Balancing Act

The transfer of wealth among generations finds financial advisors walking a tightrope between tech-savvy millennials seeking to invest and retirees looking for payouts.

Share this article!

Historically, asset management has been a community affair. According to a 2015 report from McKinsey & Company Financial Services, 70% of investors were only interested in working with a financial advisor face to face, and one who was in driving distance.

Strategies for attracting clients reflected these preferences. Networking events, seminars and referral networks were the main ways of finding a financial adviser.

Like so many industries, COVID-19 has changed the financial-planning sector. According to Google, during the first six months of the coronavirus pandemic, the frequency of online searches for financial advisers increased 17% year-over-year compared to 2019.

An updated McKinsey report from 2020 found those original preferences had nearly reversed, with 63% of clients open to working with a financial planner remotely.

As the baby boomer generation transfers wealth to their millennial children, financial advisers are staying up-to-date with online platforms to compete with trading apps that are popular with the millennials like Robinhood, as well as sites trading in cryptocurrency.

Historically low interest rates also mean financial advisers must find new ways of making clients’ money stretch out during their retirement.

One reason behind the boomer-millennial wealth transfer is a change in retirement-plan policy. A 2019 change to required minimum distributions law means retirement-fund payouts can no longer be transferred to heirs upon a client’s passing, often called “stretch” capability.

The change to the law, in addition to clients seeking to dodge estate taxes, has led to more retirees giving away their wealth while they are still alive. According to asset-management research firm Cerulli Associates, $68 trillion will move between generations over the next two decades.

The bad news for financial advisers is that millennial clients are less loyal. According to a survey by Fidelity Investments, 53% of millennials say they would seek out a new adviser if their current adviser was not using satisfactory technology, compared with only 29% of boomers.

Financial planners have adapted by offering the new generation of tech-savvy wealth holders the digital tools with which they are most comfortable.

“The stock market has become mainstream thanks to millennials embracing stock trading, often in their Robinhood accounts,” says Dan Botti, asset adviser at Peregrine Asset Advisers in Portland. “Front and center of this has been software, internet and internet commerce, which are not exclusive to millennials.

Millennials have been quicker to adopt some of the more recent fintech services. In addition, millennials serve as some of the loudest proponents of the cryptocurrency boom.”

Cryptocurrencies like Bitcoin and Ethereum have gained popularity among investors for years. The COVID-19 pandemic has accelerated investors’ interest in online assets. As of April 2021, more than 9,000 cryptocurrencies facilitated peer-to-peer transfers of data and value, according to CoinMarketCap, an online trading site for cryptocurrency.

Cryptocurrency is notoriously volatile. For most financial advisers, the cryptocurrency boom means more competition from online-trading apps, rather than another place to invest. “The bottom line is: Firms need to embrace technology as more generational-wealth transfer is taking place,” says Nik Torkelson, vice president of finance and marketing at Matisse Capital in Lake Oswego.

“An easy, user-friendly online experience has also become a necessity. If you’re not investing in increasing your digital presence — whether that is your website, social media or paid advertising — you’re missing out on connecting with people who are actively searching for your services,” says Torkelson.

Appealing to the younger generation is not the industry’s only challenge. Low interest rates brought about by COVID-19 means yields and payouts are historically low. As the economy rebounds, retirees are expected to want to travel. Clients who have grown accustomed to regular cash flow from dividends will need their financial planners to offer them solutions in the short term.

“The question for financial advisers is: ‘How can I create sufficient cash flow in this low-rate environment?’” says Torkelson.

To navigate this challenge, some wealth managers have turned to closed-end funds. These are portfolios of pooled assets that raise a fixed amount of capital through the purchasing of initial public offerings. After a set amount of capital has been made, the shares are automatically listed for trade on a stock exchange.

While this means an investor will not be able to hold on to high-performing stock, the process yields consistently higher returns and a better income stream than the standard open-ended mutual funds.

While closed-end funds lack the growth potential of open-ended funds, they may be more profitable to investors needing steady cash flow in a historically low-interest-rate environment.

As clients navigate this historic wealth transfer and prepare their savings for future emergencies, financial advisers could become essential workers in the post-pandemic economy. More changes are likely on the horizon. Millennials anticipate social security to play far less of a role in their retirement plans, according to Wells Fargo’s 2019 annual retirement study.

Annuities and brokerage accounts could become more commonplace, further increasing the demand for financial advisers who help clients secure their financial futures.

“The core purpose of financial planning is preparation. This means accounting for disasters and disruptions of all varieties,” says Botti. “The outcome of the pandemic has yielded favorable investment returns so far, but the next disruption may be less favorable. An effective plan helps overcome setbacks and continue to realistically achieve their financial goals.”

To subscribe to Oregon Business, click here.