Follow The [Future] Money

We all know young consumers are pushing for businesses to serve a social good, flexing their purchasing power with things like buycotts, but what happens when those young consumers grow into investors?

Keep in mind, millennials are on the receiving end of more than $30 trillion of inherited wealth from baby boomers. That, and the fact millennials are by far the biggest proponents of the ‘profit with purpose’ ethos- from shopping to investing. This enormous transfer of wealth, paired with acutely different investment styles, is bound to bring big change to the markets. Still, we find the majority of financial advisors showing little effort to meet new demands.

So, What’s the Big Deal? Financial advisors are already facing several uphill battles today; untrusting clients, decreasing demand, ever-growing red tape (DOL), market volatility and corrections, and the unbeatable low fees of robo-advisors. Such struggles have kept advisors focused on setting strict minimums, with a majority turning away clients with less than $250,000 in assets to ensure lucrative fees and commissions. Setting higher minimums have naturally written off the vast majority of millennials, thus advisors remain unmotivated to appeal to new investors’ demands. Big mistake.

There are over 75 million millennials out there, most of whom are rigorous savers (i.e. long-term investors) and highly skeptical of the Wall Street "suits." Keep in mind, those millennials are the beneficiaries of the older generations’ wealth – the same wealth that is currently keeping most advisors in business.

Think About It: Millennials have already found alternatives to their parents’ brokers, advisors, and planners. The lower fees and minimums, greater sense of control and constant access of apps like RobinHood, Mint, Acorns, and Wealthfront have younger generations hooked. How could advisors possibly compete?

Start by acknowledging the next wave of investors are different and then commit to taking action. Those millennials open to using an advisor want someone who shares, or at least understands, their values. Implementing SRI strategies across your portfolios could be a saving grace. Here are the basics...

Socially Responsible Investing (SRI): Investing in companies engaged in social purpose, environmental sustainability, alternative energy, or clean technology.

Environmental, Social and Governance (ESG) Criteria: A set of standards used to evaluate a company’s socially responsible operations. Environmental criteria assess how a company performs as a steward of the natural environment. Social criteria examine how a company manages relationships with its employees, suppliers, customers and communities. Governance deals with a company’s leadership, executive pay, audits, internal controls and shareholder rights.

The Sustainability Smile: A visual tool to discuss sustainable investing with clients and prospects. The smile highlights five strategies ranging from traditional finance to philanthropic investing:

1. Traditional: Investing to maximize financial gains, regardless of social impact or governance.

2. Integrated: Investing with a focus on financial results but considers how ESG factors could impact performance.

3. Ethical/Advocacy: Investing with a certain level of return-forgiveness; willing to forgo maximum returns in order to reflect specific values or advocacy views. Ethical investing screens any investment in opposition of an investor’s value set or religious denomination. Ethical portfolios typically avoid companies that produce or sell addictive substances like tobacco, alcohol and gambling. Advocacy investing seeks investments that encourage shareholder engagement through the ownership of a company's stock and active participation in shareholder proxies aimed to bring about measured change.

4. Thematic/Impact: Investing with a goal to generate competitive, risk-adjusted returns while demonstrating specific and measurable results to targeted causes or social and economic trends. Thematic investing usually reflects sector-specific industries, such as clean energy, and is currently catered to by some mutual funds and hedge fund managers. Impact investing allocates capital toward enterprises that can achieve measured results for people, planet and profit – however, investor access may be limited to accredited investor fund vehicles and certain mutual funds.

5. Philanthropic: Investing with the sole purpose of maximizing impact on charitable results or aligning with a set of values with little, if any, regard for investment returns.

[Triple] Bottom Line: A 2016 Morgan Stanley study found 82% of high net worth millennials express interest in socially responsible, sustainable, and impact investing – as opposed to only 45% of the overall high net worth investor pool. Yet, an increase in demand for sustainable, responsible, and impact investing has grown from $3.07 trillion AUM in 2012 to $8.72 trillion AUM in 2016. Considering the bulk of wealth has yet to transfer into millennials’ hands, this upward trend in SRI could see exponential growth in the years ahead.