Managing affluence across generations

Transcription

1 Wells Fargo Advantage Funds July 212 Managing affluence across generations The United States economic recession that began in December 27 and officially ended in June 29 1 has shown visible signs of improvement. Nevertheless, even affluent Americans (the wealthiest 1%) have adopted an I ll believe it when I see it state of mind. Nearly eight in 1 affluent Americans still believe that the United States is in a recession two-thirds of which see the recession continuing for at least another year. Indeed, the recession affected each generation of Americans in different ways. The Millennials (age 3 and under) have struggled to find jobs, the Generation Xers (age 31 to 46) have seen their home values plummet as they fall underwater on their mortgages, Baby Boomers (age 47 to 65) have been forced to continue working as a result of steep losses to their retirement accounts, while the Traditionalists (age 66 and older) have had to re-examine their budgets. In this report Millennials...2 Generation Xers...4 Baby Boomers...6 Traditionalists...8 The role of the financial advisor...1 For the wealthiest 1%, adapting to these changes caused a permanent shift in the way they feel, shop, and save. The notion that affluent consumers will simply revert back to the free-spending prerecession ways is no longer as likely as it once was. The recession s effect on how the top 1% handle their finances is different for each generation. As the United States emerges from this Great Recession, it is important for financial advisors to fully understand not only the financial stages of each generation but also the behaviors and feelings that drive the affluent to invest, save, and plan for their future and the future of their children. 1. National Bureau of Economic Research, Inc. (21). U.S. Business Cycle Expansions and Contractions. Retrieved from FOR INSTITUTIONAL INVESTOR USE ONLY NOT FOR USE WITH THE RETAIL PUBLIC

2 Millennials: Striving for self-sufficiency Nearly one-third of all affluent Millennials (32%) have been wealthy for essentially their entire lives, as compared with less than 1% of all other generations. This in and of itself implies that most have come into their money from an inheritance and are well adjusted to living with wealth. Many do not know a life without money, something that is unfathomable for most Americans. This has stark implications for the expectations these young people bring to bear in both the luxury marketplace and the financial world. If 32% of affluent Millennials have been wealthy for most, if not all, of their lives, then it is no surprise that a vast majority of this generation shows an interest in and passion for money and finances. Of the Millennials surveyed, 8% report that they are finding it more and more important to be selfsufficient in their finances, which is the highest among the four generations. I am finding it more and more important for me to be self-sufficient in my finances 8% 75% 75% 62% Millennials Generation Xers Baby Boomers Traditionalists The feeling of self-sufficiency can be explained in part by the reaction to the initial panic of the recession. For many of the top 1%, the pain of watching their retirement savings dwindle created the need to take matters into their own hands. Two-thirds (67%) of affluent Americans describe themselves as being self-sufficient, a feeling that has carried over into finances and investments For Millennials, the notion of being self-sufficient in finances comes with a caveat: They still have a need for someone to teach them about finances and investing in order to become self-sufficient. For Millennials though, this notion of being self-sufficient in finances comes with a caveat: They still have a need for someone to teach them about finances and investing in order to become self-sufficient. When given a list of 2 different financial information sources and asked who they rely on for financial advice, the top response for Millennials was none of these. In addition, one-third of all affluent Millennials do not know how their money is being invested, and although 63% agree that they are very familiar with all of the investments their household has, this is still significantly lower than each of the other three generations. I am very familiar with all of the investments my household has 63% 73% 86% 88% Millennials Generation Xers Baby Boomers Traditionalists 2

3 Currently invest in (selected responses) Millennials Generation Xers Baby Boomers Traditionalists Stock mutual funds 29% 52% 54% 61% Money markets 27% 34% 47% 63% Individual U.S. stocks 3% 31% 46% 58% Bond mutual funds 17% 23% 37% 52% Municipal bonds 9% 12% 24% 46% Individual international stocks 8% 17% 15% 2% Don t know 33% 28% 15% 12% Attached to this lack of knowledge about their investments is a desire to learn. More than half (56%) of Millennials are looking for new ways or methods of investing. Building self-sufficiency cannot be accomplished until an intimate knowledge of the financial industry is attained, and the Millennials know this. Building self-sufficiency cannot be accomplished until an intimate knowledge of the financial industry is attained, and the Millennials know this. Sixty-one percent of this generation report that they would like to know more about how to invest, instead of just receiving product information. The message Millennials are sending financial advisors is clear do not treat them as clients, treat them as pupils. They do not want to be told what to do; they want to be taught what to do with their money. Attracting and maintaining Millennial clients is dependent on adapting to this role as teacher. 3

