From the April 2016 issue of Research Magazine • Subscribe!

Finke: Putting Millennials’ Finances Into Focus

Here's what the data show — and advisors need to know — about the unique financial attributes and attitudes of the millennial generation

Serving millennials is "different." (Illustration by Chris Gash) Serving millennials is "different." (Illustration by Chris Gash)

In just 10 years, three out of four workers will be members of the millennial generation born between 1980 and 1996. You may have noticed that millennials are different than you and me.

They check their smartphones during a lull in conversation. They have resurrected curious vintage hairstyles. Many are eagerly awaiting receipt of their first beard of excellence award (or at least an award for participation).

In fact, if you haven't checked recently, you may find that one is living in your basement following a failed search to find fulfilling employment after racking up a six-figure student loan debt.

The first half of the 21st century will be dominated by the millennial generation just as the latter half of the 20th century was influenced by the baby boomers.

In the financial services industry, millennials are now primarily interesting as employees. But in the future, they will begin making their mark as clients. The Pension Protection Act of 2006 began a revolution in 401(k) worker participation by allowing employers to automatically place new employees into retirement accounts (from which they could opt out, but almost never do).

A recent Vanguard study finds that participation rates more than doubled from 42% to 91% with automatic enrollment. The biggest increase was, as you might imagine, among the youngest employees who saw participation rates rise from 26% to 90%. Millennials are going to save more than other generations despite their supposed lack of initiative or materialism.

One of the problems with creating generational cohorts is that we may be tempted to place too much importance on stereotypes. It's safer to focus on the facts. How are millennials really different?

A recent Pew Research study finds that millennials are more diverse (57% non-Hispanic white vs. 72% of boomers), they are more educated (54% of boomers have a high school or less education vs. 37% of millennials) and fewer married between the ages of 18 and 32 (26% vs. 48% of boomers).

This group of more diverse, more educated young people also hold different opinions. They are more liberal in their attitudes toward immigration, gay marriage and the role of government. They also are more socially engaged and want to find a fulfilling job. Their financial statements also look different, but in some surprising ways.

Risk Tolerance

In an important article published in 2011, Berkeley professor Ulrike Malmendier and Stanford professor Stefan Nagel found convincing evidence that “depression babies,” or those who experience low stock market performance early in life, were less willing to take financial risk later in life. Did the two recent market crashes in the 2000s have a big impact on millennials?

Maybe not. Two recent studies by FinaMetrica and David Blanchett of Morningstar (and me) find no evidence that millennials are more risk averse than older investors. In the FinaMetrica study of nearly 1 million clients who took a risk tolerance test between 2012 and 2015, there was no difference in risk tolerance between millennials and members of Generation X, and millennials were more risk tolerant than boomers.

Our study looks at hundreds of thousands of employees who took a risk tolerance test when they entered the Morningstar managed account program. Workers age 38 or younger were the most risk tolerant, and risk aversion was highest among boomers. Even more interesting, millennials were the least like to change their risk tolerance during the financial crisis.

Boomers, on the other hand, became more risk averse in 2008 and 2009, but then increased their risk tolerance in 2010 and 2011. Millennials were actually less prone to freaking out during a bear market than boomers.

Millennial Balance Sheet

Does a greater appetite for investment risk translate into riskier investment portfolios? Are millennials saving at all? Or are they deeply in debt? I asked Tao Guo, an assistant professor of finance at William Paterson University, to look at wealth data from the 2004 and 2013 Survey of Consumer Finances.

All comparisons are in 2013 inflation-adjusted dollars and at the household level. We look only at those age 33 and under (roughly Gen X vs. millennials) and only those who have attended college or completed a degree.

Millennials have about 10% more financial asset holdings than Generation X at the same age. This is surprising since their average income is about 25% less than Gen X (this is partially because there are more single-person households).

Are their portfolios more conservative? As a share of total financial assets, millennials hold 41% of their wealth in stocks (including retirement accounts). Gen X? 41%. Millennials don't seem to have a problem investing in stocks.

An important difference between young people in 2004 and 2013 is student debt. Average student loan debt rose from $20,544 to $33,466, and only 47% of millennials had no student debt compared with 72% of Gen X.

