Millennials fight back against the fund industry

Demanding younger investors pose a problem for underperforming, complacent funds, says Sarah Moore.

Younger investors expect far more from the investment industry than older ones and that's likely to be a problem for underperforming, complacent fund firms. Fewer than one-fifth of millennials (people born between 1980 and 2000) would be prepared to hold an underperforming fund for more than a year before pulling their money out, according to research from US fund house Legg Mason, which surveyed more than 5,000 "wealthy individuals" across 19 countries. Almost three times as many investors over the age of 40 would stick with a poorly performing fund.

The findings are an indication of how this generation's investing habits are likely to change the fund management industry, say Chris Newlands and Aime Williams in the Financial Times. For example, if fund managers have to prepare for these investors pulling their money out of a fund faster than current clients, they will have to start holding more cash to meet these redemptions.

With interest rates at such low levels, this may damage potential returns. "The reality is that cash is expensive," Paul Traynor of fund company BNY Mellon tells the FT. "That would be a drag on the performance of a fund."

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It's not just performance that bothers millennials, according to research by consultancy Deloitte. Younger investors also want to be "self-directed in their investments": they want immediate access to up-to-date information and to be able to make investment decisions independently. These demands are changing how asset managers communicate with their clients, with some developing more sophisticated technological platforms.

In one case, Seven Investment Management, a UK asset manager, has hired the video-game developers behind Donkey Kong to work on its mobile-phone app. But firms also need to work on other aspects of their business, say Deloitte, such as greater transparency on costs and prices.

Adapting to this may not be easy for an industry that is "pale, male and stale", say Newlands and Williams. But if it doesn't work out how to appeal to a younger demographic, other firms, such as one of the tech giants, will "break into the market and fill the void".

Sarah is MoneyWeek's investment editor. She graduated from the University of Southampton with a BA in English and History, before going on to complete a graduate diploma in law at the College of Law in Guildford. She joined MoneyWeek in 2014 and writes on funds, personal finance, pensions and property.