Five reasons to pay attention to Gen Z

There has been a lot of talk about millennials in the marketing world, with good reason. However, it’s time some of that spotlight is turned to the generation after them—Gen Z.

Gen Z is made up of people born after 1997 (or thereabouts, depending on your source) and comprises 30% to 40% of the world population. Gen Z has traits that have not been seen in other generations before them — knowing what they are will help when marketing to them.

1. They are a generation who have had the internet available throughout their entire lives. They are a highly digital generation and often have multiple devices going at the same time. This generation spends a lot of time researching products and brands; however, they value one-on-one advice and personal reviews, both from family and friends. For financial services, Gen Z may end up being the ultimate word-of-mouth campaigners.
2. Because Gen Z is so tech savvy they have more influence on their parents’ spending habits than previous generations. They can help their parents discover new things and places, as well as research on pricing and reviews and like to be involved in the decision-making process, particularly when it’s a purchase that’s relevant to them.
3. Gen Z is a financially conservative generation. “This generation grew up during a recession, and that has made them risk-averse and cautious when it comes to their finances. Providers will need to offer a helping hand as these consumers start to navigate the financial world.”1 They have watched millennials take on significant college debt making Gen Z-ers think more about debt and saving than generations before them.
4. As a whole, they are an entrepreneurial generation. Their online upbringing has shown them that businesses can be started with an idea and a little bit of money. They are optimistic and see opportunities that others don’t. “Gen Z may just turn out to be the most competent, productive and high achieving generation we’ve seen in a while.”2
5. Gen Z is passionate about environmental, social and political issues. Gen Z-ers have been known to research a bank’s carbon footprint before opening a checking account. They are the most diverse generation, and subsequently, they advocate strongly for social and political justice, and with their social media reach, they have the means to do it.

For financial services companies that wish to serve the up and coming Gen Z-ers, now is the time to get on board with the right advice and services. This could be impact investment options that resonate with their causes or online tools specifically created for Gen Z. It’s been said that it may very well be the generation that changes things for the better — Gen Z-ers are going to need all the support they can get.

Persistence is a Rare Commodity

For investors that remain committed to active management, finding consistently top performing managers can be challenging. One problem is, to paraphrase the common disclaimer clause, past performance does not seem to be a reliable indicator of future results.

Recently released data from S&P appears to bear out this statement. The S&P Persistence Scorecard tracks the degree to which mutual funds persist in their relative performance over time. It shows by asset class what percentage of funds performing in the first quartile or top half for a designated period remained in that position in subsequent periods. For those considering relative returns as an indicator of future success, the data tells a story:

For example:
• For all domestic equity funds in the top quartile for 2015: just 35% remained in the top quartile in 2016 and less than 2% of these funds made it to the top quartile in 2017, 2018 or 2019.

• For all domestic equity funds in the top half for 2015, 58% remained in the top half in 2016, but this percentage dropped to just 16% a year later and just 10% by 2019. 

• Over the longer term, for domestic equity funds that were in the top quartile for the five years ending in 3/2014, just 16% remained at the top for the next five year period while 32% dropped to the last quartile for that period.

• For domestic equities in the top half for the five years ending in 3/2014, 38% remained in the top half for the subsequent period while 48% fell to the bottom half. 

These dramatic shifts apply across large-, mid- and small-cap asset classes. 

Finding managers that can consistently produce alpha is an important element in the value provided by wealth managers that use active management or select active managers for specific asset classes. This data is a reminder that quality search and selection processes need to look at factors well beyond relative historical performance rankings.

Affluent Investors’ Apparent Calm in the Storm

Phoenix Marketing International (PMI) just released its Wealth & Affluent Monitor’s Investment Outlook findings for June. It shows the percentages of investors in the mass affluent and HNW market segments that say they plan either to increase their investments, decrease them or stand pat in the following three months. 

Given the dramatic spike in market volatility and ongoing economic uncertainty, one might expect there to be some significant recent moves into and out of the market by investors. Generally, however, the PMI data for mass affluent and HNW investors does not reflect this assumption. Rather, mass affluent investors largely stayed their longer-term course while HNW investors showed a stronger propensity to buy low and sell high. 

