How can we educate the next generation of investors?

Over the next decade, a new generation of investors will begin to take centre stage as Generation Xers approach the middle of their working careers, and hit their peak earning years, while more millennials begin to enter the workforce.

With rising living costs, and university debts, many of these young people are facing far greater challenges in terms of personal finance than either their parents or grandparents’ generations. But some wealth managers believe we should be optimistic about their potential as investors, due to the world they have grown into.

‘[Young people] are actually a little bit better off than generations before,’ says Madalena Teixeira, senior portfolio manager at ASK Wealth Management. ‘They have less confidence in banks and the financial system, because the financial crisis happened when they were just finishing high school or university, so many of them realise how important it is to invest. And over the last ten years, they’ve seen that the market is always moving up, so for them, it’s difficult to perceive the idea of a market that loses money.’

Because we now live in a digital world, younger investors have access to more information than ever before, in terms of newsflows, indexes, and alternative portfolios, all at the click of an app. But many managers feel where they are lacking is in terms of knowledge of many of the fundamentals of investing, such as diversification and comprehension of the value of real assets in a world of instant gratification and quick fixes such as cryptocurrency.

‘Because metallic currency is not something which the younger generation use, they have a difficulty to perceive the intrinsic value of long-term assets such as a house or commodities rather than synthetic investments,’ Teixeira says. ‘They just go with the newsflow, and hear that you can win 20% in one day on bitcoin, without realising that some assets can be tricky, and to preserve their capital they should diversify. They will see an equity that’s going up and down or a bond or ETF, but they don’t really understand the fundamentals behind it. Behind that performance is a company which produces and sells, and has dividends.’

Managers believe that it is even more crucial for the younger generations to gain an appreciation of long-term assets which can deliver value over a timeframe of years or decades, as they are more likely to live longer than their parents or grandparents as well as being less able to rely on pensions, and state assistance in later life. As a result, financial responsibilities are increasingly shifting to the individual rather than society.

‘One of the responsibilities of advisers is to help younger people understand the importance of not just dealing with all the competing financial priorities in the moment, such as getting on the property ladder or just getting by month by month, but visualising what life will be like in 50 years’ time, and why it’s so important to put money away early and leave it to compound and grow,’ says Martin Bamford, managing director of financial planner at Informed Choice.

‘Previous generations would have relied on a job for life, and a gold plated pension from their employer as well, but the changing economy and nature of the work force means that if we don’t take responsibility for our financial futures, no one else is going to look after us,’ says Bamford.

‘A lot of younger people don’t realise that shift has happened yet. They’ve seen their parents go through the workforce, and they think their retirement’s going to look quite similar. The reality is you’re going to be working later, more reliant on personal resources, and you’re probably going to be in poor health for more of your retirement, because you’ll be older. So it’s a very different retirement to our parents and grandparents, and that means you have to address it differently too.’

The increasing individual burden of financial responsibilities is easier to understand for younger people in countries around the world where there hasn’t traditionally been a large amount of state help. ‘While in the UK, people are used to being able to rely on the state, in the US, consumers have been responsible for their own retirement outcomes through thing like individual retirement accounts (IRAs), for a long time,’ says Gareth Johnson, head of digital channels and investment solutions at Brewin Dolphin.

But the generational shift in investors also poses different challenges for managers themselves, such as proving they are value for money in a world of ETFs and automated solutions. To try and engage with younger generations, many financial planners and wealth managers have invested heavily in digital services which offer greater accessibility, enabling clients to check portfolio value and performance on a 24/7 basis as well as enabling different means for them to be able to communicate and receive advice.

‘It’s increasingly hard for younger clients to take time out of their working week, and come see us in person, so we have to be flexible, and offer other options based on their preferences whether that’s phone calls, email, video calls,’ Bamford says.

‘Managers have to educate those clients that there’s things which computers can’t do, and that successful investing often comes down to whether you panic and pull your money out of the market at the wrong time. Having that human interaction, where you can say, “Trust our expertise, this is the right thing to do, so stick with it,” is key to getting the right returns in the long-term.’

Managers are also having to deal with new concerns from younger clients such as data security and privacy. ‘We’ve seen so many high profile data breaches from big organisations and social networks in recent years, it’s a good fear to have because it happens,’ Bamford says. ‘I don’t think any financial adviser firm, or any investment manager could ever guarantee that data could never be hacked, because if Russia decides to have a go at our computer systems, I’m not completely sure we have the in-house resources of a rogue nation state. But it’s a case of telling clients that we have all the right measures in place, processes, agreements, the latest software, and investing in IT security. And if things do go wrong in future, being very open and transparent about it, and making sure you reduce the risk of any harm.’