation have known nothing but a bull market for the past decade as their parents’ savings have recovered.

BKD’s Lenhart says his team strives to teach young investors about an investing strategy that simply doesn’t exist for Baby Boomers or Gen X. “The best chance for success for younger or emerging investors is not the investments themselves, so much as the time in front of them,” he says. To reach their goals, “the younger investors can be more aggressively allocated, with a longer horizon, before they need a nest egg.”

But will they? That’s an open question.

“They haven’t seen the volatility or the drawdowns,” Blasi says. “It will be interesting, as we enter the next recession—next year or in 2020-21, history will repeat—to see how they invest in the face of that.”