Mass Affluent Investors Stay Steady

Mass Affluent

The chart above tracks investment move expectations for the Mass Affluent segment (IPA $250K to $999K) each month for the trailing 12 months ending in June 2020. After a slight uptick in buying expectations in February, as the market dropped, and in selling expectations in April, as the market began to recover, expectations have tended to stay within recent historic ranges throughout the Pandemic. 

HNW Investors Take Advantage of Buying and Selling Opportunities 
The reaction to pandemic-driven market volatility by the HNW segment (IPA > $1MM) was more pronounced as the chart below shows. This group seemed to take the initial market decline in February and March as a buying opportunity as expectations to increase investments spiked while intent to decrease investments dropped to yearly lows. By June, the buying opportunity was perceived to have passed and expectations returned to more normal levels.

In hindsight, both sets of investors, given their respective wealth levels and presumed tolerances for risk, seem to have responded rationally to this recent Black Swan event. This may be a testament to investors growing market awareness or, more likely, to the guidance of their advisors in avoiding irrational investment decisions. 

High Net Worth

Happy #SocialMediaDay

Yes, there’s a day for almost everything. Today, June 30th, is Social Media Day, so Happy Social Media Day everyone. While to most of us, particularly those who are younger, it seems like social media has been around forever, it’s fun to note that the first site to reach over 1 million users (seems like small potatoes now) was MySpace, which began in 2003. Then along came Facebook in 2004, and the rest, as they say, is history. As you can see from the chart below from Pew Research, the majority of U.S. adults now use at least one social media site.

The younger the age group, not surprisingly, the higher the usage:

Facebook continues to be the most used social media platform, even among younger age groups, but Instagram has been making steady upward progress. Of course, since Facebook owns Instagram (and WhatsApp), it’s difficult to truly disaggregate the numbers. According to the data from Pew Research, other platform usage has remained relatively consistent. One platform which Pew Research does not include is TikTok, which has grown exponentially since its merger with in 2018 and expansion beyond its original China market. It has gone from 300 million users to over 1 billion by February 2019, outpacing Facebook and Instagram in downloads. The platform skews much younger than other platforms, with almost 80% of its audience age 34 or younger, according to Marketing Charts.

Social media is integral to business growth
While all of this is interesting and points to the importance of social media in our lives today, why is this important? Social media is increasingly critical to sales and retention, particularly for younger audiences. According to Adobe, “social media is the most relevant advertising channel” for 50% of Gen Z and 42% of millennials. And a study of consumer behavior by PWC finds that social networks are the biggest source of inspiration for consumer purchases. Even more telling is an article/infographic published by Smart Insights, which states that 71% of consumers who have had a positive social media experience with a brand are likely to recommend it to others. However, it also says that 80% of companies believe that they deliver great social media customer service, but only 8% of their customers agree. Social media has pervaded all aspects of individuals’ and companies’ existences, even for wealth and asset managers, where it is becoming an integral part of thought content output, client service, lead generation and client communication. Companies that are more active and successful in utilizing social media are realizing strong benefits in terms of business growth and retention, and the potential impact is growing.

A Story of Two Brands

Those watching cable news recently may have noticed a spate of new TV ads from Edelman Financial Engines. This is an extension of a national campaign started last February and features clips from the radio show of the company’s namesake Ric Edelman. Edelman co-founded Edelman Financial 30 years ago with his wife and has been the very public face of the firm ever since. 

Back in 2018, however, there were questions about whether the Edelman brand would survive. That year, private equity firm Hellman & Friedman, a majority owner of Edelman Financial, acquired retirement plan specialist, Financial Engines, and proceeded to combine it with Edelman. The branding of the new entity was up in the air. Financial Engines was substantially larger in AUM, but retail awareness of the Edelman brand was stronger as a result of Edelman’s popular radio show and publications. It took about four months for Hellman to decide on a co-branding approach with Edelman as the lead brand. An increase in lead and cash inflows identified by the firm from this year’s TV campaign featuring Edelman suggest the decision may be the right one.

