Clients in the coveted milliennial and Gen Z demographics are an interesting when it comes to their asset allocation choices and that’s not a bad thing.
Various studies and surveys indicate many younger investors are under-allocated to equities while the opposite is true of their older counterparts. To some extent, that’s not surprising when considering millennials and Gen Z have lived through and invested during the global financial crisis and, more recently, the coronavirus bear market, the highest inflation in four decades and the highest interest rates in more than two decades.
Adding to the intrigue regarding younger investors’ asset allocation proclivities is data suggesting these market participants are fond of alternative asset classes. That’s good news for advisors because if ever there was an asset group where clients need education and guidance, it is alts.
As advisors know, alts usually play third fiddle to stock and bonds, perhaps fourth fiddle when including cash. By estimates, just one in 10 investors have exposure to anything that can be considered “alternative.” However, that percentage is markedly higher with youthful market participants.
Angles on Alts
Advisors should not diminish the potential potency of alts as conversation starters with millennial and Gen Z clients. Data confirm as much.
A recent report by Lansons indicates that nearly a third of millennials that are considered affluent and a quarter of their Gen Z counterparts are familiar with alternative investments, the related platforms or are already invested in such assets.
“The majority of Americans are unfamiliar with digital platforms that offer access to alts. Four out of five (80%) have either never heard of these platforms or don’t know much about them,” notes Lansons. “The awareness gap is largest amongst older Americans, who are generally more affluent. Three in ten Gen Z and one in four Millennials (30% and 25%, respectively) know of digital alts investing platforms or already invest through one. Comparatively, only 17% of Gen Xers and 13% of Boomers have knowledge of alts investing platforms or already invest in alts.”
That’s supported by an October 2022 study published by Bank of America Private Bank, which indicates that 75% of investors in the 21 to 42 age range believe it’s necessary to have exposure to assets beyond stocks and fixed income to generate above-average long-term returns.
“Eighty percent of young investors are looking to alternative investments, such as private equity, commodities, real estate, and other tangible assets. They allocate three times more of their investment portfolios to alternative strategies (16%) and half as much to stocks (25%) than older investors (5% and 55%, respectively),” according to the Bank.
Taking Broader Views of Alts
Traditionally, alternative asserts included commodities, real estate and some other familiar stomping grounds. However, that landscape has expanded to include crypto and illiquid assets such as art, wine and much more. Don’t scoff at these as investable asset classes. As noted by Bank of America, 60% of wealthy investors expect to buy art for investment purposes over the next year and a similar percentage expect to sell art.
That doesn’t mean advisors should become art critics, but the art example highlights a reason for advisors to become more proficient with alts, including the tax and estate planning implications that come along with this asset class.
“Educating investors about the investment case for alts, and building compelling and differentiated brands, is key to gaining market share in this nascent industry. Consider that one fifth (20%) Americans would strongly consider investing in alts, and 7 percent are already planning to do so,” concludes Lansons.
Related: Help Your Clients Help Themselves