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As millennials take over the workforce, the financial services industry is searching for ways to keep pace. Traditional advising has served its place well, but millennials’ behaviors, lifestyles and goals are a far cry from the generations that came before. Most striking are the new financial challenges many faced very early in their careers. Financial advisors must use alternative approaches to sustain that new set of interests, goals, plans and challenges.
Millennials face different challenges
Interestingly, many millennials did not enter the workforce immediately after graduation. Instead, they spent time unemployed or underemployed before finding full-time work. This, combined with being early adopters of modern technology has them seeking more value and transparency in items they purchase and services they use. Millennials look at the value proposition in the experiences they share with their advisor and investing, along with clarity and transparency in the advice they receive.
When they do enter the workforce, it is with more inflation-adjusted debt than any generation before them. Of households in the United States with student debt, the average is nearly $50,000. That translates into at least an 8% to10% reduction in their earnings for the first decade they are in the workforce. Therefore, classic financial advice has to adapt for a large majority of savers, especially those in lower paying positions. Much of the advice that was appropriate for their parents at this stage in their lives, such 401(k) savings rates, home purchases, or using additional capital for investing, is irrelevant. Instead, millennials need a strategy that helps them balance investing in their future against items like debt repayment and higher inflation-adjusted living costs in comparison to their starting wages.
Furthermore, unlike their parents, many millennials have only known a challenging economic landscape. They grew up or graduated during a recession and they saw their parents' retirement funds drop in value as the great recession started in 2008. All of this has caused millennials to be skeptical of investing in the stock market and the financial system. I often encounter millennials who have decided to keep their money “safe” in money-market accounts, or low-yielding instruments even in a 401(k). Because of this skepticism, I also see millennials buying “experiences” instead of homes or investing for retirement, as they have a “live in the moment” attitude.
For millennials who want to invest or save, the path forward has become more confusing as the financial industry tries to adjust. While technology, low-cost investments and Google make investing easier, the industry has developed so many products and solutions that it is paralyzing to decide where to start. Investment costs and fund holdings are homogenous and transparent and investment vehicles are more easily researched. I often hear the phrase “I will just index my investments.” Interestingly, there are now more indexes than individual stocks listed on the exchanges, complicating the choice of indexing. The best way for millennials to combat this is to keep investment advising, well, human.
