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Younger and Experienced Investors Receptive to Actively Managed Products

When viewing investors across life stages and assets, there is a common belief that actively managed investment strategies are too expensive. However, new research shows that younger investors and experienced investors are signaling a receptivity to actively managed products based on their performance value.

Two new reports by Hearts & Wallets – “Investment Products & Asset Managers” and “Active vs. Passive and Impact Investing” – contend that these two often overlooked consumer groups and their views on actively managed products promise to “shake up this existing orthodoxy” of asset allocation and passive investing.

Drawn from more than 40,000 U.S. households in Hearts & Wallets’ Investor Quantitative Database™ (IQDB), the reports provide insight into financial product and asset allocation trends, and examine consumer behaviors around active and passive management as well as impact investing.

Product vs. Asset Awareness

According to the research, the emphasis of asset allocation over branded mutual funds has caused consumer awareness of investment products to decline, while awareness of asset allocation has increased. Moreover, consumer ability to name the investment products they own is low – and is even declining among “Late Career” and affluent consumers.

In 2011, for example, 80% of households with assets were able to say what investment products they own, but by 2015, only 65% were able to do so. In contrast, 82% of consumers can answer questions about their asset allocation, the report notes.

This dynamic, however, appears to be changing among young consumers. In 2017, 83% of “Emerging” (ages 21 to 27) and 80% of “Early Career” (ages 28 to 39) households can name the investment products they own, up from 62% and 65%, respectively, in 2014.

Younger investors are also more open to putting more money in active funds, with 25% expressing interest. Moreover, experience has a bigger impact on investing attitudes than assets do, according to the reports. Nearly one third of experienced investors strongly believe that active management is more effective than indexing in limiting downside risk and can provide better returns.

The report suggests that younger consumers “hold the key” to the next generation of managed products, as 40% prefer packaged products to assembling component investments, the highest of any life stage.

“Most mutual fund companies continue to want to target richer, older consumers, [but they] prefer to assemble components, either with an advisor or by themselves,” explains Laura Varas, CEO and founder of Hearts & Wallets. “They’re just not looking for packaged products, so targeting them is like selling ice skates to people who live in the tropics.”

The authors recommend that product managers should “find inspiration” in robo-advisors, noting that there is a great opportunity to reinvent managed products for younger consumers who already have higher brand awareness.

High Cash, Impact Investing

Meanwhile, a larger percentage of younger investors also have large concentrations of cash, giving them the immediate ability to act on their preferences, the report emphasizes. The average Early Career household now has 57% in cash and cash concentrations are also increasing among Mid-Career and Late Career households.

The report notes that this over-allocation to cash may jeopardize younger investors’ ability to meet their long-term goals and after being exposed to two downturns, they may need extra encouragement to get into the market.

“Packaged products are a great way to scale advice, especially for younger consumers who are receptive to this structure,” explains Amber Katris of Hearts & Wallets. Noting that younger consumers are looking for ways to build wealth, Katris adds that, “They currently have fewer equity funds and more bond funds and need to understand the long-term implications of this asset allocation.”

Younger investors are also the most receptive to impact investing, as long as they perform well. The findings show that 70% of Millennials include impact investing as one of their investment goals, with education as the impact area that motivates younger investors the most. The report further explains that aspirations for impact investing are high across asset levels and life stages. Yet 37% who want “to invest for a positive, social and/or environmental impact” do not necessarily have a particular cause in mind.