Working with Affluent Generation X Investors

by Ryan W. Smith
One of the biggest wealth transfers in history has already begun and will only pick up speed in the near future. Baby Boomers, long the prize of the investment advisor community, are beginning to retire in droves, with many estimates putting the number as high as 10,000 new retirees per day, a trend expected to continue for at least 10-15 years. Many of these retirees will begin divesting assets to their heirs as they age, following plans devised with their investment and wealth management professionals, or regrettably, pass away and leave their wealth to heirs via their estate plan.
While many investment advisors have been working hard to sign new clients under 50, many others have not yet formulated a plan. A recent study of 2,250 Millennial and Generation X members, all of whom met the minimum $100,000 in investment assets qualification, commissioned by Global X Management Company, an exchange-traded fund provider, looked at these investors in detail in the report, “Getting to Know Gen X and Millennial Investors.” The research itself was conducted by ORC International in mid-2016.
The report was commissioned by Global X because many investment advisors were asking for information on these two younger generations and the firm wanted to provide hard data to those advisors. One of the main findings of the report was that, when grouped by wealth and age, certain common links began to appear that surprised the researchers. These four main groups, two for each generation, were labeled as “Builders” and “Adrenaline Techies” for affluent Millennials and as “Cautious Consulters” and “Knowledgeable Xers” for wealthier Generation X individuals. For this report, the researchers considered those born between 1968 and 1979 as members of Generation X while looking only at 21 and over Millennials, i.e. those born between 1980 and 1995.

This week we will be looking at the affluent Generation X investors surveyed in this report:
Cautious Consulters
These Gen Xers, with investment assets between $100,000 and $500,000, are the most likely of the four groups surveyed to rely on Registered Investment Advisors (RIAs) for investment advice and reaching their financial goals. According to Equifax data cited in the report, this group has an approximate market size of $1.5 trillion. These investors are 38% more likely to save for retirement than invest for pleasure or short-term profits that could be used for vacations or purchases.
Cautious Consulters are 55% less likely than the other three groups to trade as a hobby because they, like the millennial group Builders, are typically not comfortable understanding types of investments and have a lower financial-IQ. These clients typically rely heavily on their RIAs and might require special attention while advisors are constructing their portfolios. They will also hesitate to make any changes once their initial portfolio has been determined and they are especially vulnerable to damaged trust, which is discussed in detail in part three of our earlier Building Successful Client Relationships series, Damaging Trust.
Part of building trust with these Generation Xers is spending extra time for financial education. These investors came into the workforce just as the tech boom of the 1990s was roaring into being and then crashing in 2000 and 2001. As they were starting families and settling down, the Great Recession of 2007-2009 unfolded and many witnessed their parents lose significant savings, perhaps even a house, as a result. Their trepidation is evidenced in action as well: once a portfolio has been agreed to by this group of investors, they will be very hesitant to make any changes.
Advisors who are successful in both educating these investors and allaying their fears have been using low-turnover and low-risk portfolio strategies, the report authors state. While these portfolios are not without risk, they do offer higher returns than more traditional “conservation of principal” portfolio strategies.
Knowledgeable Xers
These wealthier Gen Xers, with more than $500,000 in investable assets, are the most sophisticated investors surveyed by the researchers. According to Equifax data cited in the report, this group has an approximate market size of $5.4 trillion, by far the largest of the four groups surveyed. These investors are more likely to utilize RIAs for investment advice and portfolio analysis, strategy and implementation as they are 45% less likely than the other three groups to use Robo-advisors or smartphone apps for financial advice.
Knowledgeable Xers have a solid understanding of investment strategies and products. They are 15% more likely to have working knowledge of ETFs and 12% more likely to know about smart-beta ETFs, even though they prefer to invest in mutual funds.
Their greater experience in investing and their higher net worth have made many in this group entrenched with their current brokers. However, because this group also prefers low management fees and the ability to trade during the day, there is room for other brokers to more readily assist these investors in meeting their long-term goals.
More so than the Cautious Consulters, the Knowledgeable Xers appear willing to take on more risk, the report’s authors note. At least in part. Some advisors say that many of these investors want a pool of investable resources to “play with,” where most of their savings are safely in stable, lower-risk assets and the remainder can be invested in riskier assets.
ETF-based portfolios might very well fit their investment strategies in the long-term provided they receive clear and concise information along with regular insights. How they receive that information appears to be more fragmented than the other three groups as some in this group wanted regular email updates, others wanted access to social media and still others preferred phone calls.
These investors, like their Generation X counterparts, came of age during the tech boom of the 1990s. Where many in their age group are afraid of the downdrafts associated with precipitous stock market declines, the Knowledgeable Xers see themselves as similar in spirit to the groups that profited greatly from the stock market rises in the late 1990s, mid-2000s and over the past few years. They do not feel they are part of the groups that suffered from the resulting losses.