How robo-advisors will affect the advisor marketplace remains to be seen — but new research offers insights into how the next generation of investors might respond.
The Hearts & Wallets study, “New Needs, New Competitors, New Solutions: Young Investors Speak, Revealing the Real Reasons for the ‘Robos’ Emergence & What to Do Next," assesses the robo phenomenon through the prism of workers aged 21 to 39, a market that represents 34.2 million households who make decisions on $2.1 trillion of investable assets.
While admittedly that pales in comparison to total U.S. investable assets of about $41 trillion, younger consumer preferences could have an outsized impact on financial services as firms race to respond to new trends.
The Hearts & Wallets study focuses on four leading new entrants, Wealthfront, Betterment, Personal Capital and LearnVest, and finds five key insights:
A Product and a Store
The researchers find that, despite a widespread belief that new entrants will affect traditional advisors, consumers see digital advice platforms like Betterment, Wealthfront and Personal Capital as both a product and “store” (retail financial provider; Hearts & Wallets defines them as investment products gone direct with an engaging storefront. LearnVest, recently acquired by Northwestern Mutual, is a motivational financial planning platform that respondents viewed as an entirely new category of support, according to the report.
Matching Platforms and Personalities
Accustomed to overwhelming choice in the information age, younger consumers rely much more on brand personality as a tool in selecting a firm that matches their own personality than other generations do. The study found a process of elimination helps consumers winnow their options to a select set of the best personality fits.
Laura Varas, Hearts & Wallets partner and co-founder, explains that “younger consumers have been weaned on complexity, and they are excellent comparison shoppers. It’s more fun to figure out if I’m the kind of person who uses Wealthfront than to sort through 7,000 mutual funds.”
Satisfying Unmet Needs
The report notes that younger consumers love that the robos tell them what they are getting and answer the “three screaming unmet needs” first identified by Hearts & Wallets in 2010:
- tell me what you do
- tell me how you earn money
- tell me how to evaluate you
Scratching New Itches
In addition to addressing basic needs, the Hearts & Wallets study notes that robos scratch new itches that consumers didn’t even recognize they had. The report uncovers new unmet needs in a framework exercise with financial actions grouped in categories under plan, support actions, aggregation and monitoring, and investment selection advice. Both male and female respondents agreed unanimously that they want several actions within the support and aggregation categories.
Surprisingly, two of today’s most common industry calls to action — identify goals and choose investments — provoke intense but mixed reactions, according to the report. Men generally prefer these actions. Women prefer help in newer support categories, like “motivate you to save more.”
‘Getting’ Gamification
“The new entrants use design as a competitive weapon,” Varas said. “App-like features draw the consumer in. To compete, traditional firms need to recognize younger consumers are connoisseurs of interface and design and build their offerings accordingly.”
Varas continued, “In some ways, the underlying approach of the new entrants to mixing and matching asset classes isn’t that different from traditional techniques. But a 2015 target date fund will only ask what year do you want to retire. And most people don’t even want to retire! Answering questions about what makes me tick as an investor or as a person transforms the investment selection experience, making it much more distinctive, fun, and personalizes the ultimate solution in meaningful ways.”
Varas notes that these platforms are “less a threat to the current businesses of traditional advisors, who for the most part have happily ignored young and middle-aged investors to focus on Baby Boomers. Instead, the new entrants are a substitute for plain vanilla investment products. They’re so much more exciting than a single asset class mutual fund or target-date funds structured around an event that younger investors don’t even think is going to happen.”
