According to CFA Institute's recent survey From Trust to Loyalty: A Global Survey of What Investors Want, millennials (aged 25-34) are more likely than their older peers to embrace new technology to execute their financial strategies. While they may be completely at ease with fintech, the comfort and the trust that millennials place in technology can come at a steep price as it opens the door to fraud and identity theft.
Growing influence
Millennials offer a distinct worldview that influences their lifestyle choices when it comes to marriage, housing, healthcare and large asset purchases. As millennials move into their prime earning years in the near future, their worldview will undoubtedly have a significant impact on the overall economy, as illustrated by a recent infographic from Goldman Sachs.
General indifference to brick and mortar banks among millennials combined with their early adoption of mobile banking and money management applications have some banks rethinking their business models. It may be investment advisory businesses however, that feel the largest reverberations from this generational shift.
Millennials' early support for and trust of robo-advisor platforms has led to the emergence of new, low-fee competition for traditional advisory businesses in the form of large scale service providers like Wealthsimple and Nest Wealth. The principal reason for early adoption and trust in algorithmic investment services is that millennials have grown up with the internet and are used to interacting in an online marketplace. The question that remains is whether or not the availability and use of technology will be a long-term motivator for millennials when choosing or evaluating investment advice.
Trust in technology
To help answer this question and determine the reason why clients remain loyal to or leave their investment advisors, CFA Institute surveyed 3,312 retail and 502 institutional investors from across the globe.
The survey, From Trust to Loyalty: A Global Survey of What Investors Want, asked retail investors what would be more important to them in three years' time: having access to the latest technology platforms and tools to execute their investment strategy, or having a person to help navigate what is best for them and execute on their investment strategy. With the exception of investors in China and India, respondents overwhelmingly favoured human interaction (68 per cent) over technological access (32 per cent).
However, the results change meaningfully when parsed by age. Although the majority in every other age group expects to value a traditional, human advisor over the latest in investment management technology, millennials narrowly expect to prefer technology in three years' time. As this generation begins to accumulate greater wealth, advisory businesses are going to have to find innovative investment management strategies in order to provide continued value and differentiate themselves from the competition.
The survey highlights several factors that investors value as much as investment performance. Advisory businesses will need to consider and focus on these key areas moving forward if they want to attract new clients and retain existing ones:
- Investment costs are even more important than performance to global investors and firms are not meeting expectations in this area
- Institutional investors rank ethical standards above all else when it comes to the firms they hire
- Transparency and cyber security are key concerns
Be wary of where you place your trust
Relationships between technological platforms and clients are built to function without any human interaction, which sometimes makes it hard for people to evaluate if their information and interests are adequately safeguarded. Without sufficient, easy to understand information or an advisor to help make sure information is understood, there is greater risk that investors will be confused about what services or securities they are purchasing.
Take Oculus for example, the virtual reality company that was sold to Facebook in 2014 for US $2 billion. Many of the 10,000 or so people that contributed money via the crowdfunding platform Kickstarter to help get the company off the ground, felt taken or at the very least surprised when they found out that as far as Oculus was concerned their cash investments in the startup were really just donations.
There are growing reports of fraud by people using crowdfunding applications like Kickstarter, Indiegogo, or GoFundMe, that promise an investment return or other incentives that are never realized.
Beyond the resulting shock when investments are not properly understood, new advisory technologies also add an extra element of risk in the form of cybercrime.
Fraud and identity theft are more likely to occur when people overshare information or are not diligent about securing personal details that can be used to determine passwords and answer security questions. Younger people are also more apt to use new applications before a reputation and a basis of trust can be formed. Because of Know Your Customer (KYC) regulations, financial applications must ask for information such as social security numbers, birthdates, and credit card numbers, and there is always a risk this information will be used for purposes other than what they were intended for.
As millennials look for new and innovative technical solutions to manage their investment portfolios, they need to always be wary about the security of their information and their money.
In the Trust to Loyalty survey, cybersecurity was deemed as something that clients of investment firms are beginning to value as much as investment performance. Both advisors and clients are realizing that in the ever-changing world of computer-supported investment and financial management, investors should always remember the reasons for trusting in their service provider and continually asses if that trust is well placed.