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Beyond Paycheck to Paycheck Media, Total Candor Media, Michael B. Rubin Media, Michael Rubin Media
Gen Y Needs Tailored Message, Not ‘Gimmicks’

Article published by Ignites on Oct 3, 2007

By Kevin Burke

Younger investors have not been a top priority for fund companies, as many shops are preoccupied with the deluge of retiring baby boomers. But continuing to ignore the next wave of fund shareholders could prove perilous for firms that fail to build brand loyalty.

Fund companies are ill-equipped to handle the generational shift affecting its clientele, according to a KPMG International study published in July. “This industry is quite sure about products and asset classes it considers attractive to Gen Y but it is decidedly scattered in its thinking about how to engage Gen Y as customers,” the report notes.

According to the results, 22% say they have been targeting the Gen Y group for the last two years. Another 28% surveyed say they intend to develop a relationship with Gen Y over the next five years. Combined, that means only half the industry is putting forth a meaningful effort to help the roughly 60 million Americans born between 1979 and 1994.

With so many dollars and resources being spent on catering to baby boomers as they enter retirement, the younger generations tend to get lost in the shuffle. “The industry as a whole has gotten wrapped up in the baby boomer retirement wave,” says Ben Norquist, co-founder and president of Convergent Retirement Plan Solutions. “The pendulum has swung too far in one direction.”

The upshot for fund companies is that today’s 20-somethings have grown up with 401(k) plans and realize that there is more of an onus on them to build a nest egg. “The younger generation has gotten the message that they have a lot more personal responsibility for their retirement savings,” Norquist says. “They’re not going to be resistant to auto enrollment.”

But banking on the newly created features of the Pension Protection Act may not be sufficient in capturing a sizable portion of the Gen Y pie. “A lot of organizations are betting on auto enrollment as a more effective way to keep assets rolling in after baby boomers have retired. That’s an unspoken assumption,” Norquist says.

Products specifically designed to meet the needs of Gen Y investors could be a way to capture additional assets beyond 401(k) business. Target-date funds, for example, can be tailored to certain age groups based on their retirement date. These products have already taken off with older investors and 401(k) sponsors, industry flow reports have shown.

One small fund company is trying to be the first out of the gate to capture assets in this virtually untapped market. This fall, Thrasher Capital Management plans to launch the Gendex mutual fund, a product that seeks to “directly leverage the impact of systemic socioeconomic demographic and lifestyle trends and shifts.” Essentially, it looks to invest in companies that benefit from pop culture trends that are so often initiated and perpetuated by Gen Y.

After spotting these trends, portfolio manager James Perkins will incorporate them into stock selection. Clues to the formation of such trends might come from the Web, television or even an environmentally conscious rock band or celebrity, the company says.

The firm has launched a MySpace page and has placed a billboard in Times Square in an effort to grab the attention of Gen Y'ers, playing to their technology skills and perceived short attention span.

But not everyone is impressed. “It sounds like a gimmick to me,” says Christine Benz, Morningstar’s director of fund analysis.

In fact, history has shown that funds launched solely for certain age groups have not fared too well. Most notable is the USAA First Start Growth fund, aimed at delivering returns based on brand awareness among children and teens.

Some of its top holdings include burger joint giant McDonald's, toy makers Hasbro and Mattel, Google, Hershey and Best Buy. The fund has posted a net loss over the trailing one-, three- and five-year periods as of Oct. 2, according to Morningstar data.

Liberty Young Investor, which later was merged into an existing Columbia fund, made some early strides but was merged out of existence after regulators uncovered significant market-timing activity during the Spitzer-led trading investigation.

Some analysts say that the way to reach this demographic is to not create new products but use a different approach and message to deliver good existing products that have a track record. Features like low minimums, auto investment plans and low expenses are attractive to the younger, more fiscally challenged investor, analysts say.

“You don’t have to reinvent the wheel for this generation,” says Michael Rubin, founder of Total Candor, a financial planning education company in Portsmouth, N.H. Rather, fund shops need to be talking to them in a different way, he says. They also have different needs and concerns than the 20-somethings of decades past.

“Their debt load is much heavier and the cost of health insurance is rising and no longer a guaranteed company benefit,”  says Rubin. Lowering account minimums, automating registration and providing free education are a few of the ways fund companies can attract the Gen Y set.

Television ads from fund companies such as Fidelity and Schwab are squarely aimed at older generations, which may contribute to a feeling of indifference on the part of Gen Y investors, analysts say. “The message out there doesn’t seem to be geared toward anyone under the age of 35 or that doesn’t have a vice president job somewhere,” says Tom Modestino, senior analyst at Cerulli & Associates.


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