“Advisers should focus on the opportunity to build relationships with the Millennial generation of investors and have open, ongoing dialog in an effort to manage their expectations,” urges Jeffrey Cerutti, CEO of AMG Funds.
A new survey report from the firm identifies a number of ways Millennials in general make good candidates for advice. They are eager to start investing and just coming into their prime earning years, yet they are also fairly uninformed about the best strategies for planning the long-term financial future.
Case in point, Millennials with money already in the markets often display overly conservative allocations—but they speak of higher return expectations at the same time, compared with older counterparts.
“Millennial investors appear to be more conservative than older generations of investors in their asset allocation, allocating 30% on average toward equities, lower by nearly one-third than older generations, who allocate 46% to the asset class,” AMG Funds reports. “On the other hand, Millennials allocate nearly three times as much of their portfolios toward alternatives (17%) than older investors do (6%).”
Important to note, the Millennials surveyed here already have significant assets saved—$250,000 at a minimum. Far outstripping the projections of sober-minded asset managers, this group expects to earn an average annual return of 13.7% in the years ahead. Boomers, who as a group anticipate 7.7% annual returns for the foreseeable future, are a little closer to matching the expectations of the vast majority of money management professionals, which stand in the mid- to low-single digits.
“Millennials also maintain a higher average cash allocation than their Boomer counterparts (25% vs. 17%),” AMG Funds observes. “In order to meet the Millennial investor’s average annual return expectation and also overcome the drag generated by the higher cash allocation in the average Millennial’s portfolio, the remaining asset classes would need to generate an average annualized return of 18.3%, considerably higher than the 9.8% average annualized return of the S&P 500 Index over the past 15 years.”
NEXT: Education and advice sorely needed
In juxtaposition to Millennials’ unrealistic return expectations, the generation is more than twice as likely to consider themselves “extremely” or “very” knowledgeable about investing. Yet nearly two-thirds of Millennials define “long-term investing” as applying to a period of less than five years—a definition most investing professionals would disagree with.
There are some ways in which Millennials are demonstrating prudence and foresight, AMG Funds finds. For example, Millennials are “much more likely than older investors to be concerned about having enough money for their retirement years (69% vs. 28%).”
The survey report goes on to show many Millennials prefer computer-generated portfolios and automated asset-management products. “Specifically, Millennials are at least twice as likely as the broader group of respondents to believe that advisers recommend generic portfolios as opposed to providing customized advice, and that computer-generated portfolios are less risky and generate higher returns than those managed by humans,” AMG Funds says. “Nimble and adaptable advisers may be successful in connecting with Millennial investors through education and advice that focuses on helping them to meet their long-term goals.”
The analysis concludes that Millennials “seek out professional financial advice for different reasons than older investors.” Forty percent in the younger age group cited a desire to work with advisers “to enter new investment categories,” while a desire to improve results relative to their own investing ability was the prime driver for Gen X investors. Boomer investors cited a major life change or upcoming event as the most common trigger.
“When asked about the benefits of using a robo-adviser, respondents among the full range of investor age cohorts pointed toward cost (67%), unbiased advice (58%), and the flexibility to engage at a time of their choosing (57%),” AMG Funds says. “The survey results found stronger responses to negative associations regarding robo-advisers relative to responses regarding the perceived benefits; 81% of respondents felt that robo-advisers use a cookie-cutter approach; 80% believe that computer-generated portfolios do not account for qualitative information; and 78% criticized robo-advisers for not offering a dedicated point of contact.”
For more information on the results of AMG Funds research, visit www.amgfunds.com/wealth-trends.