Illustration from Unsplash+ in collaboration with Getty Images
A recent report from Deloitte predicted that by as early as 2027, generative AI could become the leading source of retail investment advice. But based on the findings in the latest investor survey from State Street Global Advisors, the asset management business of State Street Corporation (NYSE: STT), this massive AI explosion may not be in investors’ best interests.
According to State Street’s “2024 Influential Investor Segment Survey,” released June 3, many investors of all ages are not finding everything they seek or need from self-directed or robo advisors.
More than half of Gen X investors surveyed are self-directed. Yet 41% of them cite “no guidance or sounding board” as a shortcoming of self-service brokerage platforms, compared with 33% of millennials and 26% of boomers going it alone.
Millennial investors, the first digital natives, are also seeking human advice. Among those surveyed, 82% are either hybrid (working with a traditional advisor while having at least one investment account on a self-directed or robo platform) or purely self-directed. Still, 67% of advised millennials collaborate with their advisor on investment decisions and are more likely than older investors to involve their advisor in day-to-day decisions.
For example, 28% of millennials said they involve their advisor in cash management, compared with 16% of Gen X and 19% of boomers. They’re also speak more to their advisors about insurance (20%, vs. 13% of Gen X and 8% of boomers), private banking (14%, vs. 7% of Gen X and 4% of boomers) and debt management (11%, vs. 4% of Gen X and 2% of boomers).
The State Street study identifies four investor groups — hybrid investors, women, Gen X and millennials — “as pivotal pathways for advisors looking to future-proof their business,” Brie Williams, head of Practice Management at State Street Global Advisors, said in a press release.
Each of these cohorts desires collaborative relationships with advisors, is increasingly demanding modernized technology and tools, and expects to be charged competitive fees that match the value of the advisory services received, the study found.
Fees Especially Important to Hybrid Investors
While 49% of hybrid investors cited the ability to control investment decisions as a significant advantage of using self-directed account, two-thirds said they collaborate with an advisor on these decisions Nearly half of all hybrid investors (43%) also cited cost savings as a benefit. A greater share of hybrid investors have ETFs in their portfolios (47%) compared with investors who are advised-only (27%) or exclusively self-directed (37%).
The majority of hybrid investors surveyed (60%) compensate their advisors based on assets under management. But “high advisory fees are a hot-button topic for hybrid investors, especially given their ability to readily compare costs between managing their own portfolio and working with an advisor,” the State Street release noted. “This poses a risk for advisors with non-competitive fee structures.”
Nearly half (45%) of hybrid investors said they’d leave or switch advisors if fees increased, compared with 38% of all investors receiving advice and 30% of those using an advice-only model. Among all investors surveyed, a greater percentage of Gen Xers said they’d leave or switch advisors (42%) than millennials (39%) and boomers (33%).
Hybrid investors are also “quick to reconsider the [advisor] relationship if they receive subpar outcomes,” added Williams, referring to underperforming industry benchmarks.
Transparency is Key
Advisors will have to explain their value more in an increasingly AI-centric world.
In an interview with Rethinking65, Williams noted that many investors place significant value on fee transparency. “When you have a client that understands the return on investment in the advised relationship, the investment they’re making in you and in ‘future them,’ that includes the comprehension of fees for services,” she said. “At the end of the day, they’ll trust in that relationship” and have more confidence.
Being clear on fees “also helps them think about comparing the value that you’re offering, versus the other available options that are in the marketplace, whether that’s another provider across the street, or if they’re looking at online-only options,” said Williams. “When you have a prospect looking for comprehensive wealth management, they do need to understand how your business model is different than a direct investing-only platform.
“Without that comprehension it becomes about looking at apples versus oranges, which is not going to be helpful. And at that point, you’re probably competing on price alone versus value for the services that they’re receiving, including the cost structure of advisory fees versus investment fees,” she added.
“The goal for all advisors I know, front and center, is, ‘How do I show that our interests are aligned? There’s no hidden agenda here. And the decision-making that we do on your investments along with the advice and guidance we provide is in your best interest,’” Williams said.
Proving Value
“Collaborative engagements and working together on investment decisions, and showing how the asset allocation plan is designed to benefit in up and down markets — that can go a long way in stemming those concerns about competence and ability to generate sustainable returns over time,” Williams said.
So can talking to clients about the services they’re utilizing and demonstrating the tangible results of how, for example, college planning, estate planning, tax efficiency, intergenerational planning, education and coaching “are contributing to their overall goals and objectives,” she said. “That conversation alone may put their [clients’] concerns about fees at bay.”
