MARKET INSIGHTS MILLENNIALS TO MILLIONAIRES. FIS Wealth Management Series Perspectives for Community and Regional Banks

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1 MILLENNIALS TO MILLIONAIRES FIS Wealth Management Series Perspectives for Community and Regional Banks November 2015

2 The Next Generation of Wealth Management Millennial wealth: What is it? Why is it important now, and why does it continue to receive a central spot on the agendas of wealth management executives as they discuss and decide on the future of their banks? The millennial customer segment creates an interesting conundrum for community and regional banks. As the largest of all customer segments in the United States, over time the millennials will certainly accumulate significant wealth. Presently, at just about $1 trillion in assets under management, millennials are not a lot to talk about, but when with the $30 trillion in assets in the United States that baby boomers will transfer to millennials over the next 30 years, it becomes a whole new conversation. 1 As You Sow, So Shall You Reap Hopefully? Millennials pose a challenge for community and regional banks because, quite simply, many banks have trouble engaging them. As all banks recognize, millennials both the age group and the mindset like to engage digitally and by mobile, which are new channels for many smaller banks. But trickier still may be convincing executive management to invest in developing a costly new digital approach when realizing significant profits remains the abstract future predicted by optimistic strategists. In this way, millennials represent the epitome of a strategy that is based on customer lifetime value. However, if banks don t soon figure out how to communicate with and court this demographic, those banks could miss profiting from the biggest wealth transfer in history. 2

3 How Millennials Think The millennial generation population exceeds 80 million and represents more than one quarter of the nation s population. 2 Amazingly, of the three largest adult generations, millennials are most likely to say they are conservative with their money: 43 percent, versus 31 percent for boomers and 27 percent for Gen X. 3 Also interesting is that 40 percent of millennials say they are committed to passing wealth along to their families, which suggests that millennials may be the most serious investors of all generations. 4 Millennials have witnessed an array of boom and bust cycles. Dot-com bubble bursts, a mortgage crisis, stock market crashes and multiple foreign market meltdowns have made millennial investors leery of cheery advisors promising long-term gains. Reversing the Tide Millennials crave financial education. Forty-four percent say they are extremely interested in learning more about investing, which is more than both boomers and Gen X 5. Most millennials see no value in traditional advisor relationships and expect a simplified and efficient experience when dealing with their money. This generation scoffs at the idea of not getting a second opinion after receiving advice from a wealth advisor, and many are more comfortable with online communities, where investors can interact with each other and an array of financial management resources. Historically, 66 percent of children fire their parent s financial adviser after they receive their inheritance. If banks don t engage with millennials now, this percentage is predicted to grow to more than 90 percent. 6 As millennials mature and gain assets, incumbent wealth management practices will scramble to develop relationships with this 3

4 population. If banks don t reverse this tide, millennial money will naturally flow away from traditional institutions and toward service providers that have invested in attracting and retaining this generation. Can banks avoid this perfect storm? The Build, Buy, Borrow Cycle Community and regional banks must become better at talking to millennials, and digital services will be critical, too. But what options to banks have? How can smaller banks compete and collaborate in wealth s future landscape? Capco Managing Principal, Phil Kerkel has a unique view. I see it as a build, buy, borrow cycle, explains Kerkel. Right now there are well-funded tech disrupters building new platforms that are at the forefront of incorporating metadata, extreme algorithms and machine learning to deliver a polished digital wealth management advisor experience. That s robo-advising. But scale is a problem for startups. Kerkel s view is once these disrupters start to amass enough assets under management to be a nuisance to the incumbents, larger companies will buy them and embed their technology into proprietary systems. At some point, when all companies can have access to the same algorithmic tools, Kerkel envisions that the whole service can be outsourced and utilized at a much-reduced expense. Using a utility model, technology providers will be able to offer these services at lower costs as they build scale. Kerkel believes that this is a technology evolution we have seen in other aspects of financial services. The key here is to consistently understand and use emerging technology solutions and models to deliver services that will keep your distribution channels healthy and growing. 4

