Data & Research May 7, 2014

How to Succeed with Millennial Clients

Members of Generation Y (also known as Millennials) are struggling to reach financial security, but that doesn’t mean financial services firms can afford to overlook them.
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In a new study, “The Millennial Shift: Financial Services and the Digital Generation,” financial research and business intelligence firm Corporate Insight argues the 80 million members of the Millennial generation must be considered in short- and long-term business planning by financial advisers and others in the money management business. It’s a pressing matter, the firm says, considering more than half of the average adviser’s clients are from older generations, between the ages of 50 and 70, suggesting advisers will need to find new clients to prevent shrinkage in assets under management  (see “Advisers Struggle to Gain Young Clients”).

“Generation Y will be a difficult market for the financial services industry to crack,” explains James McGovern, vice president of consulting services at Corporate Insight. “This is a diverse generation that’s struggling with serious financial problems like college debt and underemployment.”

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McGovern says his firm’s research shows Millennials put a high value on transparency and are generally wary of financial institutions, particularly when it comes to ambiguous fees or pricing. They also have very high expectations in terms of online and mobile services that many firms do not meet today, he says.

The study identifies key strategic changes that financial services firms will need to embrace if they want to succeed with the Millennial generation, as follows:

  • Millennials and mobile tech — Mobile platforms are becoming the primary means of interaction between consumers and banks, Corporate Insight explains. To satisfy young consumers, banks and financial services firms will need to ensure cross-channel consistency across all electronic platforms, providing the same fundamental experience to all users regardless of the point of access. The branch office experience will also need to evolve, shifting the focus as much as possible from transactions towards education programs and recurring guidance.
  • Few assets and low risk tolerance — Millennials have limited investable assets and low tolerance for market risk, the study suggests. They feel unprepared to manage their finances, which explains their high interest in financial education and in getting help from financial experts, Corporate Insight says. Yet, while they want guidance, Millennials are also skeptical of the fees that traditional advisers charge. This poses a threat to existing models of investment advice, while at the same time creating opportunities for “hybrid” brokerage firms and start-ups that provide strong online services and low-cost guidance.
  • Wage Problems — Millennials and members of Gen Y understand that Social Security won’t be much of a resource to them when they retire, Corporate Insight says, but current financial realities make it difficult for many of them to save more for retirement. To fight this, plan providers must engage young participants through education and online planning tools. At the same time, providers must encourage plan sponsors to embrace features like auto-escalation to improve the chances that younger participants will meet their long-term financial goals.
  • Product misconceptions: While Millennials are the youngest generation, they are also one of the most financially conservative and risk-averse, the study shows. In theory, this should give insurers a competitive advantage over other industry segments when it comes to penetrating this market. Unfortunately, Millennials significantly overestimate the cost of many insurance products, while at the same time ignoring the benefits of some forms of insurance altogether. Insurers must overcome these misconceptions through education, advertising and more prominent and effective quote generation tools, Corporate Insight says.

“Millennials are struggling to reach financial maturity, but that doesn’t mean financial institutions can afford to ignore them,” McGovern says. “This is the largest generation in the history of the United States, one that could inherit tremendous wealth from their parents and that should begin to hit its economic stride in the next decade. Established financial services firms must invest now if they plan to capitalize on this opportunity.”

More information on the study and on Corporate Insight is available here.

Compliance May 7, 2014

Questions Remain on Adviser Social Media Use

Recent guidance from the Securities and Exchange Commission (SEC) on social media use in adviser advertising is helpful, says one compliance services provider, but the update leaves questions unanswered.
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Compliance staff from Dechert’s Financial Services Group say they are happy the SEC addressed investment adviser use of social media content, especially client testimonials, in a guidance update published in early April. In the update, the SEC’s Division of Investment Management maps out its position on when registered investment advisers (RIAs) may use reviews available on independent social media sites without violating testimonial rules under the Investment Advisers Act of 1940 (see “SEC Approves Limited Use of Social Media Testimonials”).

The guidance argues the SEC is sensitive to the fact that widening use of social media has dramatically increased consumer demand for independent, third-party commentary and reviews of many different types of service providers. Consistent with earlier guidance, the SEC says it is therefore okay for advisers to reference or republish social media content that reflects positive client experiences, so long as the testimonials come from an independent social media site and the adviser cannot control or filter the content to suppress negative feedback or otherwise mislead clients.

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Dechert supports this position, the firm says, but it argues SEC officials only considered a narrow set of circumstances in the latest guidance update, leaving open a number of significant questions about the application of the testimonial rule to common uses of social media—especially when advisers themselves participate on social media sites or pay them for advertising space. Dechert experts explain ambiguity also comes from the SEC’s suggestion that the concerns of publishing testimonials on traditional media may not be present in social media, because social media allows for instantaneous updating of posted commentary and concurrent viewing of all of the comment history.

The statement of this principle by the SEC, according to the Dechert analysis, seems to suggest advisers are free to use social media commentary so long as they are not filtering the content or otherwise restricting access to negative reviews, and accordingly the SEC's guidance update indicates that an investment adviser may publish on its own social media page commentary from an independent social media site if certain conditions are met. However, Dechert argues the SEC has not gone far enough in explaining these conditions, which are as follows:

  • Independence — Commentary from an independent social media site must be generated by commentators who are independent of the investment adviser. The guidance update indicates, as an example, that an investment adviser who directed its employees to write reviews about the investment adviser on an independent social media site, and then proceeded to use those testimonials in advertisements, would violate the testimonial rule. The guidance is less clear about cases in which a firm or its staff participates on a social media site but does not actively solicit endorsements on the platform. Is this advisory firm still independent of the social media site?
  • No Material Connection — There must be no “material connection” between the independent social media site and the investment adviser that would call into question the independence of that social media site or commentary. As Dechert explains, the SEC's guidance update states that a material connection between an investment adviser and an independent social media site could also exist if, for example, the investment adviser compensated a social media user (including with the offer of any product, free service or discount) for writing a review. What remains less clear cut, Dechert argues, is whether adviser advertisements appearing on an independent social media site would necessarily impeach such a site’s independence or establish a material connection, especially in cases where it could be challenging for the reader to distinguish between user-generated and adviser-generated content.
  • Completeness — The investment adviser must make available all of the commentary found on the independent social media site concerning the investment adviser, without any edits. The SEC's guidance is clear that an investment adviser may not arrange the commentary in a manner that emphasizes favorable reviews while de-emphasizing negative reviews, Dechert explains, but this is an area where technological constraints may limit the practical usefulness of the SEC's guidance. For example, unless an investment adviser has the capability to enable real-time updates on its own site as new comments are posted on independent social media sites, the adviser would be limited to posting links on its own social media site to the sites on which the commentary is posted. It's unclear, Dechert argues, whether such a manual process would satisfy the standard of completeness the SEC says it expects.

Further, the SEC staff states that investment advisers may publish testimonials that include a mathematical average of social media commentary, so long as such ratings are not based on a system designed to elicit pre-determined results favorable to the investment adviser, Dechert explains. However, the guidance update is silent as to whether investment advisers may provide only the mathematical average rating without providing the content of the commentary itself.

All of this leads Dechert experts to conclude the SEC's statement that an investment adviser’s publication on its own social media site of all of the commentary available on an independent social media site would not violate the testimonial rule, upon further analysis, is not robust enough to truly expand real advisers opportunities to utilize social media as a means of advertisement.

The criteria the SEC staff sets forth only provide limited guidance on applying the testimonial rule in the context of social media advertising, Dechert argues, so a broader interpretation of the testimonial rule will be required to permit investment advisers to utilize social media meaningfully as part of their marketing programs.

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