4 Generation Xers: Relying on the family financial team Generation Xers generally share similar financial qualities with Millennials. They strive to be highly self-sufficient, they know something but not everything about their investments, and they express a fear of running out of money (48% Generation Xers, 47% Millennials). One of the key areas where they seem to differ is the role of family and friends. The financial planning circle for the Xers is much tighter than the Millennials, as the Xers seek more insights and input from the people around them. The financial planning circle for the Xers is much tighter than the Millennials, as the Xers seek more insights and input from the people around them. Whereas the Millennials show a heavy reliance on themselves for financial advice, the Xers place this reliance on friends and family. Nearly half (49%) of all Xers rely on spouses, relatives, or friends for financial advice. Not only does this exceed the other generations, it also exceeds the number of Xers who rely on advice from financial advisors (39%). For the 39% of Xers who use financial advisors, a vast majority are not looking far to find them. Initial contact with their current advisors most often (65%) comes through family or friends. The Xers are most comfortable with their money being in the proverbial hands of their loved ones. The centrality of the family also plays a role in the household financial planning for the Xers. Among those who are married, 53% of Xers say that family financial planning is a shared responsibility. Keeping track of the household finances is a two-person task, with both parties providing input and expertise when it comes to financial decision-making. Rely on for financial advice Millennials Generation Xers Baby Boomers Traditionalists Spouse/relatives/friends 35% 49% 39% 28% Financial advisor 28% 39% 48% 55% Family financial planning Millennials Generation Xers Baby Boomers Traditionalists Shared responsibility 47% 53% 49% 47% Sole/spouse responsibility 53% 47% 51% 53% 4

5 Interestingly, the idea of the family as financial planners extends to their children as well. Seventy-four percent of Xers are talking about money with their children, and 7% admit that they make it a point to discuss finances with their children. The Xers clearly believe that educating children about financial planning is important and needs to begin early. As Generation X draws its circle of family and friends closer, the opening for financial advisors appears to be dwindling. The percentage of Xers currently looking for a new financial advisor has declined steadily since 21. I am currently looking for a new financial advisor 24% 18% 12% A key hurdle for financial advisors in acquiring new Generation X clients is their belief that finding a new advisor is a difficult process. A key hurdle for financial advisors in acquiring new Generation X clients is their belief that finding a new advisor is a difficult process. Twenty-seven percent of Xers agree that they would look into finding a new financial service advisor, but it is too much of a hassle to do so right now. This impression only bolsters the decision of affluent Xers to seek advice from friends and family, as they represent a quick and easy way to obtain financial insights. Financial advisors need to approach Generation Xers with the understanding that they are highly influenced by friends and family, who are essentially a safety net to fall back on when things get tough. To counter this, advisors must build trust with their potential clients while assuring the Xers that there is an understanding that financial decisions are a team-based effort and that it will not be a painful process. 5

6 Baby Boomers: Getting back in the game Asking a generation to endure the monetary loss from the steep stock market dives in 28 and 29 would normally be enough to cripple a person s state of mind. But Baby Boomers also had to endure the emotional loss connected with putting off their future plans, as 25% of affluent Boomers admit that the economy has forced them to delay their expected retirement date. Years of saving, investing, and planning had left Boomers with a target date for beginning the next stage in their lives, and now that date has been pushed back by six years, on average. Percentage of delayed expected retirement date due to recent economic conditions 7% 14% 25% 1% Millennials Generation Xers Baby Boomers Traditionalists It comes as no surprise then that Boomers will do anything they can to shorten that time horizon back to its original date. Over the past three years, notable shifts have occurred to rebuild retirement accounts, beginning with the elimination of debt. Seventy-seven percent of Boomers report that they have zero credit card debt, up from 69% in 21. In turn, 37% have completely paid off their houses and are now living mortgage-free. Percentage of Boomers with zero credit card debt 69% 72% 77% Percentage of Boomers who have paid off house 27% 35% 37% Although the amount of money that Boomers save each month has remained steady at 22% over the past few years, the percentage that are putting more money away for retirement has increased. Thirty-two percent of Boomers say that they are putting away more money for retirement than they were a year ago, up from 25% in 21. A slight increase in aggressive investment strategies is also evident, as 51% see the stock market as an opportunity. Percentage that have gotten more aggressive with investing strategy in the past year 6% 9% 12% With 4% of affluent Boomers reporting that one of their short-term goals is to become more financially stable, it is not surprising that aggressive actions are being taken to prepare for retirement. It is important to point out that Boomers have not limited their vision just to the near future they have also been targeting the long-term future. The number of Baby Boomers agreeing that they do not have an adequate wealth transfer plan in place has dropped from 41% in 21 and 211 to 32% in 212. The realization that preparations need to be made to pass on wealth is in the forefront of 6

