In the United States, millennials are gearing up, and some would say have already succeeded depending on the number of years one considers in the millennial sub-set timeline, to surpass the Baby Boomers in population. Pew Research Center projects the millennial population in the United States to reach 73 million in 2019. Globally, the millennial generation has already surpassed all other cohorts with 50% of the world's population under the age of 30.
According to a Deloitte study, "Until 2020, the aggregated net worth of the global millennial populations is expected to more than double compared to 2015, with estimates ranging from $19 to 24 trillion." Given the numbers, this generation warrants consideration.
Growing up in an era of financial and environmental crisis, inflationary educational costs, and unprecedented technological advancement, through the infancy of the Fourth Industrial Revolution and its disruptive and innovative technologies, the millennial generation views their future and how to save for their future very differently than any prior generation. Whether one agrees that the millennial generation – also known as Generation Y, Gen Y, Generation Next, Echo Boomers, Chief Friendship Officers, or 24/7's – were born from 1980 to 2000 or some sub-set in between, whether one believes that millennials were raised in an era of self-entitlement or are ambitious self-starters, there are a few truisms about millennials that once considered may help attract millennial generation investors.
Dictum #1 – technology is part of the millennial DNA
One axiom about millennials is that they like technology: information and connection instantly. In January 2018, The World Economic Forum's "Operating Models for the Future of Consumption" report aptly notes that "disruptive technologies, new business models and the empowered consumer are accelerating industry change"; investment managers and wealth advisors are under increasing pressure to embrace technology to attract millennial investors. Millennials have grown up with and continue to generate waves of disruptive technology and expect access to information around the clock.
It is engrained in their DNA. With this, millennials have also grown up with the knowledge of cyber risks and threats. In the financial sector, managers that not only effectively address the risk exposures but deliver instant access to information, streamline channels for continual feedback, and create effective processes where millennials can instantly customise their settings and information flow will be most successful in drawing millennial investment dollars both in fiat and digital currency. Those investment professionals flexible enough to understand and leverage from the ever-changing popular choice of social media to attract millennials attention in a world of 24/7 will be the front runners with adoption of such fourth industrial revolution technologies, such as blockchain, augmented reality/virtual reality and artificial technologies.
In dealing with investors, in particular the savvy millennials, the financial services sector has to be very cognizant of regulatory oversight in an increasingly digital world. Regulators are responding to these demands for increased transparency. In October 2017, the SEC amended Form ADV requiring enhanced disclosures by registered advisors regarding social media use. In February 2018, the SEC issued interpretative guidance regarding cybersecurity disclosure requirements which includes board risk oversight information.
In May 2016, the Cayman Islands Monetary Authority (CIMA) issued guidance to licensed businesses in Cayman outlining the importance of financial service sector focus on cyber risks and the increasing consequences of security breaches which they again reaffirmed in October 2017. With over 10,500 regulated funds, CIMA has reiterated its expectations of the board of directors of these funds to assess and monitor cybersecurity and address these risks.
CIMA has issued specific outsourcing guidance that makes it very clear that the board of directors of regulated entities must meet certain minimum expectations when appointing and monitoring material functions performed by delegates. As an independent director, discussing cybersecurity threats and solutions should be a standard agenda item when speaking with all of the fund's third party service providers. It should also be assessed and discussed by the directors themselves in relation to their own cybersecurity threats and solutions.
Dictum #2 – increased focus on socially responsible investing
The concept of socially responsible investing (SRI) and consideration of factors such as the environment, social impact and governance is not new or even of the millennial era. However, millennials did grow up in an era of rapid global sharing of economic, social and political issues via technology. Given this heightened awareness of issues, increased commitment and focus to SRI is being driven and will continue to grow from millennial investing.
According to a 2017 Morgan Stanley survey, 86% of millennials
are interested in sustainable investing. Albeit limiting to
consider SRI and interest in environmental, social and governance
factors to be solely millennial driven, the third annual Advisory
Authority Survey, conducted on behalf of Jefferson Nation,
indicated that 32% of millennials chose socially responsible
investing as their top reason for choosing an advisor; second
choice only to an advisors experience.
In the Cayman Islands, we have seen increased formation of separate classes in funds to specifically accommodate the increasing demand for SRI strategies. Unique classes are created in ongoing funds that include SRI strategies and activities. In addition, a number of separate fund entities that specifically integrate SRI themes and strategies, including screening and the integration of environment, social and governance factors, have been launched as either funds of one (similar to a managed account) or as collective investment funds. To a lesser extent, we still see side letter provisions that integrate SRI themes; however, notably the side letters more frequently address negative/exclusionary activities rather than a comprehensive SRI programme. Cayman Islands entities are designed to be flexible enabling easy creation of classes allowing for variation of terms.
Entity formation in Cayman is expedient and cost effective. The regulatory framework provides investors with the necessary transparency and protection but allows managers the ability to react quickly to the demands of investors, including the rapid expectations of the millennial generation. The onus CIMA places on the board of directors to oversee and monitor compliance with investment policies, such as SRI programmes, adds additional layers of investor comfort.
Globally, a number of managers are launching SRI funds. We see SRI growth in emerging markets as well as in the fixed income space as investor demands embrace environmental, social and governance factors. In addition, we anticipate improved metrics leading to improved transparency driven to meet the increased demands of millennials.
The millennial generation is significant in size and wealth and will continue to grow more substantive in the future. Those managers, wealth advisors and the financial service providers that take the time to understand some basic millennial truisms should succeed in attracting millennial investors. Embracing rapid technological advancements and offering socially responsible investing alternatives provide opportunities for managers and wealth advisors to attract this unique generation.
The Cayman Islands remains a leading offshore jurisdiction mindful of the importance of flexibility to meet the requirements of the millennial generation while providing a regulatory framework clearly constructed to protect investors' interests.
This article first appeared in HFMWeek's Cayman Islands Country Report published in June 2018. Click here to download the full report.
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