Millennial investors represent a huge future market for advisors, and this cohort is socially conscious when it comes to investing. However, advisors are not fully equipped to meet the demands of socially responsible investing (SRI).
According to a blog in the Harvard Business Review, millennials who are inheriting or building private wealth will greatly impact global change. In order to mobilize that capital as a force for change, three things must happen, write social entrepreneur Vilas Dhar and Boston Consulting Group consultant Julia Fetherston.
First, private-sector entrepreneurs need to identify opportunities to build companies that can use impact capital to grow to scale. This will provide an increased volume for deal flow.
Second, millennials need to “vote with their wallets,” the authors say. They need to demand that retail banks, wealth managers and advisory firms provide financial products with a variety of risk, return and impact characteristics.
Providing such products is easier said than done, as the authors illustrate. Discussing a 2013 study on millennials by Merrill, the authors write:
“Merrill Lynch described one client’s impact investment as “a tricky undertaking for both client and advisor…the collaboration, in many ways an experiment, is ongoing.” For the same investment, the report asks, “what measures should be used to judge the social impact of these investments? How long should you wait for that impact to take hold, let alone a profit stream?” These are the questions investors are looking to advisory firms to answer, not just ask.”
The authors’ third piece of advice is that public- and private-sector investors will need to partner with the academic world in order to aggregate information on impact investing deal activity, compile best practices in impact measurement, reduce transaction costs, and inspire new participants through social engagement, the authors write.
The market for impact investing will only get bigger. An estimated $41 trillion is expected to be transferred to millennials from older generations by 2052, according to a report by Boston College — the largest intergenerational wealth transfer ever.
Dhar and Fetherston also said that wealthy millennial investors were more likely to use their dollars to express social, political or environmental values.
Citing data from Deloitte, the authors say millennials want businesses to be socially impactful and are willing to trade a higher rate of return for social impact.
Yet this information does not seem to resonate with many investors. “impact investment continues to suffer from limited transaction flow and anemic dollar commitments,” Dhar and Fetherston write.
One hurdle could be the mindset of traditional investors. The authors write that “financial players who are wary of novel, risky investment structures and skeptical about trading some amount of profitability for social return” will inevitably hinder impact investing.
Without the support of these financiers to include impact investments into their repertoire of portfolios, it is uncertain how much SRIs will grow, the authors said.
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