Updated: Jan 29
We're So Special
I'm a Millennial.
I love how Facebook knows exactly what posts I want to see, and how Amazon and eBay offer me incredibly relevant products I didn't even know I needed. I always change the TV channel when commercials start, because I can't afford the newest BMW model at the moment (I'm a Millennial, remember?), and I definitely don't need the newest, most absorbent female hygiene products. When it comes down to it, I just love feeling special. And I'm not alone.
Personalization In The Digital Era
Personalization has become a key factor in providing customers with a product or an experience. This is well demonstrated in the e-commerce and content markets, where buzzwords like "Big Data", "Machine Learning" and "AI" have long been the norm. These technologies are crucial in becoming (and remaining) a big player, while competing effectively for the attention (and wallets) of customers.
Indeed, technology has ignited a new era of marketing, which is designed to segment customers on a practically individual level. Some industries, however, have yet to realize the full potential of personalization, despite the growing need and robust capabilities to accommodate this approach. The financial industry is one of them - especially when it comes to how we invest our savings.
Investing Is Important
Somewhat surprisingly, Millennials are managing to put aside more savings than their previous generations ever did. This would be fantastic, if it weren't for where these savings are actually invested. The majority of Millennial savings is held in cash, with over $300B (in the US alone). According to current estimates, this amount is expected to exceed $2T by 2025.
Given the current low interest rate, this is a poor investment for young people who have 25-40 years of saving ahead of them. Only 15% of Millennial savings are invested in equities. For those who understand the power of compound interest, it should be clear that this is an
unfortunate mistake, which will come back to haunt Millennials when they retire.
Investing is (perceived as) complex
Having an engineering background, my financial and investing skills were almost non-existent until a few years ago. The change started while I was studying for my MBA. During a Finance 101 class, it dawned upon me that I had no idea what to do with my (small amount of) savings, or what options were even open to me. All I knew was that investing was extremely complicated and should only be done by experts. In fact, most of my friends, and more broadly, most Millennials, believe this to be the case. It's not. But whether it is or isn't, it's perceived as being very complex.
It's no wonder, then, that Millennials would rather have a root canal than visit their banker. They don't believe that financial institutions (FIs) have their best interests at heart, and they are offered generic products that don't necessarily match their needs.
Financial Institutions Are Incumbent
When it comes to retail investing, FIs have essentially been offering the same product for decades. The minority of Millennials who actually approach FIs go through a basic risk assessment process, and then "fall into" one of 5-10 generic portfolios. Needless to say, that with little or no financial knowledge, these portfolios are effectively "black boxes". The underlying instruments (usually ETFs, stocks and bonds) are as transparent and understandable to most of us as quantum mechanics would have been to the Incas. Furthermore, when comparing the offerings of several FIs, one quickly realizes that there is effectively no difference between the various products, leaving us with the burning question of "Why should I go with you?".
A Hint Of Disruption
The enormous, untapped potential of Millennial investing has not gone unnoticed. Almost 10 years ago, B2C Robo-Advisors such as Betterment and Wealthfront came into play. The concept is simple: digital platforms that provide financial planning services via an automated, algorithm-driven process with little to no human intervention. These traits enable user-friendly, low-cost investment platforms that can potentially reach the masses.
But they haven't. The cost of client acquisition remains high (with estimates reaching $1,000). Importantly, due to the low-fee structures of robo-advisors, the margins just don't support profitability. Recent years have shown robo-advisors shifting from B2C to B2B, as they are purchased or white-labeled by FIs, enabling FIs to efficiently streamline their retail investing operations.
But why has the cost of acquisition remained so high? Let's talk about personalization.
Stepping Outside Of The Financial Box
When all is said and done, robo-advisors offer the same generic, "black box" products that were offered by human advisors. Whilst these are served in a beautiful digital wrapper, that simply isn't enough to overcome the lack of financial knowledge that makes Millennials head for their dentist rather than invest their savings.
The solution has to do with the "softer" sides of finance. Time and again, studies have shown that human beings are not rational. Contrary to popular belief, we don't necessarily make financial decisions based solely on risk and return. We yearn for understanding and familiarity in all aspects of life, and investing is no different.
Let's look at a few examples:
In recent years, we have witnessed a rise in Impact Investing. Impact investing lets individuals invest in companies which they believe share their social or environmental values (for example, "green planet" or "fair labor" companies). This is often in lieu of financial return.
The PureFunds ISE Cyber Security ETF (HACK), a concentrated mix of anti-hacker software companies, crossed the $1B threshold only seven months after its debut. Just to put this into perspective - Betterment, the largest robo-advisor, manages ~$10B (as of October 2017). Does this mean that cyber security is the best investment to make? Perhaps or perhaps not, but people are familiar with the concept, and were quick to invest their savings in the field.
Robinhood, the free trading platform, showed that the results of the last US presidential election could have been predicted with 86% accuracy, by analyzing the equities that their 1M customers invested in. For example, Trump supporters tended to buy gun stocks, whereas Clinton supporters bought Apple or Facebook stocks. It is clear that political affiliation has a fundamental influence on the way people invest their savings.
All this demonstrates that there are greater forces at work than financial considerations when deciding if and where to invest our savings, and that some of these forces are not yet fully understood. Isn't it time to crack the code of what makes Millennials invest?
Personalization is the future of retail investing. Tailoring every potential client's portfolio to their unique needs, familiarity and background, is highly likely to make the difference between onboarding them as a client or not. Offering generic products that are difficult to understand simply doesn't work. If financial institutions wish to remain relevant and differentiate themselves (especially with Millennials), they need to realize this and offer a more personalized experience to their clients. This will create a win-win situation where financial institutions gain trust and increase assets, while securing their clients' financial futures and keeping them away from dentists.
I am CPO and Co-Founder of Cred. Cred is a disruptive WealthTech startup aimed at enabling financial advisors and institutions to truly personalize each of their retail clients' portfolios, based on their unique backgrounds, financial situations and preferences. This is the way investing will work in our generation, and we’re excited to be pioneers on this journey. Feel free to contact me at firstname.lastname@example.org, and find us on Facebook and LinkedIn!