Content provided by Kostya Etus, CFA, Portfolio Manager

Financial advisors and investment managers are trying to crack the code on what millennial investors are looking for and how to help them save for retirement. Here are a few insights from a millennial point of view on dealing with this evolutionary generation.

Keeping Up With Technological Evolution
Millennials are always busy. They’re often tired and often working. They’re typically starting their families, and they don’t have much time to visit with financial advisors. Millennials also want everything at their fingertips, which is, of course, very possible with the evolution of the mobile phone. We all have a supercomputer in our pocket.

But, financial advisors don’t always make it easy to manage investment accounts from a mobile device. While they may prefer their clients to call if they’re concerned or have questions, many millennials simply don’t have the time. They would rather send a text message or get text message notifications. This preference is leading to growth in automated account opening tools, which enable users to sign on to a website and create accounts in a matter of minutes, while making everything easily available through an online interaction.

Advisors need to think about interactions with their clients and how they can evolve their technology offerings to keep up with this trend and adapt to the future. At CLS and our sister company, Orion, we continue to evolve our back office support with video statements, text notifications for account information, and the launch of an automated account opening platform called Autopilot. We are consistently trying to find ways to help advisors with technological evolution.

Keeping Up With Investment Evolution
As far as product evolution, all signs point to ETFs. Flows have continued to move to ETFs over the past decade, growing as much as 20-30% per year. There has been intense competition in the investment fund space, and the focus has shifted toward low-cost. Millennials are very cost-centric, and they are also very skeptical. After experiencing two major bear markets — the tech bubble in 2000 and the global financial crisis in 2008 — younger investors have little reason to trust the markets. As a result, they demand products that are easy to understand and offer transparency.

Additionally, I like to call millennials the know-it-all generation because we perceive ourselves as experts on everything. No matter the question, we simply “Google it” and find the answer instantly. The ability to look things up quickly creates a great benefit to ETFs, which are highly transparent and simple. They’re very easy to understand; they’re index-based and transparent. Anyone can look up the underlying holdings every day and know exactly what companies are being held. Millennials can really grasp and appreciate that. If you told me I could have a simple, diversified investment at a low cost, it’s a no brainer.

The chart below is from an investor study by Charles Schwab highlighting millennials’ preference for ETFs.

Keeping Up With Life Stage Evolution
The millennial generation is getting married, having children and building houses a little later than previous generations. For most millennials, these significant life events have happened in the last five years or so. Thus, the natural evolution of the stages of life suggests we will see more and more millennials begin to save for retirement.

One of the most important ways to help millennials save is through education. As Baby Boomers enter the retirement-distribution phase and younger generations continue to lag in savings, the time to bring millennials up to speed is now. We can promote education through social media and online, but some responsibility falls on employers who can provide valuable information to their millennial employees.

Employers should help their employees save for retirement through 401(k) education and ideally should start making 401(k)s mandatory. That will certainly get millennials more involved. Advisors can help by educating local employers through employee seminars and by providing more personalized advice when desired.

Keeping Up With Social Evolution
The ESG (Environment Social Governance) movement is in the infancy stages, but it has started to pick up investment interest. One reason is that social investing as a strategy has evolved in recent years.

Traditional values-based investing, SRI (Socially Responsible Investing), dates back decades. Clients typically associate it with screening out (excluding) negatively viewed companies, such as tobacco, weapon manufacturers, and some oil companies. Alternatively, the newly evolved ESG approach focuses on including investments (as opposed to excluding) that are viewed positively — companies that are benefiting society.

This new-school approach resonates more with millennials. Although older generations were also focused on social issues, millennials have zeroed in on global climate change, gender equality, and companies that are helping make the world a better place.

Keeping Up With Risk Evolution
As millennials, we’re still fairly young, but as mentioned previously, we’ve been through two major bear markets: the tech bubble in 2000 and the financial crisis in 2008. Both events made us distrust the markets. Market fear may have something to do with the lack of money millennials are investing, so it is important to highlight to millennials the importance of risk management. At CLS, we focus first and foremost on managing risk in client accounts.

What the financial crisis taught us is the traditional view of risk management, a stock-to-bond approach, isn’t the best way to manage risk. There are many factors it doesn’t capture, mainly the different risks within asset classes. Large-cap stocks have different risks from small-cap stocks, and high-yield bonds or corporate bonds have very different risks from Treasuries, which are a safe-haven asset issued by the U.S. government. So, it’s really important to assign specific risk at the individual asset-class level before aggregating it up to a risk target.

At CLS, we call this process Risk Budgeting and it is the baseline of our portfolio management philosophy. We’ve found it works well with new, younger clients. We have developed a Risk Budget calculator on our website that evaluates both ability and willingness to take on risk and suggests the market risk level an investor would be most comfortable with. In the event of another market crash, pullback, or spike-up, it is key for investors to be comfortable with their returns. Our goal is to keep clients invested for the long term as this gives them the best chance of achieving their retirement goals.