April 28th, 2017
Fintech lures millennial investors away from asset managers
A younger, tech-savvy generation is rejecting the traditional model of investment
With vast sums to invest, baby boomers have fuelled huge growth in the asset management industry over the past three decades, helping to create a $71tn business.
Born between about 1946 and 1964, boomers — often branded the richest generation in history — are the fund industry’s most important clients and are likely to remain so for years.
But another generation is catching the eye of the investment management industry. Roughly defined as those born between 1980 and 2000, technology-savvy millennials are now the largest demographic in both the UK and the US.
They have far less money to invest than boomers. Millennials hold $1tn in wealth, with just $250bn invested, according to Pitchbook, the data provider. But over the past six years, figures from Pitchbook show venture capitalists and other investors have poured $11.4bn into businesses in the field of asset management that they believe will prove popular with millennials.
These so-called fintech companies include robo-advisers, which offer low-cost automated online investment services, and other businesses aimed at making it easier and cheaper to invest and trade, often cutting out humans in favour of technology.
Carl Wessberg, a director at GP Bullhound, the investment bank, says investors backing fintech companies believe the rise of millennials will result in far-reaching changes for the asset management industry.
The argument is that asset and wealth managers that have not prepared for the dominance of millennials might miss out on trillions of dollars of potential investments in future.
Tim Wright, a partner at PwC, the professional services firm, says: “There are a lot of organisations that are still getting their head around [fintech and millennials] and will not catch up quickly.
“If asset managers don’t [catch up], they are at best limiting themselves to one subset of potential investors,” he says, referring to those who are less tech savvy and who tend to be older.
Under the traditional model of asset management, investors visit a bank, financial adviser or broker, who will recommend funds based on investors’ goals and risk tolerance. Depending on local rules, the asset management company behind the fund often pays the intermediary a kickback for recommending its product, which, conventionally, is actively managed.
But Evan Morris, alternative investment analyst at Pitchbook, says younger investors increasingly use passive products, which are cheaper, and they often want a quicker, online solution when it comes to investing, rather than in-person interactions.
85% Percentage of UK-based millennials who are comfortable with robo-advice
Research backs this up. According to a 2016 Legg Mason Global Asset Management survey, which polled more than 1,000 investors aged between 18 and 39, 85 per cent of UK-based millennials said they were comfortable with robo-advice, but only 37 per cent of investors aged 40 to 75 trusted online advice.
In response to changing demands, a host of robo-advisers such as Nutmeg in the UK, which raised £43m in funding last year, and Betterment, the world’s largest independent robo-adviser, with more than $5bn in assets under management, have been launched.
37% Percentage of investors aged 40 to 75 who trust online advice
These companies typically use exchange traded funds, rather than actively managed funds, in order to keep costs down. This means that a rise in popularity of robo-advisers could hurt the profitability of active asset managers.
Mr Morris adds: “Fintech is really start-ups picking off particular businesses that have grown long in the tooth, and finding niche opportunities where a much more nimble company can use technology to replace competitors.”
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