People used to see investing as being exclusive to the wealthy, the domain of bankers and hedge fund managers crunching numbers behind mahogany desks in corner offices. Aside from contributions to their 401(k)s, investing wasn’t prominent on average workers’ radars.
But that’s not the case anymore. Millennials especially see investing as a means toward a more secure future, and they’re keen on apps that simplify the process and make them money.
We’re witnessing the convergence of technology, social media and financial services—in short, complete disruption of the investing industry. We’ve already passed the critical juncture of acceptance, as evidenced by the storm of apps and funding portals that have launched in recent years. The marketplace is flooded with these products.
Millennial investors are really the targets for these services. This group is faster to adapt to new technology and fed up with traditional banking. A middle-aged, upper-middle-class guy from New York may be content with analog investing, but convenient digital options are the key to attracting a younger market.
Out With the Old? Yes, But Not So Fast
Apps and mobile services are the future of the financial industry, but we’ll see a period of contraction and failure before settling into the new era. The app world still has to navigate the regulatory environment, which is dramatically different than the consumerization of the web. There will likely be a high failure rate on the traditional side as well, as some members of the old guard get boxed out due to antiquated tech and customer acquisition strategies.
But don’t count the big banks out just yet. Although they’re struggling to regain ground and reputation among millennials, they’re not just going to hand over the industry to fintech companies. Right now, alternative and marketplace lenders such as Prosper and Lending Club provide much needed options for people locked out of the standard system.
As the banks see alternative finance companies receive huge valuations and gain market share, however, they’ll realize this isn’t a fad. At that point, it’s buy or build. The common approach will be a little bit of both.
Blurred Lines
The disruption occurring right now is so big that it necessitates collaboration between tech, finance and social media companies. Platforms like Facebook and Twitter have access to people, which translates into potential distribution for financial firms through the Jobs Act. Don’t be surprised to see these companies resembling one another more and more in the coming years.
This crossover has already begun in certain areas. NASDAQ purchased SecondMarket so it could tap into the talent and domain experience there. In acquisitions like this, multimillion-dollar finance outfits are buying proof of concept. They want the brain trust, marketing and millennial know-how that will turn them into half-billion-dollar businesses. LikeFolio mines social media for trends in publicly traded companies, giving investors insights into which companies are hot. Expect to see more offerings like this in the near future.
Such collaborative technology and partnerships will prove invaluable for financial advisors trying to woo millennial clients. As the industry continues to shift, here are a few key principles to keep in mind when marketing to—and advising—young clients.
1. Relevance
Big banks and traditional lenders are suffering because they didn’t anticipate this demographic’s unique needs. The mortgage agreements or auto loans of old don’t suit a generation that’s mired in student loan debt and disillusioned by the traditional American dream.
A Callahan Collection report on millennials recommended looking beyond credit scores to determine creditworthiness, providing financial education and assisting young borrowers with the buying process. The recommendations were made in reference to car loans, but they apply to all types of financing.
Because many of these particular borrowers have short credit or small employment histories, lenders need to pull in other data to assess their potential. Basing credit decisions on old underwriting models alone simply won’t work for this growing market segment. Offer millennial clients options that actually suit their lifestyles and goals.
2. Differentiation
You’re not the only one catering to this market, so you really need an angle to stand out. Present socially conscious millennials with investing products and other opportunities that align with their values.
Your clients don’t want to be caught off-guard when a friend says, “Hey, my broker brought me in on this awesome new startup that’s doing good in the community.” If you’re not finding the types of companies they want to invest in, you can be sure they’ll find some that will.
3. Alpha Capture
These early-stage, big-margin openings will appeal to young clients who aren’t afraid of taking on some risk. Look out for options in unregistered private securities that haven’t been compressed in the public market yet.
When you bring clients these opportunities early in the alpha capture cycle, they benefit from secondary liquidity gains that simply weren’t available two or three years ago. Again, it comes back to differentiating your offer. You’ll gain your clients’ trust if you constantly introduce them to unique, high-yield opportunities.
There will be some trial and error as the investment landscape reorients itself during the next few years. How and why people invest will change as more millennials enter the market and demand impact investing opportunities. There will be an unprecedented focus on app-based investing, and the advisors who can marry millennial values with financial expertise will be the big winners going forward.
Vincent Molinari is the co-founder and CEO of GATE Global Impact. He is also a managing partner at Constellation Fin Tech, and he consults with members of Congress and regulatory agencies on issues related to capital markets, early-stage companies and secondary market liquidity.
