Affluent Millennials Prefer Online Brokerage Accounts

The study by Hearts & Wallets LLC, “New Insights into the Finances of Generation Y,” finds that Gen Y’s investment preferences center around a desire for financial independence over a traditional leisure retirement, making retirement savings accounts less appealing. In fact, the study shows that 74% of affluent members of Gen Y have assets in an online brokerage account, compared with 67% who have assets in a defined contribution (DC) plan.

In addition, the study results show that affluent Gen Y members (i.e., those with more than $100,000 in household assets) are alone among working age segments in being more likely to invest assets in an online brokerage account than a DC plan. The penalty-free access to capital and far greater investment choices typically associated with online brokerage accounts attract Gen Y workers, who appear to remain fearful of long-term commitment.

“Gen Y desires financial independence rather than retirement,” says Chris J. Brown, principal, Hearts & Wallets, based in Hingham, Massachusetts. “Gen Y could become more engaged with DC plans if the financial services industry promoted more qualified plan benefits beyond saving for retirement, like tax deferral. Since many Gen Yers don’t yet own homes and thus don’t qualify for the mortgage interest deduction, perks like tax deferral or applicable ‘free money’ from an employer match can be very appealing.”

The study also finds that about three in four Gen Y workers aren’t planning for traditional retirement or the prospect of stopping work all together. Instead, Gen Y is focusing on short-term goals such as vacations and emergency funds. At the same time, the long-term goal is to avoid depending on any single employer for their livelihoods. In terms of goals, 42% of Gen Y wants to have enough money to work less and spend their time as they want when they get older.

Even though saving through tax-deferred accounts could help achieve this goal, the study finds that the current positioning of such options as retirement solutions leads Gen Y to favor taxable brokerage and bank accounts. With 70% of assets held in cash, Gen Y is the most conservative generation in its investment allocations, even though conventional theory suggests this age group should aggressively seek higher yields.

The study also shows that Gen Y is seeking answers on questions about financial prioritization, since many are undergoing life changes. Fifty-nine percent have experienced a recent life event, most commonly a move or job change. Carrying little debt and tending to save, Gen Y exhibits many fiscally responsible behaviors. Yet, some actions and attitudes limit Gen Y’s ability to build assets:

• Less than one-quarter of Gen Y owns U.S. stock mutual funds compared to a third of Generation X and Baby Boomers;
• Only 30% of Gen Y assets are allocated to employer-sponsored retirement plans or individual retirement accounts (IRAs), compared with 48% of Gen X assets;
• Only one-third of Gen Y directs 50% or more of their savings to employer-sponsored retirement plans, compared with nearly two in five Gen Xers;
• Gen Y has about 40% of their assets in bank checking or savings accounts; and
• Gen Y may not fully understand the consequences of cashing out their balance in an employer-sponsored retirement plan, since half of Gen Yers are cashing out rather than rolling over their balance into a new plan.

“The challenge for Gen Y is many are not focused on how they save,” says Laura Varas, principal, Hearts & Wallets. “Often they invest too conservatively to accrue sufficient resources for later in life. To connect, providers and advisers need to talk about financial independence and short-term goals since many Gen Yers aren’t specifically working toward a goal of retirement.”

Affluent members of Gen Y also want delivery of professional financial advice through a combination of technology and in-person meetings with financial professionals, according to the study. Varas says these recent findings support those arrived at by an earlier Heart & Wallets study, “Generations X & Y Won’t Be DIY Forever,” which concluded that younger investors use financial applications and websites to complement, not substitute for, advice from a financial professional.

The recent “New Insights” study confirms that Gen Y has little interest in services that rely solely on financial professionals, with 45% of Gen Yers preferring to use financial professionals in tandem with technology. Some favorite Gen Y financial information and advice technology uses are:

• Visiting finance portals for information, such as Yahoo Finance or others (29%), compared with 22% of Boomers;
• Using planning tools or calculators (35%);
• Using social media (Twitter, Facebook, LinkedIn) to get information about finance and investing (27%);
• Checking their accounts using computers or mobile devices (42%); and
• Usage of mobile devices for many tasks is increasing year over year. For example, in 2013, 19% of Gen Y-ers checked their accounts using mobile devices.

The study is part Hearts & Wallets’ Insight Module series and is based on review of more than 5,000 American households. Hearts & Wallets LLC is financial research firm that focuses on understanding the savings and investment needs and behaviors of American households.

More information can be requested here.