Any passable list of stereotypical millennial descriptors is bound to include “debt-ridden” and “under-employed.” These hardly paint a picture of the ideal investor. So, why is the financial market rapidly changing to meet their needs?
Despite what you might think, these seemingly negative labels, along with a confluence of technology and regulatory changes, have conspired to potentially create the savviest generation of investors in history.
Coming right out of college, millennials had accumulated more personal debt than any generation before them. Often, this is regarded as a consequence of irreverent spending and poor financial decision making. However, most of that debt comes in the form of outstanding student loans. Not-so-fun fact: Over the past 40 years, average college tuition has increased at a rate over 10 times that of median income.
After graduating, millennials were greeted by a financial crisis, a recession, and the worst job market in recent memory. Rather than compete with more experienced individuals for entry level jobs, many millennials decided to pursue a graduate degree, accruing even more debt.
And yet, millennials are not without a plan to pay off their debt. Years of penny pinching have turned them into prudent savers. This generation, who are frequently criticized for not being able to do anything without the help of their parents, is not expecting to reap the benefits of pension plans or social security on which their parents depended. Instead, they are taking the necessary steps to ensure their retirement will be taken care of by themselves.
According to the 2015 census, Millennials represent 80 million people. As the children of the enormous, but aging Baby Boomer generation, Millennials are expected to receive a financial windfall in the next decade as family wealth transfers from their parents to them. Wealthfront (not to be confused with WealthForge) estimates that by 2019, millennials will control $7 trillion in liquid assets.
This will be enough to push a small group into the accredited investor status, allowing them to invest in start-ups, VC funds, real estate opportunities, and other Reg D capital raises. In addition, the introduction of regulations like Reg CF and Reg A+ allow even unaccredited investors to invest in opportunities that used to be restricted to wealthy investors.
So, while this generation is currently struggling to pay off their student debt, they are primed to become capable, discerning investors. Forward thinking decision makers have taken notice and as a result, Millennials have quickly become a driving force in changing the way finance and investments operate.
The Intersection of Fin and Tech
If there is a one-word answer to the question “how can financial and investment markets change to attract millennial clients?” that word is “technology.”
Millennials are the generation that grew up with the internet and permanently truncated the concept of bar debates with their instinct to Google answers on their smartphones. Instead of taxis, they use Uber. Instead of radio, they listen to podcasts. And when it comes to investing, apps like Acorns and Robinhood are cropping up to replace traditional investment advisors.
That’s not to say RIAs are in danger of becoming obsolete. Surprisingly, millennials still prefer human interactions over digital ones. But, as robo-advisors begin to take over day-to-day portfolio management, RIAs may shift to servicing larger investment accounts, with their personal touch and focus on client preferences touted as amenities.
Regardless of the role of automated investment advisors, RIAs will, at minimum, need an online presence to keep up in a millennial-servicing market. This means web services, social media, and mobile apps. It also means an efficient technology solution to allow their clients to browse qualified investment opportunities, public or private, and securely subscribe through an intuitive application.
Public Markets vs Private Markets
The biggest change affected by the influx of millennials in financial markets is not so much how they invest, but what they choose to invest in—specifically whether they prefer public or private markets.
Millennials have lived through two major stock market crashes in 2001 and 2008, with a third, in 1987, likely affecting their early lives whether they remember it or not. It would be understandable if they did not fully trust public markets. In fact, a 2015 study by Capital One ShareBuilder showed that 93% of millennials either don’t trust the stock market or don’t know enough about it to invest.
On the other hand, millennials have grown up in an age when “startup” is a buzzword and entrepreneurship is a virtue. While private markets are traditionally considered riskier than public markets, millennials may not see it that way. With changes in technology and regulation, private companies are more able than ever to be transparent with their shareholders without giving away valuable information to their competitors as they would be required to do in public markets. While risk should be a factor in every investment decision, perhaps liquidity should be a greater consideration. Private investing is certainly less liquid, but does that necessarily make it a risker alternative to public markets? Private investment opportunities are just that—an alternative.
As staying private becomes more and more attractive, the public market is shrinking. At its peak in 1997, there were 9,113 companies listed in the US public market according to University of Chicago’s Center for Research in Security Prices. Since then that number has taken a nosedive, decreasing by over 3,000. As of June 2016, there were 5,734 public companies.
Some of this decline is due to consolidation, with mergers and acquisitions taking companies off the market. However, our research shows that the number of new IPOs is also decreasing, which means the market is not refreshing itself.
Through May 2017, The S&P 500 Index posted a strong total return of 8.7%. However, this performance was concentrated in a handful of stocks. Nearly 40% of the S&P 500’s performance is accounted for in just 10 stocks.
While some of those stocks are tech companies that may be attractive to tech-forward investors, any suitably diversified index will also include companies that socially conscious Millennials with a preference for impact investing may not be as keen to invest in. Much of the S&P and other passive index funds consist of big banks, oil and gas companies, and large corporations that younger generations simply don’t trust. Robo advisors may conveniently automate investing through passive exposure to markets, but Advisors should ask the following question: Will the next generation of investors be interested in shrinking, capitalization-weighted indexes dominated by a handful of mega corporations they don’t care about?
On the other hand, private companies are equipped to offer an increasingly reasonable alternative. Startups account for nearly all net new job growth, which is something Millennials can feel good about when investing. Reg CF and Reg A+, the new regulations mentioned earlier, open up an entirely new door for millennial investors wary of public markets and looking for an alternative.
With a massive impending transfer of liquid assets, progressive regulatory changes, innovations in financial technology, and questionable confidence in the public markets, the stars are aligning for Millennials to be a game changer in the private investment landscape.
TREND REPORT: Is the IPO Dead?
The market has spoken. The IPO is dead—or at least the IPO as we have traditionally known it. More companies are staying private—and a new trend is emerging.
Disclaimer: WealthForge provides this information to our clients and other friends for educational purposes only. It should not be construed or relied upon as legal advice.