7 their minds, even for those who have not set up a transfer plan yet. Forty-five percent agree that they would like to learn more about putting a proper estate/wealth transfer plan in place, up from 39% in 29. The importance of the financial advisor cannot be understated for the Boomer generation. Tasked with preparing for both their retirement and the safe transfer of money and assets to their heirs, it is no surprise that nearly half of all affluent Boomers (48%) are employing the services of a financial advisor. Interestingly though, the qualities Boomers are looking for in an advisor have shifted since 29, away from experience and track record and toward knowledge and communication. Knowledgeable about the investment markets is the #1 quality sought in an advisor, leapfrogging proven track record, which has seen a 6% decline over the time period. Perhaps most telling about the recession s impact on advisors is the increased importance placed on communication traits. In 29, someone I trust to tell me like it is and responsive to my questions and requests barely registered on the list of important qualities. Three years later, they are both in the top five, each with a double-digit increase in that time period (17% and 12%, respectively). Baby Boomers have shifted away from the feeling that their advisors need to know what to do in tough economic times. Perhaps they have come to the realization that this recession is new ground for most advisors and finding one with past experience is nearly impossible. Instead, Boomers seek assistance from someone with the knowledge and communication skills to walk them through the present and future economic landscape. Most important qualities in a financial advisor among Baby Boomers (% change from 29) Knowledgeable about investment markets Proven track record Someone I trust to tell me like it is Responsive to my questions and requests Knows what to do in current environment Strong experience Explains things clearly Looks at complete financial picture Someone I like/can relate to Lower fees 39% (+8) 37% (-6) 31% (+17) 27% (+12) 26% (-5) 22% (-3) 21% (-4) 19% (+8) 17% (-8) 14% (-3) 7

8 Traditionalists: Weathering the storm and relaxing The oldest generation of Americans, the Traditionalists, are true masters of wealth. They allow their money to define who they are, but they do not let it control their lives. The Traditionalists are the generation most likely to describe themselves as financially secure (84%), savers (6%), and investors (59%). By contrast, only 33% say they are passionate about finances and investing, and only 15% say they are passionate about money in general. The mastery of wealth was never more evident than in the past few years as the Traditionalists adjusted their lifestyle to accommodate the slow economy. The mastery of wealth was never more evident than in the past few years as the Traditionalists adjusted their lifestyles to accommodate the slow economy. Now, as the economy begins to turn itself around, the Traditionalists find themselves easing the budgetary restrictions they placed upon themselves. In 29, 67% of affluent Traditionalists agreed that they were looking closely at every spending category to see where they could save. Three years later, this number has declined more than 2% and is now at 45% I am looking closely at every spending category to see where I can save 67% 56% 47% 45% Millennials Generation Xers Baby Boomers Traditionalists This is not to say that budgeting has evaporated completely from the landscape. Forty-five percent of Traditionalists report that they are still actively managing a budget in their household. In fact, it is not so much the notion that they are maintaining a budget that drives their feelings about finances; it is the fact that they show an enormous amount of pride in creating financial harmony within their household. Eighty-seven percent of Traditionalists agree that they have done a good job of making their household more fiscally responsible. These positive feelings have driven Traditionalists to relax their budgets enough to continue enjoying the lifestyle they were leading before the recession began. 8