However, if someone is only really utilizing their financial advisor for asset allocation and not taking advantage of the numerous wealth management services available, “then they’re not really getting the full value for what they’re paying in advisory fees,” said Williams.
Depending on the advisor business model “and where the client is in his or her journey, having a scalable model with services that align in fair value isn’t necessarily a bad idea,” she said. “It can help someone progress along the financial journey, with that practice,” to where their financial life becomes more complex and they need more services offered.
But if fees remain a “pressure point,” an advisor must decide on a case-by-case basis whether it’s worth keeping a client by giving them a fee reduction, Williams adds.
Gen Xers Are the Most Advisor-phobic
“Gen X has long been underserved in financial services, despite facing pressing needs for guidance,” notes the State Street report. “They stand at a crossroads, balancing retirement planning, wealth preservation, eldercare, and support for minor (and sometimes adult) children, making goal planning a complex task.”
Yet less than one-third of advised Gen X investors surveyed said they received advanced planning services, and even fewer are coached on how to remain financially secure. Perceived lack of value is keeping 45% of Gen Xers from seeking professional investment guidance, the survey found. Many who previously worked with advisors left them because of increased costs (37%) and unfulfilled promises (20%).
In addition, Gen X, initially characterized as latchkey children, “have a stronger sense of independence of managing their own affairs while unsupervised,” Williams said. Yet “there are different safety nets and support systems that their parents had when they were approaching their 50s.”
The 50-yard Line
Diving deeper into the surveys’ findings, Williams pointed to differences between Gen Xers above and below age 50. More of those 50-and-up worry about the rising cost of healthcare (56%) than those younger than 50 (37%). While the older cohort is more apprehensive about outliving their financial assets in retirement (41%), those under 50 worry more about rising interest rates (34%) and the cost of college tuition (22%).
For those over age 50, “’entering the back nine’ of life signifies a new chapter filled with opportunities for growth and fulfillment,” said Williams. “As they navigate the uncharted territory of the latter half of their lives, it’s essential to encourage them to seek support rather than face these challenges alone.”
It’s about “how you help them shift their focus from just mere investing to really thoughtful planning which will give them what they want looking for — that secure and fulfilling retirement,” she said. “It should be retirement-income planning, it should be healthcare planning, it should be addressing the planning, desires and any necessary insurance.”
A proactive approach to planning at this stage of their life also includes teaching them to be adaptable and providing them with a sense of empowerment, Williams added. And “in my perspective, while the current economic landscape presents challenges such as rising inflation, interest rates and healthcare costs, individuals over 50 demonstrate remarkable resilience.”
What Women Investors Want
Women responding to the State Street survey were equally split between using advised and self-directed investors. Half (50%) were self-directed and half were either advised-only (26%) or hybrid (24%).
Among self-directed investors, women were much more likely than male investors to use online tools and calculators to aid in their investment decisions (39% vs. 29%). They were also more likely than men to say that access to financial planning tools was a benefit of using self-service platforms (25% vs. 19%).
According to the survey, women are also more interested than men in the following topics: retirement planning (55% vs. 43%), estate planning (25% vs. 20%), multigenerational wealth management (9% vs. 6%), education planning (7% vs. 3%) and philanthropy/legacy giving (5% vs. 3%).
Women investors are also more likely to stick with their advisors: 46% said they have been with their advisors for more than 10 years, compared with 36% of male investors.
The Bottom Line
“While there is a certain level of scrutiny involved with the hybrid investor segment, advisors have ample opportunities to build more robust relationships with them,” said Williams. “Offering an integrated experience that spans advisor-led services and direct investing platforms is paramount.”
For example, applying financial planning software can enable advisors “to collaborate with clients, explore possibilities interactively and develop actionable goals,” she said. “Understanding hybrid investors’ preferences for collaboration and team-oriented qualities in advised relationships is crucial to engaging them more effectively.”
State Street Global Advisors conducted “The Influential Investor Segment Study,” in partnership with A2Bplanning and Prodege, in September 2023. The online survey included 1,503 U.S-based investors ages 27 to 77, evenly split between millennials, Gen X and boomers. Nearly half (48%) were male, 52% female; 31% held $250,000–$499,900 in investable assets, 35% held $500,000–$999,900 and 34% held more than $1 million. Fifty percent used a financial advisor; 50% did not.
Jerilyn Klein is editorial director of Rethinking65.
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