In May of last year, Goldman Sachs acquired RIA rollup firm United Capital. In January of this year, Goldman Sachs completely dropped the United Capital brand. Going forward, United Capital is Goldman Sachs Personal Financial Management. This decision also makes sense. While widely known among a certain segment of financial advisors, United Capital had low brand awareness among retail investors. Even Joe Duran, United Capital’s founder, was not convinced that keeping the brand made business sense. Goldman Sachs also has a clear strategy to use United Capital to expand its offering to the HNW and Mass Affluent markets.

One lesson to be learned from these two very different post acquisition brand decisions is that several factors must be considered when making post-transaction brand decisions. These include the relative brand awareness in specific markets of each company, their relative size and market penetration, and most importantly, the business strategy of the combined entity going forward.

Is all Rebalancing Created Equal…and Does it Matter?

Periods of market volatility often represent an optimal time for advisors to work with their clients to rebalance their portfolios. Rebalancing serves multiple purposes. Rebalancing puts investors’ asset allocation strategies back in line with their risk profile and the goals that they are trying to achieve.

If equity markets are down, then allocations to fixed income will go up proportionately. This is particularly true currently when Treasury bond yields are so low, and there may be limited upside price potential. Rebalancing not only brings a portfolio back into alignment, but also accomplishes the proverbial “buy low and sell relatively high.” Rebalancing can provide an opportunity to invest in high-quality securities that were previously considered overvalued and/or sell securities that an advisor feels do not have the same performance potential. But when should you rebalance? A recent article in ThinkAdvisor discusses the main approaches to rebalancing:

While a hybrid approach is structured to benefit from rebalancing while avoiding the negatives, such as transaction costs and short-term gains, research finds that some form of disciplined rebalancing can still deliver better risk-adjusted returns than a portfolio that operates under a “set it and forget it” strategy. In addition, rebalancing gives advisors an opportunity to interact positively with their clients during challenging times, demonstrate a proactive value-added approach and help their clients avoid emotional investing and maintain a disciplined plan.  

Fees Hold Steady

Pricemetrix, a McKinsey company, recently released its 9th Annual The state of North American retail wealth management report. The findings suggest some important trends related to fee levels and revenue generation among advisors in the latter half of the decade.

First, the longer-term slow decline in advisory fees appears to have bottomed out. As the table below shows, new account fees have stabilized at close to one percent for the last three years. Supporting this fee trend is an increase in the breadth and depth of client relationships as advisors have sought to provide more value to their larger client relationships.

The stabilization in fee levels also occurred during the later years of an extended bull market and subsequent robust investment performance, resulting in less focus on the impact of fees on returns. It remains to be seen whether investors’ views on fee levels change significantly given the expected lower return environment. 

The Pricemetrix study also shows the dramatic rise in advisors’ dependence on fee income as their primary source of revenue. In 2015, fee revenues accounted for just under half of advisors’ gross production. By 2019, this share rose to nearly 70%. If there is a material decline in AUM stemming from the pandemic’s effects on the economy and the markets it will have an immediate and significant negative impact on advisors’ income. This may lead them to be more aggressive in searching for new clients as well as retaining existing clients, which could lead to discounting of fees. However, the increase in fee-based revenue as a percentage of overall production means the impact of that strategy would be quite severe. 

As we monitor the widespread impact of the pandemic and its aftermath on the economy overall and the wealth management industry specifically, we continue to keep a close eye on longer-term trends in fee levels.  

More Inroads for Private Equity

In recent years, the use of private equity (PE) as part of an asset allocation strategy has increased substantially. Investors have come to recognize the advantages of this class of alternatives both as a source of added returns and as a portfolio diversifier. The opportunity set in PE is also growing while the relative number of public company investments is declining.

Due to the complexity, cost and illiquidity of most PE investments, those able to benefit from the asset class to date have largely been institutions and UHNW individuals, who are typically considered accredited or qualified investors. However, this may be about to change.

