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A Client Divergence in Wealth Management Exposed

Preferences and priorities of investors under 40 are evolving faster. Wealth managers must pick up their pace, according to a new report.

It's no secret or surprise that younger investors are different than older ones. But their preferences and priorities are evolving at a faster pace than financial advisors might realize, and they aren’t transforming into investors akin to those of older generations. For those reasons, wealth managers need to accelerate their own rate of change.

This is especially the case for investors under age 40, according to J.D. Power’s 2021 U.S. Full-Service Investor Satisfaction Study, published Thursday.

“Not only has the pandemic significantly accelerated their shift to more digital engagement, but emerging issues like ESG are also a major priority for them that isn’t seen as much yet among Boomers,” Mike Foy, senior director of Wealth Intelligence at J.D. Power, said in a statement about the report. 

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“Wealth management providers are making a mistake if they assume that the emerging affluent investors will simply evolve into Boomers over time. Firms with the ability to recognize and address these changing needs will define success through the great wealth transfer.”

The Millennial generation is expected to inherit more than $68 trillion in wealth, J.D. Power says, and the Covid-19 pandemic has accelerated and "exposed a stark divergence in the investment behavior of younger investors compared with their older counterparts.”

More than half, or 55%, of investors under age 40 with a financial advisor prefer to communicate with them using digital channels compared to just 26% of older investors. And younger clients are using those channels to communicate more: 71% increased the frequency of interaction with their wealth management firm during the pandemic. Interaction by phone was up 33%, website up 25%, email up 24% and mobile apps up 23%. Only 38% of investors older than 40 increased their level of engagement during the past year.

Younger investors are also more open to different fee models: 74% would prefer to pay for full-service wealth management via a one-time fee-for-service model and 73% said they preferred a subscription model. Meanwhile, just 42% of older investors support a fee-for-service model and 34% support a subscription model.

Younger investors were also twice as likely to make financial changes, according to J.D. Power. Last year, 58% of investors under age 40 made changes to their investment portfolios, including increasing or decreasing investments, stopped recurring contributions or made withdrawals. During the same period, just 28% of investors 40 and older made those changes.

Financial advisors are underestimating investor demand for ESG and J.D. Power’s report showed younger investors are factoring ESG into how much money they give to their advisor. Among investors under age 40 who strongly agree their wealth manager is committed to ESG efforts, 52% said they plan to increase their investment with that firm. Only 24% of investors over 40 said the same. 

Young investors also remain skeptical of their wealth management firm’s dedication to ESG; 68% said they either have doubts about their firm’s commitment to ESG or don’t know about it. 

Michael Thrasher (@Mike_Thrasher) is a reporter at RIA Intel based in New York City.

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