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The rapidly evolving investor

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The following is an excerpt from the white paper, Wealth and Asset Management 2021: Preparing for Transformative Change, written by Roubini ThoughtLab based on a global survey that BMO Global Asset Management sponsored. To download the full content of this section, scroll to the bottom of this page.

 
As demographic and wealth patterns change around the world, providers will need to engage a more heterogeneous set of investors. Although the core values of this more diverse client base will stay the same, their priorities, behaviors, product needs, and payment preferences will vary widely. Understanding the behavioral differences – and commonalities – among these investor segments will be vital for future success.

Core investor values remain the same

Despite market upheavals, our study shows that individual investors are sticking with their core investment beliefs: Put money into what you understand, save for your family, trust known brands, and seek external advice. They also value advice from alternative sources, and believe they will achieve better results by working with experts. (See Figure 2-1.)

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Source: Roubini ThoughtLab

These basic attitudes are unlikely to change even as investor demographics shift. Contrary to conventional wisdom, investors in new segments – such as millennials, women and emerging-market investors – often put a higher premium on these core values than their peers in traditional market segments. For example, women are less prone than men to invest in something they do not understand; millennials have greater trust than boomers in established brands; and investors in emerging markets have a higher regard for working with wealth experts than their counterparts in mature markets.

But investors will behave very differently

Over the next five years, investors’ behaviors and product needs will shift dramatically. Most investors, particularly millennials and Gen X, plan to expand their use of anytime, anywhere, any device access. (See Figure 2-3.) “The traditional notion of sitting down in a mahogany paneled office at a set time with a highly skilled wealth advisor is becoming an anachronism,” remarks Christopher Jones, EVP of Investment Management and Chief Investment Officer of Financial Engines.

But digital interaction is just the tip of the iceberg. Asset choices will evolve as investors seek more personalized products and services, invest more heavily in alternative investments, move from active to passive solutions, and rely more on fintech. Relationships with providers will also change: Investors will work more with investment providers that give specialized and holistic advice, and they will transfer investments to organizations offering better services and greater investment options. And investors will take steps to reduce fees and move from commissions to more transparent fee-based services.

Our survey shows that investment providers are fully aware of the future shifts in investor behaviors, but may be overestimating the pace of change over the next five years. For example, as Figure 2-3 shows, 55% of investment providers expect investors to invest more in socially responsible investments, compared with just 29% of investors (Listen to our Better Conversations podcast on this topic: Guiding the social and environmentally conscious investor). And while half of the investment providers expect investors to use wealth advisors more than self-directing their portfolios, only 32% of investors agree.

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Source: Roubini ThoughtLab

Appealing to the next generation of investors

One looming concern of investment providers is the intergenerational transfer of wealth to younger investors – a change that 26% of respondents said would have a major effect on their business. According to Bank of America, the wealth transfer to millennials in North America alone will amount to $30 trillion over the next 30 to 40 years.

MRA Associates, an investment advisory boutique, is actively preparing for this generational shift, according to Nathan Erickson, the company’s Chief Investment Officer. Like many wealth managers, MRA Associates targets investors who are in the middle- to late stages of their professional careers and have already amassed significant wealth. To sustain their business, the company must develop relationships with successive, younger generations of clients. Erickson explains, “There certainly is a focus on touching all generations of existing and future clients. If we don’t, we’ll lose that business – and our clients’ children and grandchildren will lose continuity.”

Steve Scruton, President of Broadridge Advisor Solutions, believes that “forward-looking companies should implement technology plans designed to get ahead of the curve for dealing with millennials.” According to Scruton, those plans should include:

  1. Building brands and communications channels that will resonate with millennials, including social, email, web, and online collaboration.
  2. Leveraging advanced analytics to identify millennials with a high probability of becoming wealthy and to target, track, and engage those prospects.
  3. Using technology to align multigenerational advisors into teams to engage high-value family relationships and lay the groundwork for a transition plan.
  4. Creating mobile and web-based investor portals that give investors what they want, when they want it, and how they want it – while gathering valuable customer data for advisors.
  5. Implementing aggregation technology that lets the advisor take a 360-degree view of a family’s assets to inform planning and identify up-sell opportunities.

Investors will widen their investment approaches

As investors’ behaviors shift and their wealth grows, they will widen their investment approaches. Cited by 67% of respondents, alternative investments – such as real estate, infrastructure, and hedge funds – will see the largest increase in five years’ time, as investors seek new ways to diversify their portfolios (Listen to our Better Conversations podcast on this topic: Alternative investments: exploring the opportunities).

Despite a rise in do-it-yourself solutions, the use of personalized advice will stay dominant. Some of the largest growth will come from newer forms of investment, such as socially responsible investments and social trading. The competition between passive and active funds will also heat up over the next five years.

But providers will need to be sensitive to diverging preferences among investors. For example, 52% percent of female respondents expect to use socially responsible investments in the next five years, compared with 41% of men. Similarly, 71% of UHNW investors plan to move to passive funds, versus 47% of the mass affluent. And alternative investments will stay the province of the financially literate (71%) and UHNW (81%).

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This article was written by Roubini ThoughtLab and is based on a global survey that BMO Global Asset Management sponsored. BMO Global Asset Management is not affiliated with Roubini ThoughtLab. The views and opinions expressed in this article do not necessarily reflect those held by BMO Global Asset Management or any division of BMO Harris Bank N.A., nor by BMO Financial Group or any part of BMO Financial Group.

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