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October 2008

Gen X

This is the generation of people born between 1963 and 1980 that entered the workplace from the 1980s onward. Those who belong to Generation X are said to not be solely motivated by money, instead looking for a work-life balance. They favor flexible work places, embrace the concept of employability and value opportunities for learning, self-advancement and new challenges.

Gen Y

Gen Y is identified as the group of individuals born after 1980 and before 2000. Today, Gen Y continues to be characterized by many as a sort of super-sized Gen X. These young people are highly technical, self taught in many topics and feedback oriented.

The dramatic changes occurring in financial markets around the world will have a significant impact on the future of the financial services industry. But there is an even more significant long-term factor that will shape our industry’s future that we cannot ignore: demographics. Not only does the aging of America affect our clients and their needs, but it also foreshadows a coming change in the profile of investment advisors. And these changes may drastically impact the investment advisory industry, the way financial professionals run their businesses and even advisors’ behavior toward their clients.

As baby boomers begin to enter their twilight years, a new group of younger investment professionals is beginning to emerge. This group, commonly known as Generation X and Generation Y, are those under the age of 44. With the mean age of investment advisors hovering around 56, we decided to take a closer look at Gen X and Gen Y (also known as “NextGens”) investment professionals who sometimes feel alone in amidst their grey counterparts. What have Gen X and Gen Y advisors learned from “industry pioneers” and what do they do differently?

Targeting a younger client base
The majority of investment professionals focus nearly all (85%) of their attention on the same old market segments—baby boomers and their preceding generations—ignoring the untouched growth opportunity in investors under the age of 46. However, younger financial professionals are much more likely to foster relationships with younger investors, with nearly a third (31%) of their clients being in the NextGen camp.

Percentage of Clients by Generation: NextGen Advisor vs. Average Advisor

Serving the middle class
While most of the market pursues the high-end mass affluent and high-net-worth group, younger advisors are more open to less affluent clients. These NextGen advisors appear to think that the best way to establish themselves in the market is to reach out and serve middle-class clients. According to the most recent Rydex AdvisorBenchmarking survey, younger investment advisors are nearly twice as likely to serve the moderate net worth investor market (those with investable assets of less than $500,000) than the “average advisor”–51% versus 27%. Because traditional AUM fees may not provide enough income, young advisors are more likely to charge project management fees in addition to the AUM fees to make up the difference. This allows younger advisors to spend more time serving clients, and offer hourly as-needed financial planning and advice to anyone regardless of income. Table “Revenue Mix” below shows the difference in composition of income for both advisor groups. A case in point is the decreased reliance on asset-based fees as a source of revenue: retainer and fixed fees comprise 35% for an average advisor compared to 43% for NextGens.

Asset Range Mix of Clients: NextGen Advisor vs. Average Advisor

Revenue Mix

Firm's Variable	NextGen	Average RIA
Percentage of Revenues from AUM	56%	64%
Percentage of Revenues from Retainer and Fixed Fees	43%	35%
Commissions	1%	1%

Stronger reliance on technology
Having grown up with technology, NextGen advisors are very comfortable with this medium for streamlining processes and communication. Nearly all NextGen advisors market their services through web sites vs. 65% for the average advisor. They are also more likely to utilize email to communicate with their clients. One-hundred percent of NextGen advisors surveyed indicated that they use email, compared to 80% of average advisors.

One of the major challenges investment advisors have in today’s environment is how to market their firms and create a sustainable process for attracting new clients without relying solely on referrals. Younger advisors might be in a better position to capitalize on their own skills and position themselves to younger and moderately wealthy clients.

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