Source: Instagram
There were two seemingly unrelated articles this week in The Economist that may have had more in common than they realized. One discussed the crowded field for wealth management and how banks are moving downmarket to try and capture wealth management business from less wealthy customers, or the “unwashed masses” as the magazine jokingly referred to the rest of us.
The other had to do with young people and the media. This story contrasted the media consumption of the world’s young adults, mostly focusing on those in their early 20’s or teenagers. It pointed out that within just 9 years, from 2009 to 2018, the share of teenagers who read newspapers fell from 60% to 20%. Now teens get the majority of their news from social media. The big players in this field being Instagram, WhatsApp and YouTube.
Source: Pew Research
Where Wealth and Youth Meet
Social media is increasingly reflecting the real world and with that comes a lot of the scamming and greed that goes on in real life. The piece on media points out that the consumption and demands of the young increasingly blur the lines between entertainment, current events and activism. Social media is also becoming a place where people can market themselves and make money. So it’s only natural that financial scams start to develop within this atmosphere. Spamming for financial scams is endemic on Instagram and scammers are bold enough to contact people directly and ask for personal details as I have pointed out in my post Inside the Forex Scam on Instagram. With a billion users on Instagram, it’s also only natural for those with a large following to use all those eyeballs to market products to get paid. This has enmeshed advertising and entertainment so much so that Instagram now requires those who are selling products to add the “#ad” hashtag below their post.
All of this mixing of established news, entertainment and advertising can seem jarring for some but it isn’t the first time that new platforms have disrupted the way we consume information. In the 1800’s newspapers boomed in the US, growing from 35 in the 1775 to 2,526 in 1850. The advent of the penny press which allowed cheap printing of tens of thousands of papers a day, changed the content of newspapers. To be able to market them to the masses, high minded politics was ditched for scandal and sensationalism. This isn’t too dissimilar from what we are seeing today, people want to see celebrities, have a laugh, know what is going on and, now that the internet allows them to interact in real time, feel like they are making a difference. Just like trashy newspapers too, they have a healthy skepticism of anything they read.
In those times, just like we will see in the future, the public coalesced around the more reputable news sources with others specializing in the salacious and sensational bits of news. I think this is what we will see happen with social media as well in the coming years. In the mean time, there is a huge gap that the wealth management industry could be filling were they to engage more with the youth, many of whom will be the next batch of rich some day.
The Opportunity for Money Management Online
There is a lot of hunger for wealth on social media. It could be because it feels even closer for many people when they are connected with someone that is constantly showing off money or material possessions. It could be because of social pressure or increased materialism, whatever the causes, the youth online have a hunger to do well. They are also impatient. When 8 year old YouTubers are making more than some Fortune 500 CEO’s, many think why would they want to toil away for decades at a large company?
On the one hand, this makes many fall prey to those financial scammers, on the other hand it means there is a huge demand for knowledge of money, finance and wealth. Some important and responsible influencers are gaining traction preaching patience, doing what you are passionate about and financial responsibility. These include entrepreneurs and motivational speakers like Gary Vaynerchuk, Peter Voogd and Eric Thomas. For people that are already on the path of building wealth and responsibility, there is room for wealth management to help guide them to reach those more substantial levels of wealth more quickly.
One of those ways is to encourage more young people to invest in the markets. Only 22% of millennials invest in the stock market and even the other generations don’t fair up very well in comparison.
Percentage of Each Generation That Are Invested in the Stock Market:
They have everyday questions like whether they should save for retirement or pay off debt, what they should invest in and how they can ever afford a home.
For those with little capital and simple questions like these, the wealth management industry has filled the space with robo advisors. These are software programs that can suggest how to save and invest without any human interaction. Firms like Betterment, Wealthfront and Personal Capital can advise on these matters without the expensive cost of a personal manager.
Banks and wealth management firms have not really captured the value chain though. They stay segmented into those focussing on the very wealthy, like those with a net worth of $30 million or more, while ignoring the middle and bottom. Since the crisis some have caught on to the idea of capturing the soon to be wealthy early. Morgan Stanley targets those with a net worth of as little as $200 thousand and banks on the idea that people seldom switch their wealth manager. This allows them to keep clients for many years. Those $200k accounts could easily blossom into million dollar accounts with the right guidance and prudent risk taking.
However that seems to remain the cutoff. Other than smaller firms, there doesn’t seem to be a firm that is truly cultivating the wealthy from the very start by engaging with them through social media and robo advisors and then expanding the offering once they become more wealthy. In this sense the industry has an opportunity to create their own next generation of customers by educating and encouraging budgeting, investing and risk taking.
Where Cardi B Meets Low Interest Rates
Taking risk, not just entrepreneurial risk but market risk for those young people with regular jobs is key for building wealth in the long run. This takes on even new urgency when interest rates across the rich world are so low. Savers are going to get pummeled long term if they don’t end up taking on more risk.
Look at the case of Germans, who are historically obsessed with saving but are extremely risk averse and don’t invest much of their money in the market. The average German household saves more than in many other countries including the US.
Source: Bloomberg
Yet a 2013 study found that German household net worth is about the Euro area average and much lower compared to France, Italy and even Greece.
Source: Peterson Institute
This just goes to show how saving is only half of the game, young people not only need to learn how to harness their power to save and ignore all the materialism, they need to also learn about market risk taking and long term return which will make a huge difference in the long run.
Even if the market doesn’t do well for the next 10 years as many are predicting, the money that people manage to save and invest while they are young will likely be the most valuable money they will ever make if it is left to compound.
To give you an idea how powerful compounding and risk taking is, take the example of one of my grandparent’s investments. They invested in a mutual fund like the Putnum Investors Fund (PINVX) in the 1930’s and never touched the money they put in. These shares currently cost around $29 a share. When my father mentioned he had sold the shares a few years ago to roll them into an index fund, he noted that the original cost basis, due to stock splits, was a few pennies per share. Even if we take into account the expense that mutual funds charge of about 1% and the average annual market return of about 10%, 90 years of compounding would produce a return of 233,452%. That kind of return could turn $100 into $233,452, that is the power of taking risk long term and staying invested.
Conclusion
Why have banks and and wealth managers taken such a passive approach to the “pre-wealthy” as I like to call them? One is that they have spent the past 10 years since the crisis cleaning up their mess and their balance sheets, stabilizing themselves and placating regulators who have been breathing down their necks to avoid a repeat of past mistakes. They have been focused on the low hanging fruit, those already rich, and those about to retire. It could also have something to do with the fact that wealth managers just don’t know how to relate to a younger crowd as the median age for a wealth manager right now is 46.
For the coming decades, competition and a fractured wealth market (the largest wealth manager, UBS only controls about 3% of the global wealth market) dictate that the industry is ripe for change and a sweeping vision of how wealth and financial planning can be approached in a different way will be necessary. This will mean engaging the youth and guiding good habits early to create the next generation of wealthy. It will mean outreach and education in behavioral finance and the psychology of saving. It will also mean engaging customers on new platforms such as YouTube and Instagram, potentially via influencers to reach a new market of potential clients. Somebody get Cardi B to tell the kids they need to earn more interest on their savings.
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