A Cogent Reports webinar on Thursday provided a look at affluent investors, particularly millennials, and how they invest.
The findings are from the 2015 Investor Brandscape report, which was conducted between May and July among 3,889 financial decision makers 18 and older with at least $100,000 in investable assets.
Nearly half of affluent investors in the study were boomers, with an average age of 54, and 27% were from Gen X. Ten percent of the affluent investors were millennials.
Half of respondents had between $100,000 and $250,000, and a quarter had between $250,000 and $500,000. The average affluent investor’s net worth is over $900,000, and unsurprisingly, increases with age.
What is surprising is that while Gen X has a greater net worth than their Gen Y counterparts ($733,000 compared with $650,000), average investable assets were higher for millennials ($420,000 compared with $399,000 for Gen X).
That could be due to the fact that 38% of millennials said they had assets that they inherited compared with 14% of Gen X respondents, Julia Johnston-Ketterer, senior product director of investor-based products for Cogent Reports, said on the webinar. The report also found more than a quarter of millennials are business owners.
“We think these two factors are likely top reasons for millennials having higher levels of investable assets compared to the Gen X investors in our study,” Ketterer said.
Almost 60% of assets are held in retirement accounts, but Cogent found the percentage of assets held in employer-sponsored plans is falling and investors are favoring IRAs.
Mutual funds and individual stocks continue to be the most popular investment products for affluent investors.
“At first blush, we see that ETF ownership does not appear to have changed, but it actually is up from 2012 when only 14% of affluent investors reported owning the product, compared to 17% this year,” Ketterer said.
Millennials are particularly interested in ETFs, especially those who work with a traditional advisor, she said. Thirty-eight percent of that age group are invested in exchange-traded funds.
The report also tracked affluent investors’ interest in active versus passive strategies overall and found they were fairly evenly split between active, passive and hybrid strategies. Millennials showed a clear preference for hybrid strategies — 60% — followed by Gen X, 48% of whom are using an active-passive blend. By comparison, 39% of all affluent investors were using a hybrid strategy.
Millennials continue to have a low risk tolerance considering their long investment horizon, although they had more of their assets in higher-risk investments than their older counterparts.
That’s at least in part because of their experience with the financial crisis, “because this generation really lived through that period of time and many of them were coming into their formative teen years or in college and experienced what it’s like to be in a recession.”
Millennials’ low risk tolerance could also be inherited, in a sense. “We think, too, that because there’s this influence of legacy assets in many of their portfolios, some of the way in which they are invested could be influenced by the previous generation in their family,” Ketterer said.
However, “while we do see this generation looks before they leap, we also saw they have the largest proportion of high-risk investments,” Ketterer said, adding that it speaks to “the nature of this investor segment to dabble in various types of investments.”
The survey found investors are both uncertain and hopeful, but the August volatility had a big effect on them. Prior to the downturn, 37% of respondents said they were uncertain about the economy, and 32% said they were hopeful.
When asked the same question after the downturn, levels of hopefulness, optimism and confidence fell, and anxiety and uncertainty increased, even among those who were working with an advisor, whether a traditional or online provider, Ketterer said.
“We were somewhat surprised to find that investor sentiment among advised investors was quite similar [to self-directed investors] in terms of the response to the August downturn, so even the influence of working with someone providing advice did not shelter them from having that type of reaction,” she said.
Robo-Advisors and Automated Advice
Three-quarters of affluent investors have at least a portion of their assets managed without any input from an investment professional, and a third manage 100% of their assets on their own.
Most investors, however, are using a mix of self-directed assets and assets that are managed either by an advisor, or an advice product or service through a financial firm.
Affluent millennials are most likely to have a relationship with an advisor, the report found, although they have the lowest percent of their assets with that advisor. Three-quarters of the youngest investors are using an advisor.
“This generation has a tendency of having had an intergenerational relationship with an investment professional to manage legacy assets,” Ketterer said.
She noted there are a number of ways to define “robo-advisor.” The report defined a robo-advisor as a service that offers advice based on a “sophisticated computerized model” as opposed to a financial professional. Nearly a third of investors had some portion of their assets with a robo-advisor based on that definition.
Of those investors, three-quarters were using only one robo-provider. One in 10 were using one of the emerging robos like Wealthfront or Betterment, while 17% were using an automated solution through legacy brands like Schwab, Vanguard or Fidelity.
Three percent of respondents said they use some other company for robo-services, which Ketterer said indicates “there’s potential confusion between robo-services and model portfolios offered by broker-dealers of traditional financial advisors.”
More than half of robo users are millennials or Gen Xers with less than $250,000 in investable assets. They’re also more likely to be male.
“In what is proving to be a substantial threat to the traditional advice model, investors who do use a robo-advisor are investing well over half of their assets with the automated advice provider, whether the provider is a legacy or emerging robo brand,” Ketterer said.
Despite their rapid growth, the new robos may not have much of a hold on the industry. Less than half of investors who were interested in a robo could name one, and among those who could, legacy brands were more popular.
Investors who are interested in using robos are “laser focused” on saving for retirement, the report found. “We do think that’s why we’re seeing this high uptick in interest among Gen Xers for robo-advice services,” Ketterer said.
The first Gen Xers turn 50 this year, she noted, and retirement doesn’t seem as far away as it once did.
— Check out Advisors’ Real Weapon Against Robos Isn’t Tech on ThinkAdvisor.