This week the U.S. Department of Labor issued an Information Letter under ERISA concerning private equity investments as a component of a professionally managed asset allocation fund offered as an investment option for participants in defined contribution plans. The Letter concluded that: “a plan fiduciary would not, in the view of the Department, violate the fiduciary’s duties under section 403 and 404 of ERISA solely because the fiduciary offers a professionally managed asset allocation fund with a private equity component as a designated investment alternative for an ERISA covered individual account plan in the manner described in this letter.”

In effect, the DOL put its stamp of approval on PE investments in DC plans when they are part of an asset allocation fund. This is a significant development in potentially enhancing access to more sophisticated investment options for plan participants while expanding the market for PE firms and firms that package and distribute PE-based solutions.

The acceptance of PE in the DC market will depend in part on whether portfolios are constructed to provide appropriate risk management for investors and, longer-term, how PE enhanced portfolios perform. We continue to monitor the market in the DC space going forward, as well as the impact on target date portfolio construction and availability in the 401k marketplace. 

A Message from Optima Group

All of us at Optima Group have been moved and saddened watching the tragic news about George Floyd, Breonna Taylor and Ahmaud Arbery. While much has been written about these killings and the continuation of the racial injustice and inequality that exists in our country, change takes action. Here are some things we can all do to promote positive change.If you or a friend is an educator, buy books that feature people of color as protagonists and heroes. A few good lists are 
1. NPRGrassROOTS Community FoundationMahogany Books, and Today’s Parent.
2. Watch and share this video of Neil deGrasse Tyson speaking about his experience as a black student telling people that he wanted to be a scientist and astrophysicist.
3. Work with your local police departments and town government to ensure that body cameras are available (and turned on) and promote high-quality police de-escalation training.
4. Promote the hiring of black educators where black children are being taught. If you want to know more about why and how this makes a difference for black children, check out this episode of Malcolm Gladwell’s podcast.
5. Support the ACLUNAACPSouthern Poverty Law CenterUnited Negro College FundBlack Youth Project 100Color of Change, the Equal Justice Initiative or an organization of your choice that focuses on racial equality and justice. 
6. Support black businesses. You can find them at WeBuyBlackThe Black Wallet, and Official Black Wall Street.

Together we must transform the United States into a country where all people are treated with dignity and respect. A nation where no one will have to look over their shoulder and fear for their lives because of the color of their skin.  

RIA UX design before and after COVID-19

There is currently a plethora of information and opinions about how COVID-19 has and will continue to change the way we all do business. Technology is often at the forefront of these decisions.

Consider your local pizza restaurant, where you order pizza for Friday movie night. In the past, you’d call in an order, and you could hear the background conversations because the teenager who answered put you “on hold” by putting the phone down on the counter. You would go in to pick up the pizza, maybe see a neighbor, chat, come home and relax for the night. That same pizza place now has to compete more fiercely with Domino’s, which has a full staff that designed a compelling user experience (UX) that makes it easy for you to order online and have your pizza delivered. You can pick a time and select one of their promotional items while also applying coupons and racking up rewards.

The biggest difference, now, between your local place and Domino’s may be the UX you are using while interacting with them online. Many small restaurants have had to update or launch a website where you can order—without the expert UX staff Domino’s has. For a small pizzeria, the UX may be terrible, and in frustration, you may start ordering from Domino’s. This scenario can be applied to any business. Simply put, a good user experience can help keep and acquire new clients, while a bad user experience can be a deal breaker.

In a recent study by Aite Group, when asked about the benefits RIAs would like to see from client-facing technologies in the near future, found that 51% said, “acquire new clients.” This is not surprising; your pizza place would like to acquire new clients too. And, just like restaurants, RIAs need to provide an online UX that is easy to navigate, provides information where people expect to see it, has calls to action and delivers relevant thought leadership. While UX alone isn’t going to give RIAs everything they want (after all, people still want good pizza), now is a great opportunity to make a UX that works harder and is more effective. In combination with creating informative campaigns and continued communication with prospects and clients, technology can begin to play a bigger role in acquiring new clients.