Generation Z investing guide for wealth advisors

Gen Z and investing: a field guide for wealth advisors — and a warning

April 3, 2023 2:44 PM

The oldest members of the cohort are now 26 and represent the future of wealth management's client base. So why are so many financial advisory firms behind the curve in understanding how they think?

They love watching dancer and social media personality Charli D'Amelio, TikTok's top U.S star, cradle a gold-sequined Prada handbag, and learning how to bake "cloud bread."

"They" is Generation Z, and the 70 million-strong cohort stands to inherit at least tens of billions of dollars and assets from their parents and grandparents in coming decades. Yet 1 in 3 members may get their financial advice not from professional wealth planners, but from TikTok and YouTube, platforms permeated with myths, misperceptions and outright falsehoods dispensed by so-called experts.

The cohort, along with millennials (what Fidelity Investments calls "Gen Y"), comprised nearly half, or 47%, of the U.S. population in 2021, but only 14% of all advisory clients, Fidelity's 2022 Investor Insights Study shows.

As the wealth management industry sifts through a mountain of data on how these potential future clients save, spend and invest, one thing is clear: Born after 1996, Gen Z is the first cohort to have never known a world without the internet and smartphones. Here's what financial advisors need to know about their future client base, the oldest of whom are now 26.

How they save

The Federal Reserve's 2019 Survey of Consumer Finances, the central bank's most recent data set, showed that Americans under the age of 35, a group which includes Gen Z and the oldest millennials, had an average net worth of just over $76,000. But the median net worth was just under $14,000, evidence that some Gen Zers are growing wealth faster than others.

As the youngest generation in the workforce, most Gen Zers have four-plus decades of earning power ahead. Giant asset management firm BlackRock found in a survey fielded in March and April of 2022 that savers aged 21-30 (so, some millennials) had amassed on average more than $64,000.

Gen Z's average savings rate in the survey was 14%, roughly the same as older cohorts. But their retirement plans are more ambitious: Most expect, or want, to retire more than two years earlier, at age 63½ , compared to age 65¾ for boomers.

Still, nearly 3 in 4 Gen Zers told the BlackRock survey that they're "willing to save less for retirement if faced with other big ticket goals," such as buying a home.

What they invest in

The newest generation may be young, but it's already thinking about retirement. More than half, or 54%, is invested in target-date funds, which grow more conservative the closer an investor nears leaving the workforce, BlackRock found.

Nearly half, or 47%, reported that having environmental, social and governance-themed investment options was "very important, compared to 38% of millennials and nearly 1 in 4 of Gen X.

Many Gen Z investors got swept up two years ago in "meme" stocks — like movie theater chain AMC, which jumped last week following reports that it might be acquired by Amazon — and FOMO (fear of missing out). The crazes, fueled by a thread on online forum Reddit, "awakened many young Americans to the possibility of investing" and got them "more excited" to learn about the markets, Fidelity wrote in an early 2021 survey of Gen Z investors then aged 18-24.

The average Gen Z investor is used to a world of leaner returns. Credit Suisse's Global Investment Returns Yearbook for 2023 showed that equities during an adult Gen Zer's lifetime have returned an average 4% a year, significantly less than the 6.7% boomers have seen.

As of the end of 2021, shares in Tesla, Apple, AMC Entertainment, Amazon and Microsoft were most likely to be held by Gen Z investors, according to Apex Clearing, a custody and clearing service used by brokers including SoFi and Goldman Sachs's Marcus.

Only 12% of Gen Zers invest in mutual funds vs. 38% of millennials, an Investopedia survey last year showed. Nearly 1 in 4, or 23%, own cryptocurrencies, less than millennials (28%) and Gen X (38%).

At 46%, Gen Z is the least confident of any age group about its financial knowledge.

A bundle of nerves

Diverse and on track to become the best-educated generation ever, plenty of studies show Gen Z to also be more anxious and stressed than older generations.

More than 9 in 10 Gen Z workers are stressed, more than the average 84% of employees of all ages, according to insurer Cigna's 2022 Global Well-being Survey. The primary cause: worries about the economy.

Lived experience becomes a baseline, and the COVID-19 pandemic, which emerged in early 2020, spiked stress levels. In 2019, only 5% of Gen Z was worried about finances. By April 2020, the rate had soared to 66%, the most of any generational cohort, a 2020 study by consulting firm BCG found.

Angst, or something like it, looms large; a McKinsey survey in January 2022 found that 1 in 4 Gen Zers feels "emotionally distressed," double and triple the rate of older generations.

Amid climate change, rising inequality and global political instability, what do they worry about the most? Money.

Seven in 10 Gen Zers aged 18 and older cited money as their biggest source of stress in a September 2021 survey by Credit Karma. Nine in 10 cohort members in the BlackRock poll said the pandemic and inflation had "affected their attitude towards retirement saving," meaning caused them to become more worried.

Financial advice

Social media and a lack of trust in traditional financial institutions have created a $104 billion market for "finfluencers," or social media stars who provide financial advice, according to a report last year from the World Economic Forum.

No dropping into your stock broker's office like grandpa did. Just as they love watching an Australian shepherd on TikTok painting a yellow flower using a brush in its snout, Gen Z investors are up to five times more likely to seek investing tips on social media compared with adults aged 41 and over, a March 2021 survey by creditcards.com showed. Nearly 1 in 3, or 28%, turned to both friends and online influencers for guidance. For millennials, the rate was 28%, and for boomers, 4%.

A different study, a 2021 survey by the National Association of Personal Financial Advisors, found that more than half, or 56%, of Gen Z uses a financial advisor, but that only 17% actually listen to their advisor when it comes to financial guidance. Just over 1 in 3 turn to a family member. More than 1 in 4 rely on social media, NAPFA said.

When it comes to reaching the ears and eyes of younger investors, social media stars are running circles around advisory companies and brokerages. The leading TikTok finfluencers, including @marktilbury, with 7.1 million followers, have audiences that far outstrip those of the few wealth advisory and financial planning companies now on the platform.

Giant Fidelity has just 27,900 followers. Even online brokerage Robinhood has only 136,300.

Wealth advisors

What's known as the Great Wealth Transfer will see an estimated $84 trillion in U.S. assets pass down to younger generations through 2045, Boston-based research firm Cerulli Associates says.

It's a high-stakes, high-risk shift for wealth advisors: When money passes to heirs, advisory firms typically lose 70% to 80% of those assets as the inheritor switches advisors, according to EY.

It may not help things that financial advisors skew older. Almost half of all certified financial planners are age 50 and up, CFP Board data show.

Senior or not, wealth advisors are focused on chasing high net worth clients. But with boomers representing on average 87% of an advisory firm's annual revenue, "ignoring young investors could put your firm's longevity at risk," Fidelity wrote in its 2022 Investor Insights Study.

"Many financial advisors are skeptical about serving young investors because they don't think they can afford financial advice or be served profitably in the short term," the Boston-based investment company wrote. "However, a dearth of young clients may impact the value of your firm today, and the long-term sustainability of your business."