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The Recession Generation: How Millennials Are Changing Money Management Forever
This story appears in the August 18, 2014 issue of Forbes.
They're richer than you think. They're more scared than their elders. And they're ripe for the picking. Inside the race to cash in on Millennials' trillions.
By Janet Novack and Samantha Sharf
Without any apparent irony, the woman who aspires to change financial services in the 21st century sits in a conference room in Manhattan she named for Warren Buffett, despite his famous disdain for technology, and ticks off apps that have reimagined how her generation interacts with the world: Uber for transportation, Tinder for dating, even Washio for laundry and dry cleaning. “We do things on our schedule, from our phones with the push of a button, and we absolutely demand affordability,” says Alexa von Tobel.
Her point, of course, is that financial services are ripe for some youthful disruption. And the 30-year-old New Yorker with a name more befitting an octogenarian baroness has perhaps the leading company for doing just that: Von Tobel founded and runs LearnVest, a site and app designed to make managing your money as easy as streaming music or ordering from Amazon. Since 2009 she’s raised a whopping $72 million, including from Jim Breyer’s Accel Partners, which famously funded Facebook in its early stages. The latest $28 million round, in April, valued LearnVest upwards of a cool quarter-billion.
And von Tobel isn’t alone. Over the past three years, according to CB Insights, more than $1 billion has been sunk into tech-driven personal finance companies–a whopping $261 million in the second quarter of 2014 alone–with a special emphasis on startups targeting young investors, complete with the user-friendly, low-cost, mobile-enabled features they crave (social responsibility is a plus, too). There’s Wealthfront, which helps young tech workers convert company stock into a diversified portfolio of ETFs; Betterment, which automates savings and asset allocation; and Motif Investing, which allows small investors to bet their money on a whole industry or trend (say, “Digital Dollars”) rather than a single stock.
One thing that shapes almost all of these concepts: They’re practical. They emphasize stewardship, long-term appreciation and using technology to cut costs.
“I don’t want to be invested in just one company or one sector. At the same time I also don’t want to put all this work into actually managing my money,” says Cristina Cordova, a 26-year-old Stanford grad who invests through Wealthfront and also pushed the startup where she works to offer a 401(k). Of the few good things that came out of the Great Recession, creating a thrifty generation that appreciates the value of a buck and the need to save may be one of them.
The stakes are huge. For all the public focus on twentysomethings moving back with their parents or Lena Dunham and her underemployed friends carping about their lot on HBO’s Girls, Millennials, roughly defined as young adults born after 1980, control maybe $2 trillion in liquid assets, Wealthfront says. By the end of the decade that number is expected to surge to $7 trillion. And that will get vastly bigger as Millennials enter their prime earning years and then a massive wealth transfer from their Boomer parents begins.
More than just tap the Millennial cash hoard, these startups, and legacy financial managers now actively competing with them, are wagering that mimicking this generation’s mind-set will lead to online innovations in budgeting, planning and managing money that will transform the entire $30 trillion-plus universe of Americans’ investable assets. Fiftysomethings now enjoy bingeing on Netflix, texting that they’re running late and trolling Facebook as much as their kids do. “It’s beyond the tipping point,” says von Tobel of her generation. “[We] are the decision makers, the influencers.”
If that’s not already true, demographics dictate that it soon will be, which means the race to reinvent money management is full-on. And as von Tobel is finding out–her stake in LearnVest is surely worth tens of millions on paper–helping Millennials slowly build small fortunes promises to quickly create some large ones.
Stephanie Halligan graduated from college in May 2009, ready to confirm every stereotype about her generation: She had a less-than-marketable degree (international relations) from an overpriced private school (Boston University), which had left her stacked with debt ($30,000) and no employment prospects (the financial meltdown, at its full nadir, sent her into the worst job market since the Depression).
But a funny thing happened on the way to what, on paper, seemed a few years of slinging Starbucks Frappuccinos near Mom’s house. The Boston charity where she’d volunteered senior year teaching personal finance workshops to refugees agreed to keep her on as an intern with a $1,000-a-month stipend, and by the fall of 2009 she had parlayed that experience into a $47,000-a-year job in Washington developing savings education for the poor. In 2012 she jumped at a higher salary to EverFi, an educational tech company that counts Amazon founder Jeff Bezos and Twitter cofounder Evan Williams among its investors. By last October Halligan had paid off her student loans and built enough savings and confidence to leave her $70,000-a-year job and hang out her shingle as a financial empowerment consultant. “I got rid of my debt because I wanted my freedom,” says Halligan, who already has $50,000 in her retirement accounts and continues to save.
