Emerging Millionaires: An Opportunity For Advisors - But Expect A Change In Demographics - Survey

Eliane Chavagnon Editor - Family Wealth Report January 17, 2014

Emerging Millionaires: An Opportunity For Advisors - But Expect A Change In Demographics - Survey

An alarming 77 per cent of those on the cusp of entering millionaire territory don’t have a written financial plan, while a similar percentage aren’t confident in their ability to invest, a new study shows.

An alarming 77 per cent of those on the cusp of entering millionaire status don’t have a written financial plan, while a similar percentage aren’t confident in their ability to invest, a new Fidelity Investments survey has revealed.

The study - part of Fidelity’s Insights on Advice series – involved individuals with an average of $800,000 in total assets and an annual household income of $150,000.

It found that, unlike today’s millionaires who are more likely to be male and mostly on the Baby Boomer end of the age spectrum, nearly half of the millionaires of tomorrow are women (49 per cent) and Gen X/Y (49 per cent).

“These investors represent significant demographic shifts that may impact the make-up of financial advisors’ client base, with female and Gen X/Y investors expected to amass $22 trillion and $41 trillion in assets by 2023 respectively,” Fidelity said.

Meanwhile, the study identified three significant behavioral trends that the firm believes may be holding the “millionaires of tomorrow” back from hitting the million-dollar mark:

1. Playing it too safe when it comes to investing: While they are seemingly on top of “financial basics” like debt and household expenses, they’re not comfortable taking on risk to maximize returns.

2. Not having a plan to meet their long-term financial objectives: This cohort, Fidelity said, is highly focused on the long-term – yet they do not have a plan to help get them there.

3. Not using financial advisors: Despite a lack in confidence as regards investing, the millionaires of tomorrow are not turning to financial advisors for help.

“The challenge for advisors will be to prove their value – and the value of taking on risk – to a group that is somewhat unsure of professional advice,” said Bob Oros, executive vice president, Fidelity Institutional Wealth Services.

A broader trend

Fidelity’s insights echo those stemming from a recent report by Spectrem, which found that wealthy millennial investors see the world and their finances in a much different light than previous generations, while over a quarter of them have never considered using a financial advisor. Only 4 per cent of wealthy millennial investors - defined by the firm as individuals age 32 and under with over $1 million in net worth - consider themselves to be “advisor-dependent,” compared to 10 per cent of Baby Boomer respondents (those aged 48-66), Spectrem said.

While those in this segment were defined as millionaires already, they share similar traits to those on the cusp of hitting the million-dollar mark in that they are likely to be younger and have a different mindset compared to today’s cohort of older, wealthy individuals. Both the soon-to-be millionaires and the millennials who already are represent a significant opportunity for those in the business of managing people’s wealth and advising on wealth-related issues - although understanding the mindset and various preferences of these segments is crucial.

Spectrem’s findings also reflected insights from an Accenture report earlier this year, which said that millennial investors are more conservative and less trusting of financial advisors than Baby Boom and Gen X investors. They’re also more inclined to consult other sources before accepting financial advice, it said.

The millionaire-of-tomorrow’s mindset

Looking at each of the above-identified behavioral traits, Fidelity’s study found that this emerging segment is generally on the ball financially, with 77 per cent having reported that they already have or are currently managing household expenses more closely, and 85 per cent feeling they are in control of their debt. Increasing wealth was their second top financial goal, and over quarter (27 per cent) said they were looking to improve their returns on investments.

However, they may be missing the investor mentality to boost their wealth. For example, the study found that cash, CDs and money markets constitute the second-largest asset category in their portfolios, and close to half (45 per cent) reported they are focusing their investment strategies on reducing risk, minimizing loss and avoiding market volatility. But as wealth increases, so too does the level of complexity of managing it.

In addition to the alarming finding that 77 per cent of the respondents do not have a financial plan, nearly four in ten do not even intend to establish one. Yet, respondents tended to cite not having enough saved for retirement as their top financial concern.

“Millionaires of Tomorrow seem to appreciate the importance of saving for retirement now if they are to be well positioned in the future,” said Oros. “But without a plan in place to reach their goals, they may not be taking the necessary steps to save enough for retirement.”

Meanwhile, as regards the finding that 70 per cent lack investing knowledge, it is interesting to note that only 51 per cent are turning to financial advisors while 39 per cent are opting to “go it alone,” Fidelity said. Additionally, of those not working with an advisor, 46 per cent felt advisors aren’t interested in investors with smaller assets, and 53 per cent were put off by advisor fees.

“Keeping in mind the long-term value these relationships may bring, advisors may want to consider altering their fee structures or their services to cater to this fee-averse group,” Fidelity said.

As Michael Liersch, director of behavioral finance at Merrill Lynch Wealth Management previously told Family Wealth Report: “I think the biggest opportunity based on what we’re seeing from the data is that younger investors want to be seen as individuals and they want advisors and wealth managers to come to them with a structured way of helping them articulate what they want out of the investment process and what they need to do to achieve that.”

Affluent Investor Insights was an online study conducted by Bellomy Research, an independent firm not affiliated with Fidelity Investments, from May 16, 2013, to May 29, 2013. It was focused on understanding investors’ attitudes, behaviors, and preferences related to investing, wealth management, and advice usage. It was held among a target sample of 813 respondents.

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