9 Along with getting their everyday household budgets in order, Traditionalists have worked diligently to prepare for the eventual transfer of wealth to their heirs. Only 16% say they do not have an adequate wealth transfer plan in place, down from 25% in 29. In addition, only 29% say they would like to learn more about putting a wealth transfer plan in place. The groundwork is in place for the transfer of wealth, and the role of the financial advisor in this process is that of curator. For the most part, affluent Traditionalists show little concern about their finances. They have reached the point where they understand they will not run out of money, and they know that saving for their future is no longer a priority. Interest in learning about investing is also not a priority for this group, as they would prefer to spend their days enjoying retirement rather than worrying about new methods of investing. Their wealth is in the hands of the financial advisor who will work to maintain it and prepare to pass it on to future generations I need to know more about how to invest, instead of receiving more product information 61% 59% 45% 28% Millennials Generation Xers Baby Boomers Traditionalists In the eye of the Traditionalist, the financial advisor must act as the bridge between generations. Sixty percent of Traditionalists want their heirs to be stewards of the family wealth and to manage it and pass it on for future generations. Transferring wealth is not as simple as handing the money or assets over and walking away, and the Traditionalists are extremely cognizant of this; this is where the role of the financial advisor can come into play. I am looking for new ways/methods of investing % 46% 42% 27% Millennials Generation Xers Baby Boomers Traditionalists 9

10 The role of the financial advisor In the emergence of a postrecession economy, it is critical to understand the generational differences that drive the choices of affluent and wealthy investors. Although nearly one-third of all Millennials have grown up with wealth, they need and desire guidance and tutoring from financial advisors so they can be self-sufficient as they look toward their futures. Generation Xers, on the other hand, have retreated into a close-knit circle of family and friends as they make financial decisions; this close circle is an important element of every aspect of their lives, so the financial advisor must build trust with Gen Xers. Baby Boomers who were once financially stable now seek ways to regain the stability that faltered as their plans changed throughout the recession. They feel that they must make up for lost time, and they rely upon their established relationships with knowledgeable and competent financial advisors in order to do so. in enjoying their wealth than finding new ways to build it. They seek out financial advisors who can ensure that their wealth will transfer to the next generation, continuing the cycle. As the United States emerges from its recession, the groundwork has been laid for the financial advisor to make these visions possible. As the United States emerges from its recession, the groundwork has been laid for the financial advisor to make these visions possible. The Traditionalists proved themselves to be masters of their wealth as they were able to ride out the recession by making smart choices. Now that things are improving, they are more interested 1

11 About the Survey of Affluence & Wealth in America The industry-leading Survey of Affluence & Wealth in America, produced by Harrison Group, details the lives and lifestyles of Americans with at least $1, in discretionary income. Collectively, these households generally reflect the top 1% of the American financial elite, representing, by our estimates, 12 million households in 212 (this is 5, households more than we estimated in 211). The sampling plan ensures adequate representation of loftier economic strata as well, including those in the top 1% (those with household incomes of at least $45,). In addition, we can reliably profile individuals in the top.6%, as well as those with more than $5 million in total assets. 11

12 Strength. Expertise. Partnership. Wells Fargo Advantage Funds skillfully guides institutions, financial advisors, and individuals through the investment terrain to help them reach their financial objectives. Everything we do on behalf of our investors is built on the standards of integrity and service established by our parent company, Wells Fargo & Company; the expertise of our independent investment teams and rigorous ongoing investment review; and the collaborative level of superior service that is our trademark. More information about Wells Fargo Advantage Funds is available free upon request. To obtain literature, please write, , or call: Wells Fargo Advantage Funds P.O. Box 8266 Boston, MA Institutional investment professionals: Retail investment professionals: Website: wellsfargoadvantagefunds.com The views expressed are as of March 212 and are those of Harrison Group, a YouGov Company. The information and statistics in this report have been obtained from sources we believe to be reliable but are not guaranteed by us to be accurate or complete. The views and any forward-looking statements are subject to change at any time. Wells Fargo Funds Management, LLC, disclaims any obligation to publicly update or revise any views expressed. Source: 212 Survey of Affluence & Wealth in America, Harrison Group, a YouGov Company, and American Express Publishing Wells Fargo Funds Management, LLC, a wholly owned subsidiary of Wells Fargo & Company, provides investment advisory and administrative services for Wells Fargo Advantage Funds. Other affiliates of Wells Fargo & Company provide subadvisory and other services for the funds. The funds are distributed by Wells Fargo Funds Distributor, LLC, Member FINRA/SIPC, an affiliate of Wells Fargo & Company FOR INSTITUTIONAL INVESTOR USE ONLY NOT FOR USE WITH THE RETAIL PUBLIC 212 Wells Fargo Funds Management, LLC. All rights reserved. FAWP5 7-12