The Great Wealth Transfer: How Millennials and Gen Z Are Changing Investment Trends

Baby Boomers are transferring their wealth to Millennials and Gen Z, as historical transfers of wealth take place in the largest inter-generational transfer of wealth ever experienced, projected at $68 trillion for Baby Boomers to Millennials and Gen Z over the next several decades. As these younger generations also inherit this wealth, the future of global markets is being dominated by their investment preferences and financial behaviors.

In this article, we explain the changes in investment trends as Millennials and Gen Z are approaching the reach of "mature" investors, what trends they are following, and a case study on how investment firms are modifying these trends.

Understanding the Great Wealth Transfer

The Great Wealth Transfer is the process of Baby Boomers (born 1945-1960), who are sitting on an unprecedented amount of wealth, passing their assets down to their children, which include members of the Millennials (born 1981-1996) and Gen Z (born 1997 and later) generations. This generational shift is fueled by elements like increased life expectancy, more wealth being accumulated by Baby Boomers, and shifts in inheritance law.

The shift is projected to transform the world economy in deep and irreversible ways. Younger generations—who typically have different financial goals, value systems and investment styles are likely to allocate their inherited wealth in different directions. This transition is opening up new opportunities and challenges for investment managers, financial institutions, and the financial ecosystem at large.

How Millennials and Gen Z Are Changing Investment Trends

Like most generations, millennials and Gen Z differ from the generations before them in many different ways, but their attitudes toward money, investments, and financial planning rank high among those differences. These include several key trends that are shaping change in the behaviour you are asked to invest:

1. Socially Responsible and ESG Investing: Millennials and Gen Z have more of an inclination to invest in socially responsible investments (SRI) along with companies that share their values. They place a heavy emphasis on environmental, social, and governance (ESG) criteria in the decision-making these days. Younger investors increasingly are valuing sustainability, ethics and corporate social responsibility in deciding where to put their money.

       According to a 2021 study from Morgan Stanley, 86% of Millennials and 79% of Gen

       Z investors are interested in sustainable investing vs only 50% of Baby Boomers. This

       trend is prompting financial firms to incorporate ESG factors into their investment

       strategies.

2. Digital Assets and Cryptocurrency: Types of alternative investments, such as cryptocurrency have also contributed to the popularity of investing with younger generations, especially millennials and Gen Z.

       While the market is highly volatile, Bitcoin, Ethereum, and other digital currencies have become a credible store of value for long-term price appreciation.

       Younger investors are also attracted to the rise of NFTs (Non-Fungible Tokens) and decentralized finance (DeFi) platforms, as they seek to diversify their investment portfolio and capitalize on novel technologies. In 2020, 40% of Millennials owned some type of cryptocurrency, compared to only 3% of Baby Boomers.

3. Tech-Savvy Investing: As digital natives, millennials and Gen Z are harnessing technology to help them invest. Investment apps such as Robinhood, Acorns, and Stash saw their popularity grow by providing simple-to-use interfaces that allowed upstart investors to buy stocks, ETFs and even cryptocurrencies at very low fees. Additionally, new types of investment technologies, such as robo-advisors and algorithm-driven financial planning tools, have made it easier for even very young investors to oversee their own portfolios without relying on traditional financial advisors.

       Additionally, social media outlets such as Reddit and Twitter are shining a brighter light on investment decisions as evident in the 2021 GameStop short squeeze driven by

        countless Millennial and Gen Z investors on the r/WallStreetBets subreddit.

4. Preference for Passive Investing: Passive investment strategies, such as index funds and exchange-traded funds (ETFs), have greater appeal among millennials and Gen Z than active investing. These investment strategies are often regarded as low-cost and low-risk, particularly in volatile markets. Millennials and Gen Z have driven the rise of passive investing, piling into broad market indices that give exposure to almost every asset class.

5. Focus on Financial Independence and Early Retirement: FIRE (Financial Independence, Retire Early) is impacting both Millennials and Gen Z. Millennial investors, in particular, tend to be aggressive savers, smart investors, and financially savvy, seeking an early retirement. They frequently emphasize saving a large share of their pay and benefiting from tax-advantaged investment accounts like IRAs and 401(k)s.

Case Study: BlackRock’s Approach to the Wealth Transfer

As the world's largest asset management company, BlackRock has already acknowledged the significance of the Great Wealth Transfer, and has been changing its approach to target Millennial and Gen Z investors.

Adapting to ESG Preferences

In response to the rising appetite for sustainable investments, BlackRock has made substantial progress in customer with ESG investment options. In 2020, BlackRock said it would divest from companies that generate more than 25% of their revenues from thermal coal production. It also launched a suite of funds focused on environmental, social, and governance (ESG) issues and raised its level of shareholder engagement to pressure corporations to be more responsible.

Through its focus on ESG investments, BlackRock had aligned with younger investors who prioritize sustainability and social impact in their investment decisions.

Offering Digital Platforms for Young Investors

Beyond its ESG strategies, BlackRock has made technology investments to support younger investors' needs, as well. The company partnered with Acorns, a popular micro-investing cultivator, in 2021. Acorns also has an easy-to-use app that makes it simple for young investors to invest their spare change and create portfolios based on automated investment strategies.

By this partnership, black rock stimulates the young generation with tools that will be more available and cheaper to invest. The shift is in line with BlackRock’s strategy to be a trusted partner to the next generation of investors.

The Economic Impact of the Wealth Transfer

The Great Wealth Transfer is still in the process of reshaping the economy, but its effects are expected to be significant:

1. Shift Towards Sustainable Markets: With younger generations making environmental conditions leading to their investment decisions, demand for products and services oriented towards sustainable and responsible behavior will increase.

2. Technological Disruption in Financial Services: The increasing adoption of technologies like blockchain and AI is causing disruption in the financial services sector, resulting in the development of new aggregated technologies and financial products.

3. Change in Corporate Governance: With more Millennials and Gen Z investors, bottom line corporate transparency, ethics, and sustainability will start to have a much larger presence in boardrooms.

Conclusion

The Great Wealth Transfer is a major sea change in global finance. Millennials and Gen Z are getting a windfall of billions and trillions of dollars and they want to invest in things that push an agenda. Focused on socially responsible investing, digital assets, and passive investment strategies, younger generations are pushing market evolution and challenging traditional financial paradigms.

Investment firms that understand and embrace these changing dynamics will be better equipped to attract the wealth of tomorrow’s investors. The financial approach of this new generations will shape global markets as the money transfer process continues through 2030 and beyond. Afterall, they have the greates purchasing power ever, being the first generation that was effectively raised by technology.

Work Cited:

1. Morgan Stanley. (2021). The Millennial and Gen Z Investor: Shifting Preferences and Trends. Morgan Stanley Wealth Management Report.

2. BlackRock. (2020). Sustainable Investing and ESG Trends. Retrieved from www.blackrock.com.

3. The Investment Company Institute (ICI). (2020). The Rise of Passive Investing. ICI Report.

4. Pew Research. (2022). Millennials and Gen Z Investment Preferences. Retrieved from www.pewresearch.org

5. CNBC. (2023). How Millennials Are Driving the ESG Investment Boom. Retrieved from www.cnbc.com

6. Financial Times. (2023). The Future of Wealth Management in a Post-Boomer World. Retrieved from www.ft.com

7. Harvard Business Review. (2022). How the Next Generation is Reshaping Financial Markets. Retrieved from www.hbr.org