In many ways, Halligan embodies what makes Millennials such a ripe audience for the financial industry. Using the broadest strokes, Baby Boomers, who grew up in the land of plenty that was postwar America, spent their formative years as spenders. Cynical Generation X, aptly distrustful that either government or business would take care of them, turned out to be precocious risk-takers. Millennials, coddled by their helicopter parents and scared straight by the Great Recession, have turned into a generation of savers.
Yes, young adults who have gone no further than high school are worse off than in recent history. But fewer Millennials fall into that camp. Here’s an eye-opening statistic: In 2013, 34% of 25- to 32-year-olds held at least a bachelor’s degree, versus 25% of Gen Xers (born between 1965 and 1980) and 24% of Baby Boomers when they were at the same age, according to the Pew Research Center. And despite their greater numbers and the catastrophic job market during the past five years, those Millennial college grads were earning slightly more, in inflation-adjusted dollars, than Gen Xers did at the same age–a median of $45,500 in 2013, versus $43,663 in 1995, Pew calculates. Yes, the student loan debt accrued collecting all those degrees will surely prove a drag on Millennials’ net worth. But at a May St. Louis Federal Reserve conference focused on personal balance sheet issues, there seemed to be more worry about Gen Xers, who bought homes for top dollar before the real estate crash. Bottom line: a torrent of well-educated Millennials flooding the “mass affluent” market of those with at least $100,000 of investable assets over the coming years.
The Millennials’ quest for security is one reason they’re turning out to be young savers. Like their Gen X elders, very few believe that they’ll get much, if anything from Social Security. And they hit the job market just as Congress made it easier, in 2006, for companies to use “automatic enrollment” for their 401(k)s (about 60% of employers surveyed by Aon Hewitt now use it). The upshot: Many Millennials have started saving for retirement in their early 20s, compared with a median age of 35 for those Boomers who have saved, according to a new Transamerica Institute study.
Ironically, this generation of digital natives intuitively understand disruptive technology, making them better positioned than any before it in human history to launch businesses of substance (with the Mark Zuckerbergs and Kevin Systroms becoming fabulously wealthy as a result)–yet taken as a whole, they’re too risk averse to leave a good job for a risky gig. Last year, with the job market recovering and the number of “involuntary” entrepreneurs falling, 20- to 34-year-olds had the lowest entrepreneurial startup rate of any age group–a rate which was just half that of 45- to 54-year-olds. In fact, the startup rate in 2013 for young adults was the lowest since the Kauffman Foundation began tracking it in 1996. “They feel constantly obsessing over making money is no way to live,” says Neil Howe, likely America’s biggest expert on generations.
Indeed, a large part of the reason that Halligan set up her own shingle was to make her own schedule. This summer she spent six weeks in Africa, including a Mount Kilimanjaro climb, a trip for which she saved since 2012. Slow and steady, like a mountaineer: That’s how most Millennials seem poised to interact with money going forward–which presents all sorts of opportunity for the financial services industry.
So what does financial services, as geared toward Millennials, look like?
It might start with making investing more like a videogame. New York-based broker dealer Kapitall improbably combines an arcade-worthy interface with stock investing. “If you look at the existing financial services experiences, you have to enter at the master’s level degree or there is nothing for you,” says CEO Jarrett Lilien, 52, a former E-Trade executive. “That’s why they are intimidating, and that is why they feel exclusionary.” Twentysomethings are twice as likely as older generations to play videogames on a given day. But they’re not yet comfortable with stocks; a recent UBS survey found that investors aged 21 to 36 have only 28% of their investable assets in stocks, with more than half in cash. Older generations hold 46% in stocks and 23% in cash. An example of a solution for that, as Kapitall sees it: Stock picks look like iPhone icons and are color-coded by sector to make it easy to visualize diversification. They currently have 15,000 brokerage users (plus 250,000 virtual trading accounts), though with a $25 million war chest from the likes of Linden Venture Fund and Lilien’s own Bendigo Partners, that’s bound to grow.
Upstart has another intriguing model, based on another concept that young adults are more comfortable participating in: crowdsourcing. This peer-to-peer lending site judges the creditworthiness of prospective borrowers not only by their short traditional credit histories but also by using an algorithm that includes the school they attended, their college grades and major, their job history and even their SAT, GMAT and LSAT scores. So far about 400 loans have been funded through Upstart since it started in April to accept applications for loans with fixed rates of 6% to 17.5%, and an origination fee paid to Upstart of 1% to 6%.
