T.HINK BY A. Millennial Investor, and you could think of someone like Vincent Iantomasi, one of many amateur traders who offer investment advice on TikTok, a social media app. With “Blueberry Faygo” by Lil Mosey, an 18-year-old rapper playing quietly in the background, Iantomasi tells investors looking for classy returns to pile into SPXL, a leveraged exchange traded fund. Or you think of users on “r / wallstreetbets,” a forum on Reddit, another social media site, who post “loss porn”: screenshots of their accounts on Robinhood, an investing app, after they shorted their savings . dated derivative stocks of Tesla, an electric car maker.
Young investors have become notorious during the pandemic. As the markets have skyrocketed, budding punters have been frantic day trading on their phones. However, if you look beyond notoriety, a profound shift in fixed asset ownership is emerging. Millennials, typically defined as those born between 1981 and 1996, still have a tiny share of total wealth (see chart). In America, they have a fortune of $ 9.1 trillion, only 7% of total net worth, well below the 26% who had baby boomers of a similar age. However, savings and inheritance losses mean that the proportion of millennials will rise rapidly. Changes in technology and pension policies allow them to exercise more control over their wealth than their parents. The effects on investment firms and markets are already evident.
The young acquire wealth by inheriting or earning it. More than a third of the American workforce is already millennial, and they are the largest cohort since 2016 (although some are still in training). Bank of America Merrill Lynch expects its earnings power to grow nearly three-quarters globally in 2015-30 as more people start work and others reach seniority.
Inheritance flows are set to be faster. The population structure in most rich countries is outwardly curved for the baby boomer generation and then also for their children, many of whom are millennials. Every five years, $ 1.3 billion in investable wealth, or 5% of the stock, is passed on to generations in America. The pace of wealth transfer is likely to double by 2036-40, when boomers die. According to Cerulli Associates, a research firm, millennials will inherit $ 22 trillion by 2042.
It is a mistake to assume that millennials will invest like their parents. Two forces will push them to gain more control over their wealth: changes in pensions and advances in technology. First, look at pensions. In the 1970s, most systems were “performance-based” (DB). The beneficiaries received a fixed income based on their final salary and had no control over how their pots were laid out. In 1978, the Revenue Act created the 401 (k) plan in America – a defined contribution system that gives savers more control over where their money goes. The assets held in such pensions have exceeded that DB Where investment firms used to compete for the mandate for a company’s retirement pot, they are now likely one of many managers employees can choose from.
Even as they gain more control over their retirement plans, millennials are using technology to invest directly in stocks and bonds. When most of the boomers started bailing out a handful of investment firms, big mutual funds with high fees came up. However, e-commerce makes it much easier and cheaper to buy and sell directly. The cost of investing $ 100 on an exchange has gone from $ 6 in 1975 to less than a thousandth of a cent today. In 2019, the four major retail platforms Charles Schwab, E * Trade, Fidelity and TD Ameritrade – Cutting Commissions to Zero as Robinhood, a pioneer of the zero commission model, gained popularity. A generation that grew up on smartphones is just as likely to trust an app as a well-heeled broker.
Fintech firms are working to take advantage of the coming wind. Robinhood may have hit the headlines, but millennials are just as interested in using other digital services. One example is “robo-advisors” who automatically allocate the invested assets to low-cost index funds based on age and risk preferences for a small fee. According to BlackRock, an asset manager, four in five millennials who are aware of these advisors are interested in employing them. In Betterment and Wealthfront, two startups with robo-advisory services, just as much cash – maybe $ 40 billion together – is parked as in Robinhood. Although Betterment has some older customers, the average customer is 35, says Jon Stein, its founder. Robinhood does not disclose how much cash is held on its platform, however JMP Securities, a research firm, estimates the average account holds $ 1,000 to $ 5,000. That would bring the total assets in its 13 million accounts to $ 13 billion to $ 65 billion.
Some established companies are trying to catch up. In 2019, Morgan bought Stanley Solium, which manages the exercisability of stock options for technicians, in the hopes that one day they will be wealthy customers. Others are more gloomy. Most wealth managers surveyed by Accenture, a consulting firm, believe they will lose a third of their clients’ wealth at the time of succession. When the reaper comes for their customers, their business will go with them.
What are the goals for millennials? According to Deloitte, another consulting firm, 87% of respondents believe that business success shouldn’t be measured in terms of financial performance alone. They seem to be responding to this impulse too. Morgan Stanley finds that those under the age of 35 are twice as likely as others to sell a stake if they consider a company’s behavior to be environmentally or socially unsustainable. Of course, with the arrival of kids and mortgages, millennials can get tougher. On the other hand, after seeing two economic crises in about a decade, they may want to shake up shareholder capitalism. Millennial investors will change the way asset management works – and maybe the economy, too – in 2020. ■
This article appeared in the Finance & Economics section of the print edition under the heading “The Generation Game”.