How Can Financial Advisors Better Serve Millennial Clients?

The CEO and co-founder of XY Planning Network and AdvicePay, a compliant payment processor for financial advisors, Alan Moore discussed his efforts to support younger investors with tailored, affordable services on Morningstar's The Long View podcast.

Catering to clients without investable assets, Moore's business model breaks from the mold and offers younger investors access to fiduciary financial advice--regardless of their accumulated wealth. Unpacking this model, Moore explained how generation X and generation Y investors differ from their forebears when it comes to trading fervor, attitudes toward environmental, social, and governance investing, and attraction to niche markets.

Here are a few excerpts on millennial investors and trading trends from Moore's conversation with Morningstar's Christine Benz and Jeff Ptak:

How Do Trading Trends Impact Younger Investors?

Ptak: Let's discuss younger investors. Does the current trading frenzy among younger investors for things like individual stocks--I suppose we could add crypto and NFTs to that list--worry you?

Moore: Oh, it terrifies me. We could talk about each one of those supposed asset classes individually. I've always had clients come to me saying, "I want to put just 1% of my portfolio into something." We used to hope that they would lose a little bit of money. Because if they lost money the first time, they would never go back. But if they won, they would get hooked. At some point, if you are trading stocks, if you are buying in and out of crypto, if you are buying NFTs, it's gambling. It's not investing anymore. But we call it investing, and it makes us feel better. But in the end, if you are operating that way with your investment strategy, you are gambling. You might as well go to Vegas. The odds are probably better.

Over the past couple years, these platforms have popped up in the middle of the longest bull market in history. These platforms, robo-advisors included, have all ridden the wave of a bull market. Sure, we've had some blips on the investment radar over the past year, year and a half. But it does scare me. It gives the illusion of higher returns. We are seeing really high return expectations among young consumers. They will say, "I want 12% or 15%." It is not realistic to be able to achieve that. I don't care if you did that one year, or your friends did that because they bought Dogecoin at the right moment. It's not sustainable. We are seeing higher return expectations being set. We are seeing folks looking for the high of gambling. They are looking for the high of winning. And unfortunately, that's a really, really great way to lose all of your money. Because, in the end, there is someone who is smarter, more sophisticated when it comes to investments sitting on the other side of that transaction. I think that's important to recognize. For you to make money in the market, to beat the market, someone has to lose. In the end, if the market is returning 8%, and you want to make 10%, someone's got to make 6% for you to do that. I'm not willing to assume I am smarter than all the algorithms and all the folks with Ph.D.s on the other side of these transactions. I think it's a terrible idea.

Investing should be boring. I know a lot of folks don't want to hear that because it can be exciting. It feels like something you can control. But investing should be something where, every now and then, you look at your 401(k) and think, "Wow, that's great. It's up $10,000 since I looked last, because I've been saving every two weeks into it, and the market has gone up a little bit." If it's not your full-time job, you should not be thinking about investing in the markets on a daily, weekly, or even monthly basis. Investing is something you shouldn't have to pay attention to so that you can focus on what you can control--on living your life.

How Can Advisors Help Younger Clients Navigate Investing Trends?

Benz: How can advisors thread that needle, though? How can they harness the enthusiasm of younger clients, while also convincing them to invest sensibly? How do you navigate that as an advisor?

Moore: I think it comes back to having an ideal client profile. If you are used to working with clients who are index investors, and then someone shows up and says, "Let's talk crypto," you really should send that client to an expert who can talk to them about cryptocurrency and what's going to make sense for them. If you want crypto to be your focus and your niche, OK, then ultimately adopt it. But I would say be really careful of riding the wave of enthusiasm. We see this time after time. A lot of advisors got burned in the housing bubble of 2007-08 because we rode the enthusiasm wave. The same in 2000: We rode the dot-com bubble. I do think we are likely in a bubble that's going to pop, because the only guarantee of markets is that they go up and they go down. The market is going to go down at some point.

I do believe, though, that advisors should be able to look back on this time and say, "My clients did miss out on some investment returns, and I am OK with that, because they ultimately were able to achieve their goals." Yes, there are strategies of having your client put 1% or 5% of their money in a play account and letting them play, particularly if they are looking to learn, if they are looking to research stocks and monitor and see how it's going. I don't think that's a bad strategy. What you cannot do is put a client's ability to achieve their long-term financial goals at risk by gambling and playing with their money. If, ultimately, you aren't aligned with a client in that area, then they are probably going to need a different advisor--one who would embrace that strategy better than I could.

This article was adapted from an interview that aired on Morningstar's The Long View podcast. Listen to the full episode.