Author: Maha Khan Phillips
Asset managers must adapt if they are to survive, let alone thrive, as a new generation come into their wealth, says Julian Samways
Asset management has historically been a fairly traditional sector with respect to how it conducts itself and interacts with its customers. Investment objectives, typically based on meeting long-term needs such as retirement, are set, and assets are managed accordingly. Detailed – dare we say, often dense – reports are then regularly produced to show the performance that has been delivered and explain why the fund manager is doing things in a particular way.
It is a model that has lasted for more than a generation and, by and large, has served the asset management industry well.
However, nothing lasts forever, no matter how established. The clientele that asset managers have catered to for so many years has begun to change, an evolution that has become more evident and rapid over the last five years. Cerulli Associates estimates that as much as $68 trillion will move from ‘baby boomers’ to their children over the next 25 years in the US alone, with millennials becoming the next generation of asset management industry customers.
The success of new, disruptive market entrants such as Nutmeg over the last decade shows that asset managers must adapt if they are to survive, let alone thrive. And this means understanding and responding to the needs, expectations and preferences of a younger generation very different to its predecessors.
Shifting Values
How do these needs vary? For a start, new generations of investors have very different priorities to those of their parents and grandparents when it comes to what they are prepared to allocate money to and the resulting returns they expect.
The balance between ‘values’ and ‘profits’ is finer than it has ever been. A 2020 survey by The Share Centre found that 49% of Generation Z’s and 47% of millennials would be willing to make slightly less profit if the companies they invest in are more aligned with their values. Returns alone are not enough; this new generation of investors want to know that their investments are having a meaningful and positive impact on the world around them, be this addressing the challenge of climate change, improving social mobility, or contributing to a fairer society.
For asset managers, this inevitably means more scrutiny as the standards expected from both their investment products and their businesses become higher and more stringent. Talk is cheap and asset managers must be seen to be practicing what they preach or risk being disparaged for ‘greenwashing’, a label that can have sizeable and potentially long-lasting implications. The criticisms of some of the world’s largest asset managers is a case in point and has proved damaging to the reputations of a number of leading businesses.
Growing Social Network
The risks of reputational damage become even more pertinent when considering the influence of social media platforms, a key source of information and communication not just for millennials but, increasingly, society in general. Analysis by Statista estimates that, at the end of 2019, 93% of 25–34-year-olds in the UK has some sort of social network profile, with platforms such as Facebook and Twitter enabling users to source information and express their views and experiences on a wide range of topics.
The potential influence that these platforms can have in ‘making or breaking’ reputations is substantial and therefore needs to be carefully considered by all companies, including those in the investment community, when conducting their day-to-day business. Twitter, in particular, has become something of an echo chamber for individuals to articulate their frustrations and it is all too easy for businesses to suffer as complaints and irritations expressed over this and other social media channels become ‘viral’.
Further, the extent of social media use in day-to-day life also gives important insights into how younger generations want to be communicated to. Will a generation used to communicating in 240 characters or 15-second videos really be responsive to lengthy, impenetrable written documents? Short, sharp insights, delivered by easily accessible tools and technologies, are now the order of the day. The asset management industry has been somewhat slow to adopt these capabilities compared to other parts of the financial services sector, and must move quickly to close these gaps.
The urgent need for action is made even more critical given how the savings and retirement space has itself evolved in recent years. In the UK, the move to defined contribution structures, auto-enrolment and the adoption of ‘pensions freedoms’ have given this new generation of investors much more responsibility and control over their financial assets than ever before.
This generation does not think in the same terms as their parents and grandparents: the convention of putting aside money for retirement has changed. This is not to say that millennials do not think about this; more that they do not necessarily think with such a long-term view. Savings are now much more for immediate concerns – holidays, weddings, first homes, first cars – with retirement a much more distant prospect.
For an industry reliant on managing assets for the long-term, this alone should be a concern. Added to this, however, is a clear trend of disengagement among a section of today’s savers. A recent study by Nest Insight found that while savers who auto-enrolled in defined contribution schemes were positive about their pensions, very few were engaged with them with 40% unaware they could change contribution levels and 16% having never checked their balances. In this context, the challenges facing the asset management industry in meeting the needs of a new generation of investors are obvious.
But, before the sector gets too downhearted, it is also important to recognise the opportunities. Yes: the asset management industry must adapt, but the benefits of doing so are considerable. By embracing the needs of its younger customer base, asset managers not only have the potential to access a sizeable source of assets; they also have the ability to engage with a broader swathe of investors from the efficiencies created by using the technologies that are defining the millennial generation.
Times are changing. The asset management industry must change with them.
Julian Samways is Managing Director of JPES Partners