It’s all about the…: These days, for consumer fintech companies in wealth management (we will call them fintechs for short), it is, to paraphrase Meghan Trainor, all about the millennials. Fintech unicorns are courting millennials and garnering billion-dollar valuations for succeeding at it. The median age of a customer of brokerage firm Robinhood is 28, and 78% are under 35. The average age of a Betterment customer is 35 and two-thirds of its customers are millennials. With three million accounts, Acorns has primarily a millennial customer base as well. However, if these companies and their millennial-chasing brethren are hoping to raise meaningful assets under management, it is time for them to move on from the millennials.
Why Millennials? It’s understandable why millennials might look like an appealing bunch at first glance. First, there are lot of them: millennials are the nation’s largest living generation. There are more than 75 million millennials, and they spend $1.3 trillion annually. And the percentage of the population they represent will increase. Indeed, as Baby Boomers age, they will naturally decline as a percentage of the population. Over time, millennials will earn more money, and, also actuarially speaking, they will eventually inherit the money that the generations before them have accumulated.
Um, but: Today, millennials, as a group, have no money (to speak of). They are the generation with more debt than any prior generation thanks to things like student loans. Baby Boomers, the Silent Generation (baby boomers’ parents), and Gen Xers have all the money. According to the Deloitte Center for Financial Services, millennials today have just 4% of the nation’s wealth, compared to 50% for Baby Boomers and 33% for the Silent Generation. And while it’s true that the Silent Generation will, over time, pass their wealth on (that’s the actuarial stuff), most of their money will go to baby boomers. Baby Boomers will live a long time from now, and when they pass, most of that money will then go to Gen Xers. Millennials will earn more over time, but it will be a long, long time before they have real wealth. As Keynes once said, in the long run, we are all dead, and fintechs who are waiting for millennials will run out of money and be dead too before that ever happens.
Is all hope dead? Some fintech executives say that they’re not targeting millennials explicitly, but attracting more millennials because millennials are more tech savvy than previous generations. But according to the AARP, 70% of adults over the age of 50 use smartphones and 40% use tablets. It turns out, many fintechs are just fishing in ponds stocked with millennials. It’s not that Baby Boomers and Gen Xers aren’t tech savvy, they just have different needs. Those generations are dealing with saving for kids going to college, dealing with their elderly parents and contemplating retirement if it ever comes. So, the fact that the fintechs have predominantly millennial customers is not because the millennials are more tech savvy, but perhaps because they don’t solve the problems that the older generations are dealing with.
Follow the Money: Willie Sutton, a renowned bank robber, once said he robs banks because “that’s where the money is.” In order for wealth management fintechs to succeed, they too will need to go where the money is, and evolve to capture non-millennials as customers. So, where are the big flows now? Currently, there are $23.2 trillion in retirement plans, the vast majority of that owned by Baby Boomers. As the Baby Boomers retire, this money will flow out of 401ks into IRAs and other investment accounts. Baby Boomers need help managing this money, and they need even more help making it last. Fintechs (and traditional advisors) who help their clients deal with this drawdown will succeed. Baby Boomers have wealth tied up in small businesses and home equity that they will need to liquidate to make this last. Over the next 15 years, $24 trillion will be bequest to the Baby Boomers and Gen Xers (that is that actuarial reality, again). Studies show that when a parent dies, the children who inherit that money will change financial advisors. An advisor, electronic or physical, that is there to help an heir deal with their newfound finances stands to capture real assets and revenue. Some fintechs, such as Personal Capital and Financial Engines, are already there. (Financial Engines just announced its sale to Hellman & Friedman for $3 billion). The others need to go to where the money is, or they too will suffer an actuarial fate.