5 Talking to an Advisor or an Algorithm? As it relates to millennials, Kerkel maintains, The questions millennials are asking are: Why do I need an advisor, and what can they offer me that I can t access on my own? But I do actually see a continued need for the advisor role in the future. Think of it this way: As consumers we have all the information necessary via the Internet to learn how to build a house. But do we have the experience, the expertise and, most importantly, the time to build our own homes? Of course not. Nearly all of us would rather pay a fair and transparent price to a builder so we have the time to pursue the career of our choosing. For most consumers, it s the same with wealth management. Kerkel believes, People are willing to pay a fee for a certain return and for assurance that it is someone else s day job to watch their money. We saw the same thing with the unbundling and automation that lead to e-trading. People felt freed, empowered and vindicated. But then many consumers got confused, lost interest and ended up getting burned when stock markets dropped. There is still a role for the advisor. But who or what will fill the advisor role of the future? New frontiers in analytics and artificial intelligence mean that a majority maybe someday all of the activities performed by traditional advisors can be performed by computers, in an eerily human way. Even if the fact remains that people still want advisors, some industry futurists see a time when advisors will be algorithms wrapped in engaging digital skins. Closing the Great Divide Whether this aggressive future view of algorithms supplanting advisors fully comes to pass remains to be seen. But we can safely assume that technology innovation will continue to dramatically change the wealth management business. We also can assume that some constants will remain. For millennials, personal and tailored attention, whether delivered by a machine or a human, will be critical. And to remain competitive, bank must also utilize their distribution capabilities to their fullest potential. For community and regional banks, the strategic planning effort to nurture millennials to become millionaires should include the following: Understand the millennial mindset and build relationships Engage them with digital services and provide education to build trust, gain wallet share and become positioned to capture the generational wealth transfer. Capitalize on the full suite of distribution and service advantages that banks hold over the competition Banks can nurture millennial consumers as they grow and gain wealth by providing advisory services as well as retail banking, mortgage and small business services all in a local, community context. Focus on the front office Retain skilled advisor staff and seek to bring younger advisors onboard. Keep track of technology innovation: the aggregators, providers of personal financial management tools and robo-advisors Work with emerging fintech startups, traditional wealth management technologists and informed consultancies that are closely following industry trends. Seek opportunities to partner, collaborate and learn, because relatively soon these services will become mainstream. Costs will drop and accessibility will expand. 5

6 Learn More For additional information on this topic, please contact our experts. Phil Kerkel Managing Principal Wealth Management Practice Capco T: Jeff Bloedorn Vice President, Strategy and Business Development Wealth Outsourcing Solutions FIS T: About FIS FIS is a global leader in financial services technology, with a focus on retail and institutional banking, payments, asset and wealth management, risk and compliance, consulting and outsourcing solutions. Through the depth and breadth of our solutions portfolio, global capabilities and domain expertise, FIS serves more than 20,000 clients in over 130 countries. Headquartered in Jacksonville, Florida, FIS employs more than 55,000 people worldwide and holds leadership positions in payment processing, financial software and banking solutions. Providing software, services and outsourcing of the technology that empowers the financial world, FIS is a Fortune 500 company and is a member of Standard & Poor s 500 Index. For more information about FIS, visit Endnotes 1 Accenture, The Greater wealth transfer: Capitalizing on the intergenerational shift in wealth, 2015, 2 United States Census Bureau, Millennials Outnumber Baby Boomers and Are Far More Diverse, June 25, Accenture, The Greater wealth transfer: Capitalizing on the intergenerational shift in wealth, 2015, 4 Accenture, Millennial Investors More Conservative, Less Trusting of Financial Advisors than Baby Boomers and Gen Xers, According to Accenture Survey, February 6, 2013, investors-moreconservative-less-trusting-of-financial-advisors-than-b-by-boomers-and-gen-xers-according-to- accenture-survey.htm. 5 Ibid. 6 Ernst & Young, Global wealth and asset management industry outlook, 2014, FIS and/or its subsidiaries. All Rights Reserved.