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Millennials. The generation born between 1981 and 1996 who provide such fascination for those outside this age group. And they are rapidly becoming the largest generation globally, outnumbering the ‘baby boomers’.
Millennials are often described as demanding – having high expectations and not afraid to question authority. Now they are becoming the driving force behind two phenomena: sustainable investing and increased digitalisation of more or less everything. And they are ignored at our peril.
Sustainable investing continues its rise in popularity among millennials, who are putting more emphasis on the environmental and social factors when deciding where to invest. According to the Financial Times, 88% of millennials say that sustainability is a priority for them in their investments. A particularly relevant group are the high-net-worth millennials who invest in a socially conscious way.
In June, We Are Guernsey hosted a Sustainable Finance online conference, discussing the broader shift towards sustainable investing. It was reported that 51% of high-net-worth (HNW) investors are looking to shift their investment portfolios towards sustainable investing. Whether someone reads that number as ‘only’ 51% or ‘majority’ of HNW investors, we cannot deny that it is a significant proportion of the investor population – and growing, if millennial trends are anything to go by.
Wealth Management Dilemma
Wealth Management has a tricky task on its hands with bridging the gap between the previous generations and the millennials. And the challenge is two-fold: what to invest in and how to do it. When it comes to investing, the gaps appear to be huge between millennials and previous generations. Traditionally, there has been a very strong focus on financial returns – whether in the short, medium or long term – with less emphasis given to environmental, social and governance factors. Mostly it was assumed that investing sustainably would mean sacrificing financial returns. But the wave of environmentally and socially conscious millennials has turned the logic on its head and introduced a dilemma for wealth managers.
Aiming for the impossible?
Wealth Managers have a fiduciary duty and are obliged to act in the best interest of their clients. Traditionally, the best interest was often perceived as the best possible financial return within a given timeline (short, medium or long term).
On the other hand, the wealth managers need to take into consideration investor’s preferences. In the context of the millennial preferences for responsible and sustainable investing, that brings to the fore the question of ‘morality’ in investing. Is it morally right to profit from a business activity if it is polluting rivers, exploiting workforce or making climate change worse?
Having lived in a world where to invest sustainably was to sacrifice returns, wealth managers are now suddenly faced with an entire generation of investors who want both – to invest sustainably and get good returns. Luckily for wealth managers, sustainable investing has become mainstream in the last decade. JP Morgan Asset Management reported that in 2018 sustainable investment assets reached over US$30 trillion globally. Morningstar reported in February this year that European investors poured a record-shattering EUR120 billion into sustainable investment options in 2019 alone, which brought the Assets Under Management figure for European sustainable funds to a healthy EUR668 billion, up 58% from 2018. In recent years, as more capital is invested sustainably, research shows that returns are on par with conventional investment strategies. Forbes, for example, reports that renewable energy investments are delivering better returns than fossil fuels in the US, UK and Europe.
To add fuel to the fire, Morningstar recently reported the results of their analysis which showed that the sustainable funds, not only outperformed traditional funds over a 10 year period, but seemed to have also weathered the Covid-19 storm better than the traditional funds. If we then add on the Sustainable Finance regulatory framework introduced by the European Commission in March 2018, then it becomes clear that sustainability considerations when making investment decisions are not a nice to have, but a must-have.
Technology as the second wave of change
Now we come to the second part of the millennial-driven change and another challenge for wealth managers – the technology and digitalisation it brings.
In the distant year of 2016, PwC highlighted the growing digital appetite of the wealthy. While the focus of the report was the Asia Pacific region, the data showed a global trend in digitalisation among the High-Net-Worth Individuals (HNWIs), particularly the under 45s group. In practice that means not only using online banking and mobile phone apps for managing day-to-day transactions, but also an increasing demand to have all their financial affairs at their fingertips. It was telling that 69% of HNWIs responding to the survey reported using online/mobile banking but only a quarter of wealth managers offered any other digital channels beyond email.
As digitalisation has only been gathering pace since 2016, we anticipate that wealth managers will very soon simply have to offer mostly digital interaction with their clients. Everything from initial client onboarding, to keeping their data up to date, displaying the status of their investments on-demand and in real-time, enable selection of their investment preferences and seamless switching between products.
Considering the wealth management industry has to date been slow to adapt to the increasingly digital age, our mission at TrustQuay is to digitalise corporate services, trust and fund administrators, helping firms to offer the services millennials demand and offer their customers the tools they need for the millennial age.