“Some of these people are going to be very financially successful and very successful in their careers, and it’s only a matter of figuring out who,” says 23-year-old Upstart cofounder Paul Gu, who studied economics and computer science at Yale for two years before taking one of billionaire Paul Thiel’s $100,000 fellowships for entrepreneurial dropouts. Upstart, with former Google executives Dave Girouard and Anna M. Counselman as cofounders, has raised $7.7 million from an all-star venture lineup–Thiel’s Founders Fund, Khosla Ventures, First Round Capital, Kleiner Perkins, New Enterprise Associates and Google Ventures, among others–and expects to go out for another round later this year.
But the biggest group of startups, often referred to as “robo-advisors”–notably Wealthfront, Betterment, Future Advisor and SigFig–marry algorithms and user-friendly interfaces to allocate money into low-cost index ETFs based on modern portfolio theory and the individual investor’s age and objectives. “Fifteen years ago investors thought ‘I need to find a guru who can beat the market.’ Today most people no longer believe that,” says Bill Harris, a financial tech veteran who served as CEO of Intuit and PayPal in the 1990s and is the founder of Personal Capital, which focuses on the high end of this market. “They believe the two most important things are diversification and cost.”
The leader so far: Palo Alto-based Wealthfront, which has $65.5 million invested in it from various members of Silicon Valley royalty (Marc Andreessen and Ben Horowitz were both personal angel investors) with $1.25 billion under management, in more than 13,000 accounts (average: $93,000). It targets anxious rank-and-file tech employees who have much of their net worth in company stock, initiating special programs at Facebook and Twitter to help workers sell off their post-IPO shares in an orderly fashion. “There is a lot of stress when people are paid in stock,” says CEO Adam Nash, 39, a veteran of LinkedIn, eBay and venture capital. “Everyone knows at some level that they should diversify, but most people don’t do anything. They end up sitting on the stock for long periods of time, watching their net worth go up and down.”
Using computers over human investment advisors has a huge cost advantage. Rather than the traditional asset management industry fee structure, which assesses a higher percentage of assets (typically 1% a year or more) on smaller accounts, Wealthfront charges a flat 0.25% of assets a year on all accounts–and makes management of the first $10,000 free, increasing that figure by $5,000 for each friend who signs up. (Cordova, for example, is eligible to have $60,000 managed for free.)
Betterment, with $45 million raised so far, has a more authentic pedigree for its audience: It was launched in 2008 by two twentysomething New York buddies with their own savings. CEO and cofounder Jon Stein is a Harvard economics graduate with a Columbia M.B.A., who says he became disillusioned by his four years as a New York banking consultant. “We never, in meetings, talked about: ‘Who is the end customer.’ We talked about: ‘How do we optimize this product for profitability? What fees can we add on?’ ” says the 35-year-old.
Betterment draws heavily on behavioral finance to make saving and investing simple–and automatic. Most clients allow contributions to be deducted from their checking accounts, and in contrast to Wealthfront, it attracts smaller savers, with $730 million in assets in 40,000 accounts, averaging $18,250. It allocates their money across 13 low-cost stock and bond ETFs based on an investor’s age, goals (emergency fund or retirement) and type of account (taxable or IRA). The fee ranges from 0.35% of assets down to 0.15%. “ We are the leaders of a movement that now has a sense of inevitability about it that it didn’t four years ago,” says Stein.
Stein dreams of building a more expansive personalized service where many details of your financial life, from budgeting to bill paying to investing, would be automated, with every spare penny allocated to make sure you keep up with emergency savings, retirement savings and even with saving for that trip to Africa. Human advisors at Betterment? Not in the cards, says Stein.
LearnVest is an outlier: Von Tobel is determined to make human financial planners available, even to Millennials with small or no grubstakes. A Florida native, her obsession with financial advice began at 14, when her father died suddenly and she realized her mother hadn’t a clue about the family’s finances. After graduating from Harvard, she worked for two years (including at Morgan Stanley) and then went off to Harvard Business School, where her plan for a personal finance startup won a competition in her first semester. She dropped out and headed to New York with her plan in 2008–just in time to see the economy fall off a cliff. “It was terrifying, but life is short, and you’ve got to do the things that matter to you,” says von Tobel, whose market focus sometimes takes comical turns (she insistently refers to her generation as “they” rather than “we” despite the fact that she’s smack in the middle of it).
She found a crucial backer in then-Accel partner Theresia Gouw, who managed LearnVest’s first venture capital financing. The first step was building a brand, von Tobel’s and LearnVest’s, which started as a free website with personal finance content for women (it’s averaging 1.4 million unique visitors a month this year, according to comScore). Then came the financial planning service and a financial education program sold to employers.