Are millennials in trouble because they have so much debt? Actually, no. Millennials hold less total debt that Gen X because they don't have a mortgage. The real estate meltdown may mean that millennials look more like housing bubble babies than depression babies. Their average mortgage balance in 2013 was less than half ($30,172 vs. $62,836) what it was in 2004 for those 33 and under.

But low home ownership also has consequences on the asset part of the balance sheet. Millennials have less than half the average home value ($46,581 vs. $99,288), resulting in a home equity difference of about $20,000. This accounts for most of the net-worth gap between millennials and Gen X ($97,166 vs. $128,034).

Other interesting differences emerge in the debt categories. Millennials have less than half the average credit card debt (only $1,160 compared to $2,510), are 25% less likely to revolve their credit card balance, and their average car loan is 42% lower. This matches well with a 2013 study that found that materialism among 12th graders peaked in Generation X and fell among millennials.

According to Nathan Harness, an associate professor at Texas A&M and a frequent speaker on millennials to the financial services industry, “money is important to them, but flexibility and sense of social change is important. Boomers may be more focused on accumulating in order to gain flexibility later in life, while millennials may value that flexibility now.”

Harness also makes an important point about framing goals in order to appeal to a millennial client. “They have a preference for experiences over things. We may have to reframe retirement in terms of investing in future experiences.”

Jamie Hopkins, associate professor of taxation at The American College, thinks that the financial services industry hasn't paid enough attention to the millennial generation. “For the most part, they’re really targeting the baby boomers. There's not a big focus right now on wealth accumulation and protection for a young family. Financial services can't lose sight of the next generation just because they’re focused on the boomers right now.”

If more millennials are accumulating financial assets by accident because they never bothered to opt out of their retirement account, a lot of workers who wouldn't have accumulated wealth in older generations are now going to be responsible for managing a significant nest egg later in life. It's easy to imagine that this group won't be the typical do-it-yourselfer.

“One of the big risks for millennials is that, once they move from one job to the next and get access to the money, they spend the money without rolling it over,” notes Hopkins. “Setting those relationships up early can help keep that wealth at a young age and grow it into their 40s and 50s.”

Creating a relationship with tomorrow's defined contribution millionaire doesn't sound like a bad business strategy.

Work/Life Balance

And what about the entitled millennial who doesn't want to work late and demands a month off for a hiking trip in Tibet? Are millennials really that much different from other workers?

The preference for a flexible workplace appears to hold water. “According to the surveys, it seems like millennials care more about the work/life balance,” notes Hopkins. A recent study by the Council of Economic Advisers found that a much higher percentage of millennials value having time for recreation, finding new ways to experience things, and contributing to society.

This is related to another common theme among millennial surveys — millennials want to enjoy their jobs. They have a strong desire to contribute to the social good through their work, and they’re going to be far more attracted to a job that is consistent with their values (and remember those values might not align with yours). Interestingly, millennials appear to be less motivated by salary — but they’re willing to do a lot more research to figure out whether the salary is fair.

It's hard to find evidence of a big chasm between generations in the employment data. According to Hopkins, “people switch jobs about the same amount as they always have.” In fact, according to the Current Population Survey, millennials are actually sticking with their jobs longer than Gen X workers. Rates of unemployment are slightly higher than they were among young people (7.2% in 2015 vs. 5.5% in 2007) for a more educated and loyal workforce. That doesn't sound like such a bad deal for employers.

In the financial services business, this means increasing the focus on the social benefit provided by helping clients meet their life goals. Millennials want a salary that is competitive, but compensation might not be enough to keep them engaged. Higher rates of narcissism mean that bosses can improve loyalty by increasing involvement in decisions, and encouraging feedback from employees as a part of mentoring instead of only providing advice.

As clients, millennials are going to be more receptive to goals (and investments) that are more in line with their values and emphasize experience over things. They’ll be more tech savvy, and more accustomed to immediate communication. And, over time, they’re going to accumulate more retirement wealth than any other generation and will eventually inherit the significant wealth of the boomers.

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