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Robo-Advisor

Robo-Advisors Aren’t Just for Millennials

Regardless of age group, everyone deserves to benefit from smarter technology, especially when it comes to something as important as investing for the future.

Articles by Jon

By Jon Stein
CEO & Founder, Betterment  |  Published: September 30, 2015

Many people assume that automated investing services, also called "robo-advisors," try to target millennials.

The problem is that singling out this one group of people would be doing the rest of the population a tremendous disservice.

Everyone, regardless of age, deserves to benefit from smarter technology, especially when it comes to something as important as investing for the future.

McDonald’s has been trying to get millennials on board for years, but it’s been an uphill battle.

In 2013, the fast food chain introduced the chicken McWrap—grilled or crispy, in three different varieties—hoping that it would offer the personalization that millennials crave.1

When that didn’t work, in 2014, McDonald’s started in limited markets its Create Your Taste burger program, where patrons could build a burger to their liking.2 That’s the same year it tried to trademark “McBrunch,” an all-day breakfast menu that is said could go nationwide by October.3

Despite these efforts, McDonald’s announced in July 2015 that it saw a 10% drop in quarterly sales and earnings per share.4 Now, the fast food chain is continuing to search for new ways to improve their food and freshen the brand.

The desire to target millennials is hardly unique to fast food restaurants. Companies in all industries have agonized over how to cater to this mysterious group of young people (most often defined as those born 1980 to 2000; though I just missed the cutoff, I consider myself a millennial at heart) who are said to be impatient, used to instant gratification, and hyper tech savvy. Some of it has worked; some of it hasn’t.

Many people assume that automated investing services, also called “robo-advisors,” are following this targeting trend. Millennials love technology, people think, so they must be ideal customers for an investing service that’s completely automated and easy to use.

There is some truth to this; our own customer base is evidence of it (the average age of Betterment customers is 35, and about two-thirds of our customers are millennials). It makes sense, because automated investing is new, and millennials tend to be early adopters of new technology.

The problem is that singling out this one group of people would be doing the rest of the population a tremendous disservice. Regardless of age group, everyone deserves to benefit from smarter technology, especially when it comes to something as important as investing for the future.

Understanding the Fixation

Millennials are the nation’s largest living generation this year. There are more than 75 million of them,5 and they spend $1.3 trillion annually.6 So it’s easy to understand why brands are trying to win over this group of influencers.

The fascination with millennials goes back to a shift in technology. There’s never been a time in human history when young people knew so much—not necessarily more information, but new. Things are changing so quickly now that it causes a perceived divide between millennials and previous generations, at least in how brands perceive them.

In reality, it’s not so much that millennials understand technology better than others, it’s that they’ve grown up in a completely digital age and are used to constant innovation. It doesn’t faze them; they expect it.

When you’re close to something, you’re the first to know when it changes. For example, educators are the first to know when there’s been major progress in education reform. Healthcare workers are the first to know when there’s a new groundbreaking vaccine. Millennials are the first to know when there’s a new consumer-facing product or service that’s using innovative technology. But eventually everyone, no matter their age, benefits from these changes, no matter the industry.

Take the iPhone, for example. Sure, early adopters might have been slightly younger than people who use it now, but over time seemingly everyone started using it. The percentage of people age 55 and older who use an iPhone increased by 91% over seven years, from 2007 to 2014.7

Even my 91-year-old grandmother has an iPhone (she follows me on Instagram to see pictures of my 1-year-old daughter). The corporate world, which is infamous for holding onto the BlackBerry as long as it possibly could, now uses the iPhone. Millennials were first, but the rest of the population followed because the experience was simply better.

Advice for a Smarter Investor

Technological innovation will only keep evolving. Soon, there will be things even millennials don’t understand. Brands will start obsessing over Generation Z, and a new craze will be born.

That’s why age doesn’t matter. Whether you’re 21 or 91, you deserve to benefit from the best services available and the smartest investing best practices. Here are are a few that I believe are important for most investors of all ages and experience levels.

Think about investing in terms of goals.

When you invest, avoid blindly putting money into the market; instead, think about what you want to accomplish in the future in terms of specific goals. These are things like retirement, a home down payment, your child’s education, making your money last your lifetime, or simply building wealth for the long term. By having clear, concrete goals, you can put together a properly risk-adjusted investment plan, which can increase the likelihood that you’ll reach them.

Adjust your asset allocation for each goal based on your time horizon.

Your goals are different from each other, so you want to think of them as separate portfolios with different asset allocations based on time horizon. For example, a retirement goal with a 30-year time horizon can have a riskier allocation, say 90% stocks and 10% bonds, because it’s a long-term goal.

A shorter-term goal, on the other hand, such as a home down payment, or a portfolio that generates income, may have a less risky allocation—50% stocks, 50% bonds. As you get closer to reaching your goal, that allocation is likely going to change to reflect a shorter time horizon. When your portfolio is properly risk-adjusted, it is designed for optimal returns, helping to protect your money in a market downturn, and helping you to achieve your goals.

Understand what you’re paying in fees and taxes.

You not only want to look at fees that you’re paying your actual investment provider, but it’s also important to pay attention to any hidden costs in the funds in your portfolio.

For individual investors, basic index-tracking exchange-traded funds (ETFs) tend to be cheaper than equivalent index mutual funds, and have no minimums. For example, consider the price difference between Vanguard’s Total Stock Market ETF (VTI) and equivalent mutual fund (VTSMX) with no minimum. They both follow the same CRSP U.S. Total Market Index, but there is a significant cost difference. VTI has an expense ratio of 0.05%, whereas VTSMX has an expense ratio of 0.17%.  To achieve the same expense ratio of the ETF, you’d need to invest in the equivalent VTSAX, which has a minimum investment of $10,000.

Avoid mistakes.

Attempting to avoid periods of poor performance in the markets, investors are sometimes tempted to “time the market” by selling and buying large sums at different times. This strategy is very difficult to execute successfully over time, and more often than not results in reduced performance rather than improved performance. It’s a big reason why individual investors, on average, get only half the returns of the market.

1 http://adage.com/article/news/mcdonald-s-1-rank-millennials/240497/

2 http://www.usatoday.com/story/money/business/2014/12/07/mcdonalds-fast-food-restaurants-create-your-taste-millennials/19943987/

3 http://consumerist.com/2015/07/22/mcdonalds-all-day-breakfast-could-go-nationwide-by-october/

4 http://money.cnn.com/2015/07/23/investing/mcdonalds-earnings-sales-down/

5 http://www.pewresearch.org/fact-tank/2015/01/16/this-year-millennials-will-overtake-baby-boomers/

https://www.bcgperspectives.com/content/articles/marketing_center_consumer_customer_insight_how_millennials_changing_marketing_forever/; https://www.verizondigitalmedia.com/content/VerizonStudy_Digital_millennial.pdf

7 In 2007, 11% of iPhone users were 55+, according to comScore data. In 2014, 21% of iPhone users were 55+, according to comSore data. That’s an increase of approximately 91%.

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