Soon enough, Wall Street will have to take millennial investors seriously
THINK OF A millennial investor, and you might picture someone like Vincent Iantomasi, one of a legion of amateur traders dishing out investment advice on TikTok, a social-media app. With “Blueberry Faygo” by Lil Mosey, an 18-year-old rapper, playing softly in the background, Mr Iantomasi tells investors looking for racy returns to pile into spxl, a leveraged exchange-traded fund. Or you might think of users of “r/wallstreetbets”, a forum on Reddit, another social-media site, who post “loss porn”: screenshots of their accounts on Robinhood, an investing app, after betting their life savings on short-dated derivative shares in Tesla, an electric-car maker.
Young investors have become infamous during the pandemic. As markets have rocketed, budding punters have engaged in a frenzy of day-trading on their phones. Look past the notoriety, though, and a profound shift in the generational composition of investment assets looms. Millennials, typically defined as those born between 1981 and 1996, still hold a tiny share of total wealth (see chart). In America they own $9.1trn in assets, just 7% of the total, well below the 26% held by baby-boomers when they were of a similar age. But accumulated saving and inheritance windfalls mean that millennials’ share will rise rapidly. And shifts in technology and pension policies will allow them to exert more control over their assets than their parents did. The implications for investment firms and markets are already becoming apparent.
The young acquire wealth by inheriting and earning it. Already more than a third of America’s labour force is millennial and they have been the largest cohort since 2016 (even though some of the youngest are still in education). Bank of America Merrill Lynch reckons that, worldwide, millennials’ earning power will rise by nearly three-quarters between 2015 and 2030 as more start work and others gain seniority.
Inheritance flows are set to speed up. The age structure of the population in most rich countries bulges outwards for the baby-boomer generation and then again for their children, many of whom are millennials. Every five years around $1.5trn-worth of investible assets, or 5% of the stock, passes down the generations in America, reckons Accenture, a consultancy. The pace of the wealth transfer will probably double in 2031-45 as boomers die.
It is a mistake to assume that these heirs will invest their cash as their parents did. Two forces will lead them to seek more autonomy over their assets: changes to pensions; and advances in technology.
Consider pensions first. In the 1970s most schemes were “defined-benefit” (DB). Beneficiaries were paid a fixed income based on their final salary and had no say in how their pots were invested. Then in 1978 the Revenue Act created the 401(k) plan in America—an employer-sponsored scheme where savers have more control over where their cash goes. Assets held in “defined-contribution” schemes have exceeded those in DB pensions since 1995. Where investment firms used to compete to win the mandate for a company’s pension pot, today they are likely to be one of a myriad of managers that staff can choose from.
Even as they gain more control over workplace pensions, millennials are using technology to invest in shares and bonds directly. When most boomers began saving, a few investment firms loomed large, offering high-fee mutual funds. But electronic trading makes it much easier and cheaper to buy and sell directly. The cost of investing $100 on a stock exchange has fallen from $6 in 1975 to less than a penny today. In 2019 the big retail-trading platforms—Charles Schwab, E*Trade, Fidelity and td Ameritrade—cut commissions to 0% as Robinhood, a pioneer of the zero-commission model, gained popularity. A generation reared on smartphones is as likely to trust an app as a well-heeled broker.
Fintech firms are working to capitalise on the coming windfall. Robinhood may have attracted the headlines, but millennials are just as keen to use other digital services. One example is “robo-advisers”, which automatically allocate invested assets across low-cost index funds based on age and risk-preferences for a low fee. According to BlackRock, an asset manager, four in five millennials that were aware of these advisers were keen to use them. As much cash—perhaps $40bn combined—appears to be parked in Betterment and Wealthfront, two popular robo-advisory startups, as in Robinhood. Though Betterment has some older clients, the average customer is 35, says Jon Stein, its founder. Robinhood does not disclose the amount of cash held on its platform, but JMP Securities, a research firm, estimates that the average account size is between $1,000 and $5,000. This would put total assets held across its 13m accounts at $13bn-65bn.
Some incumbents are trying to catch up. In 2019, for example, Morgan Stanley, a bank, bought Solium, a firm that manages vesting stock options for tech workers, in the hope that these will one day be wealthy clients. Others are gloomier. Most wealth managers surveyed by Accenture, a consultancy, this year, expected to lose a third of their customers’ wealth at the point of succession. When the reaper comes for their clients, their business will go with them.
What goals will millennials pursue? Some 87% of them believe corporate success should be measured by more than financial performance, according to a survey by Deloitte, a consultancy. They also seem to act on that impulse. Morgan Stanley finds that the under-35s are twice as likely as others to sell an investment position if they consider a company’s behaviour to be environmentally or socially unsustainable. Of course, millennials may become more hard-nosed as they get older and children and mortgages come along. Then again, having lived through two economic crises in a decade or so, they may want to shake up shareholder capitalism. The butt of jokes in 2020, millennial investors will eventually change how asset management works—and perhaps the economy, too.
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