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Is the Time Ripe for Advisors to Court Young Investors?

Many financial advisors are skeptical about serving young investors because they don't think they can afford advice or be served profitably in the short term, but new research suggests that — contrary to stereotypes — young investors can be attractive clients for wealth management firms.

In fact, the research from Fidelity Investments shows that nearly two-thirds (63%) of so-called “Gen YZ” investors — defined as those born between 1981 and 2012—believe that working with an advisor is key to achieving financial success and 60% feel a heightened need to engage a financial advisor this year due to economic uncertainty. 

What’s more, with 57% of existing client assets expected to pass to the next generation by 2045, this presents a significant growth opportunity for financial advisors. This also presents a potential vulnerability for those who don’t prioritize engaging with this group, as firms with a younger client base are growing nearly 10 times faster than their peers, Fidelity notes. 

“Our industry is approaching a transfer of wealth tipping point as younger investors look for an advice model that is different from what worked for their parents and grandparents,” explains Anand Sekhar, vice president of Practice Management & Consulting at Fidelity Institutional. “Advisors who don’t adapt to this shift also risk the overall longevity and valuation of their firm.”

The Business Imperative 

Having already lived through the disruptions of the Great Recession and COVID-19 pandemic, young investors appear motivated to improve their financial standing.  

Consider, for example, that in the third quarter of 2022, young investors between the ages of 18-35 opened nearly half (45%) of all new Fidelity retail accounts, which, the firm notes, was the highest percentage from this group since the first quarter of 2021.

Yet, despite young investors’ interest in their finances, advisors are not capitalizing on opportunities to engage them. According to the firm’s research, 85% of young investors would like some form of behavioral coaching from their advisors to help them avoid making mistakes or making rash decisions, but advisors apparently have reached out to only 13% of clients’ children and only one in five advisors have an asset-weighted client age under 60 years old.

Meanwhile, a firm’s overall health and valuation can also be put at risk by not engaging younger investors. According to Fidelity’s research, organic growth is negatively impacted as a firm’s set of clients ages, and potential buyers are likely to pay a premium for firms with younger client bases. 

Firms with an asset-weighted client age less than 62 had an average organic growth rate of 10% compared to a 1% average organic growth rate for firms with an asset-weighted client age of 69 or older. 

Moreover, the number of assets at risk of wealth transfer also increases with the average age of a firm’s clients. As much as 78% of assets are estimated to be “at risk” for firms with an average asset-weighted age of 69 or older, versus just 37% of assets for those with an asset-weighted client age of less than 62, according to the analysis. 

A Redefined Advice Model

So what’s an advisor to do? With Generations Y (also known as Millennials) and Z following nontraditional life paths and currently more focused on creating financial independence than older generations, this increases the importance of offering product choices, education and support that meet their changing interests, Fidelity suggests.    

To that end, roughly 67% of young investors expect their advisor to provide services beyond financial advice and investment management. And while 63% agree that advisors should play an important role in providing access to sophisticated investment strategies like alternatives, more than half (55%) of young investors believe that aligning investments to their values is more important than getting maximum returns.

However, this doesn’t mean firms can take a “one-size-fits-all” approach to young investors. “Advisors have an opportunity to be deliberate about the attributes they seek in a younger client, whether it be profession, savings rate, risk tolerance, or other traits,” emphasizes Sekhar. “This will help establish the right product and service offerings, pricing and operating models.”

“If I could offer advisors one key takeaway, it’s to not let the fear of short-term profitability overshadow the long-term value of engaging this client segment,” he adds. “Younger investors are actively seeking financial advice, and if you cannot meet their diverse and unique needs today, they will find someone who can—and take the transfer of wealth with them.”

Fidelity’s 2022 Investor Insights Study was conducted from Aug. 8–Sept. 2, 2022, surveying a total of 2,490 investors, including 673 millionaires and 1,520 investors with advisors. Respondents were screened for a minimum level of $50,000 in investable assets (excluding retirement assets and primary residence), with additional quotas by age and affluence levels. Findings are also based on a Fidelity analysis of 1,501 on-platform custody firms.