Investing for Gen Y: 5 Rules to Remember

Savvy financial planners are always interested in catching the next generation of investors to replace older clients, but serving today’s young adults presents a special challenge.
Many members of Generation Y entered adulthood at the time of the worst recession since the Great Depression. Many of these young adults also graduated from college with an unprecedented amount of student debt and have faced a punishing job market.

“Generation Y has basically come of age when it was not a guarantee that their experience would be better than their parents,” says Elliot Weissbluth, CEO of Chicago-based HighTower Advisors. “There’s a harsh reality they face — that even though they followed the playbook, they’re not assured a good job and success.”

As a result, he says, they are skeptical of investing and are risk-averse. While these young people understand the need to save, they are reluctant to invest as aggressively as they should. This presents both an opportunity and difficulties for advisors. Here are five key concepts to keep in mind about Gen Y:

1. They won’t all be good prospects.

In truth, many potential Gen Y clients may simply be steering clear of investing altogether — either by choice or by necessity. “They’re coming out with more college debt than any other group, and a lot of them are underemployed,” says advisor Joanne Woiteshek, the secretary and treasurer of Interactive Financial Advisors in Oak Brook, Ill. Until the last 18 months or so, she says, “they haven’t really seen a good market, so they’re a little afraid to invest.”

The most likely candidates, advisors note, are scions of wealthier families, who have less college debt and are more likely to inherit family assets. “Our approach is through family members,” says Michael Blehar, managing director and principal of Fort Pitt Capital Group in Pittsburgh. “If we’re managing money for mom and dad, we want to have that next generation. We don’t want to say, 'Go away and come back when you have the required minimum.’?”

Blehar says this sometimes means dispensing advice on 401(k)s as a kind of add-on to the services his firm provides to its more established clientele.

2. They’ll do more research than your other clients.

“Gen Y is very skeptical, very research-oriented, very information heavy,” says Brandon Moss, managing director of United Capital in Dallas. “They Google everything and they verify everything.”
Indeed: 28% of Gen Y respondents wouldn’t act on an advisor’s advice without consulting other sources, compared with just 7% of baby boomers, according to research by Accenture. “They live and thrive on information,” Moss says. “The more information we can provide — the more content, the more blog posts, the more avenues we can give them to learn about — the better.”

But sheer volume of information is not enough, according to Adam Thurgood, a HighTower managing director and partner in Las Vegas. Communication with young investors needs to include the whats and whys — answers to questions previous generations might not have asked. “They do like to have a lot of different options,” he adds.

3. They want to have input.

Of course, all that data sometimes can become overwhelming, so be sure to frame presentations as a starting point for a decision-making process. Moss cautions that a planner who comes up with a strategy and presents it to the client without soliciting input is unlikely to be successful. “This generation hates that,” he explains. “They like to be part of the design process, the creation process.”

This doesn’t necessarily mean that millennials can’t pull the trigger when they are ready to act — and they don’t want you to hesitate either, argues Brent Perry, founder of Piedmont Financial Advisors in Indianapolis. “They come to expect the ability to make decisions immediately,” he says. “They want to be able to make it happen right now. If there’s friction because it takes some time to implement, they may not do it.”

4. They’re too conservative for their own good.

“Millennial investors have grown up with two of the worst bear markets in history and they have a massive amount of information available to them,” says H. Jude Boudreaux, founder of Upperline Financial Planning in New Orleans. These two factors combine to fuel fear and indecision, he says.

Some 43% of millennials consider themselves “conservative” investors, compared with just 31% of baby boomers, Accenture found. Since Gen Yers are a gun-shy bunch, planners use a variety of strategies to keep them comfortable while also making sure they’re reaching their savings goals.

“There is a lot more willingness to hold cash” — an attitude “you would not normally see from someone that young,” Thurgood says. “That’s obviously detrimental to their portfolio long term. They’re starting to make some good money, but their low willingness to take risk creates a much more complicated allocation problem.”

“A lot of them haven’t even thought about the time value of money,” Woiteshek adds. “Life expectancies are so long now,” and yet many young adults don’t grasp how much money they will need to have a comfortable life.

One positive trait of members of Gen Y is that they’re much more open to investment ideas, from ETFs in international and emerging markets to high-yield bonds and even mortgage-backed securities, according to Moss. “They understand we live in a global world, so they’re much more open to allocations that may not be as traditional as 60% U.S. stocks, 40% corporate bonds,”
he says.

That said, it’s a risk to push them too hard, Boudreaux warns. “I think it’s a mistake for advisors to try to push them to age-based portfolios or places where they’ll be more aggressive,” he says. “If 2008 happens again, they’re going to bolt. They’re going to sell at the wrong time and make decisions based on fear. If you put them in a very aggressive portfolio, at the first dip they’ll be gone.”

5. They respond to statistics.

Since volatility may prompt skittish Gen Yers to head for the exits at the first sign of softness, planners need to stage an intervention and prevent their clients’ emotions from torpedoing their wealth goals. To accomplish this, Thurgood recommends focusing on this generation’s native tongue: information.

“I tend to be statistically driven,” he says. Talk about the long-term nature of asset prices and fluctuations that can occur, he suggests, as well as long-term expectations for returns.
Rather than ask millennial clients how much risk they want to stomach — because the answer is likely to be lower than it should be to deliver a secure long-term future — spell out what their money needs to accomplish. “It’s a conversation we have all the time — the need to take risk,” Moss says.

Yet even this may still not be enough to overcome the hesitation that can hamstring a millennial’s portfolio. Cut through that reluctance by pointing out that the inevitable creep of inflation means that even money stashed in safe places will succumb to erosion in purchasing power, Thurgood says.

“When you bring up the loss of capital from decay of purchasing power and start to put it in that context, you can really feel the mood change,” he says. “They start to realize that, long term, there’s a lot more risk being on the conservative side.” 

Martha C. White, a New York writer, has contributed to The New York Times, Fast Company and Time.com.

Read more:

• 7 Smart Ways to Work With Next-Gen Clients
• Advisors: Get Ready for Next Gen Clients
• Millennials Present Opportunity & Challenge for Advisors