The current LearnVest model requires clients to fork over $19 a month plus an upfront fee of $89 to $399 for a mix of computer-generated advice and figurative hand-holding by human financial planners. (The $399 plan includes asset allocation advice.) A customer’s LearnVest “dashboard” links all her bank, credit cards and investing accounts (14 on average) and displays her plan, her “to-do” list and info on progress she’s made. Help is also delivered via app, e-mail, Web chat, and through phone or Skype calls with a financial pro–however the customer wants it, except in person. Clients are sent nudges (Did you roll over your 401(k)), chirpy e-mails (“Great work!”) and even rewards such as an iTunes song (recent prize: Pharrell Williams’ “Happy”) for accomplishing the first to-do. “We’re not a financial brand,” says von Tobel. “We are a lifestyle brand that is giving you consumability around your money.”
Research shows that even tech-happy Millennials on the higher-end of the financial spectrum like the idea of accessing a human now and then. That said, it’s not clear if people want their money merged with their lifestyle: As of the end of 2013, according to an SEC filing, LearnVest had only 3,700 paying clients for its planning service, and von Tobel won’t disclose the current count. While Americans often pay high and hidden fees for financial services, few have ever shelled out directly for financial planning–almost never on a monthly basis. Von Tobel, for her part, likens it to a charge Millennials can identify with: a health club membership fees.
So with many trillions at stake, how are the financial services giants reacting? Stodgy Vanguard Group, which became the world’s largest mutual fund company by offering cheap index funds and ETFs, seems to be taking clues from both the “robo-advisors” and outfits like LearnVest, with its new Personal Advisor Services, which uses algorithms to construct portfolios and initial plans–and provides video conference access to human planners for only 0.3% of assets, down from the 0.7% fee service it has offered for nearly 20 years. That said, this is more Millennial-influenced than targeted–only investors with at least $100,000 at Vanguard are eligible to sign up now, though there are hopes to slash that figure to $50,000 by next year’s official rollout. “There’s more demand now than we anticipated,” says Karin Risi, a Vanguard principal in charge of retail advice services, adding that even longtime do-it-yourself clients have advice needs, particularly when wealth is being passed to children or spouses.
Fidelity, for its part, seems further behind: For now it’s focusing on content, through a new website, www.moneyfirsts.com, that includes tools and education articles (partly from LearnVest) and a link to a Fidelity Facebook planning app. The company also brags about the kind of basics–depositing checks via smartphone and eliminating ATM fees–that hardly seem revolutionary.
Given their hidebound natures, many of the big players are adroitly moving into if-you-can’t-beat-them, own-them mode. In April Betterment raised a whopping $32 million–and Northwestern Mutual Capital and Citi Ventures were among the new investors. BlackRock, the world’s largest money manager, is among those who have plowed $57 million into Harris’ startup, Personal Capital, which combines the freemium model that has worked for so many Millennial-driven startups with a highly sophisticated tax play. Users get a slick dashboard that aggregates and analyzes all your accounts, gratis. If you want to go further, Personal Capital charges a hefty 0.95% of assets a year on accounts from the $100,000 minimum to $250,000 (with fees falling by steps to 0.75% for $5 million-plus) to mimic ETFs–and cut tax bills. Instead of buying, say, the hugely popular Vanguard S&P 500 ETF, which owns all 500 stocks in the index, Personal Capital buys 100 of those stocks for an investor (enough to track the index), and the company’s computers search daily for opportunities to sell an individual losing stock to harvest tax losses.
Goldman Sachs and JPMorgan Chase, meanwhile, are among those who have poured $86 million into Motif Investing, a new online brokerage that allows users to build, buy, share and discuss (publicly or in private groups) ETF-like stock portfolios (called Motifs) selected to represent an investing theme, industry, a hunch or even a social commitment, such as green investing. For a single $9.95 trading fee, an investor with as little as $250 gets shares (or partial shares) of all the stocks in a Motif. Among those currently most popular: 3-D Printing and Biotech Breakthroughs.
“The answer for the Millennials is not ‘Trust us, go to sleep, and let us manage your money,’ ” says Motif founder and CEO Hardeep Walia, 41, “ We want to engage them.” He emulates the robo-advisors with a new family of commission-free, prepackaged Motifs, with the allocation of each designed for a specific time period and risk tolerance. Walia argues that these funds can serve as the low-cost core of an investor’s portfolio, with “satellite” investments based on their own research or advice from a professional advisor. (Playing all the angles, he’s started a service that allows outside advisors to create and maintain Motifs with their clients.)
The industry is even hedging with von Tobel’s LearnVest. American Express Ventures and Northwestern Mutual Capital are among her big backers. Her original venture backer, Theresia Gouw, who remains a board member, envisions LearnVest staying independent. (“Six years from now I think it has a shot to be a really interesting stand-alone public company.”) Regardless, von Tobel says she’ll be successful by hewing to the wants of the most numerous generation in American history: “I am building something that I wish existed for me.”
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