The term “millennials” is likely to conjure up images of unemployed or underemployed college grads living in their parents’ basements. Even those with good jobs and lucrative careers typically won’t earn a lot of money for years to come. But this group is out to change the world and, in the process, will turn the financial advisory world on its head.

At 83.1 million strong, millennials—born between 1982 and 2000—outnumber baby boomers and represent more than one-quarter of the U.S. population, according to U.S. Census Bureau estimates released earlier this year. They’re also expected to inherit $30 trillion over the next several decades, in the largest-ever generational wealth shift.

But it’s millennials’ mind-set that really sets them apart. According to a 2014 study from U.S. Trust, 67% of them, compared with 36% of baby boomers and 44% of Generation X, agree their investment decisions are a way to express their social, political or environmental values. Most millennials (73%) also believe it’s possible to achieve market rate returns by investing in companies based on their social or environmental impact.

Paul Ellis, a CFP licensee who practiced with Ameriprise for 23 years and now consults full time, offering advisors marketing and portfolio strategies for sustainable investing, is intrigued by what he refers to as the “millennial generation/impact investing nexus.”

“I think it’s the most important strategic issue for the next 20 years in our industry, and the advisors who make it a priority will capture market share in assets under management and millennial clients,” he says. “They will also influence portfolio product construction and implementation strategies for every firm in the industry.”

Millennials have made it very clear that they want to work with like-minded advisors, says Ellis, owner of Paul Ellis Consulting in Beacon, N.Y. According to research he points to from PricewaterhouseCoopers, 98% of millennials plan to find their own advisors instead of using their parents’. “It’s incumbent on advisors to make the next move,” he says.

Ellis, who notes that some very large wealth transfers have already occurred between wealthy baby boomers and their millennial children, has heard investment firms voice concern that the younger generation will move to new advisors more interested in sustainability and impact investing.

Not surprisingly, asset managers are starting to build expertise in this area. Bank of America Merrill Lynch, JP Morgan and Morgan Stanley have all introduced impact platforms. In October, Goldman Sachs Asset Management (GSAM) acquired Imprint Capital Advisors LLC, an impact-investing firm headquartered in San Francisco.  

“An increasing number of our clients are asking about how their investments align with their values and what opportunities are to invest with impact,” says Hugh Lawson, the global head of institutional client strategy at GSAM who leads the environmental, social and governance investing efforts for the firm’s Investment Management Division. “Millennials are core to this, but the interest extends beyond that demographic.”

Gearing Up
The Wealth Consulting Group, a Las Vegas-headquartered independent wealth management and financial services company that manages approximately $500 million in assets for 1,400 households, is giving much thought to millennials and impact.

According to Jimmy Lee, the Wealth Consulting Group’s CEO, consulting with Ellis has helped his firm gain a better understanding of the impact landscape and how to better communicate its value to clients and prospects. In September, his firm launched four high-impact model portfolios, which its investment committee built by leveraging research from Morningstar and other research firms. Lee’s firm is also working on a separate-account version.

The Wealth Consulting Group’s new high-impact portfolios invest in companies that are developing innovative solutions to global sustainability challenges, promoting gender diversity and women’s leadership, and supporting community-based financial institutions that promote small businesses, health care, education and housing. The firm works with fund managers that are actively involved in shareholder advocacy and public policy engagement.

“Even though we’re not the first out of the gate, I believe we’re one of the early adopters of this strategy for client retention and growth,” says Lee, who notes that, according to Cerulli Associates, 63% of advisors have little or no interest in sustainable investing. “In order to keep the family line, we have to do this before the older generation passes away.”

The Wealth Consulting Group already meets often with clients’ millennial children to discuss their parents’ estate planning and how inheritances will affect the children’s lives. The firm also helps the next generation with budgeting and debt concerns, including student loans. Lee hopes the new platforms will appeal to millennials, who he says think differently about money. A growing number of the firm’s older clients also want to align their investments with their personal values.

The firm has begun to ask clients more about their investing values and interest in impact during its fact-finding. It doesn’t try to push clients toward impact investing, but lets them know there are opportunities to invest without giving up returns. Lee notes that multiple studies have established a link between sustainable investing and improved performance.

San Francisco-based Wetherby Asset Management, which has more than $4 billion of assets under management and about 500 clients, is also stepping up its emphasis on impact investing.

“It’s more about serving all of our clients and less about a millennial strategy,” says CEO Debra (Deb) Wetherby, who notes that her firm’s early adopters were typically older clients who had been philanthropically active and saw impact investing as another way to extend their social impact objectives.

However, she adds, “A higher percentage of our millennial clients, like the U.S. Trust data says, want their values reflected in their portfolios.” They’ve either created their own wealth or are second- and third-generation members of wealthy families she works with.

Wetherby Asset Management had a consulting relationship with Imprint Capital Advisors but then brought its expertise in-house this year by creating a new position: director of impact investing. “It’s an opportunity to do something we should’ve done a couple of years ago: building our internal capability,” says Wetherby. Justina Lai, the new director, was formerly a director and senior investment analyst focused on private market strategies at San Francisco-based impact investment management firm Sonen Capital.

Lai and Wetherby have been discussing whether it’s best to do impact investing by focusing on specific environmental or social issues or by looking at specific asset classes. “The reality is, I think we’ll do some of both,” says Wetherby.

“What’s interesting is clients’ interest in impact runs the gamut,” says Lai. Some only know what they want to avoid, while others may be interested in a particular issue or willing to learn how issues fit together—for instance, the way water management affects the rights and lives of women and girls. Clients further along in their journey through this world may wish to take on more complex investments.

“Across almost all asset classes, there are a sufficient number of high-quality opportunities so we will be able to meet clients’ needs and goals,” Lai says.
Millennials tend to be more risk averse, says Wetherby, because they haven’t had great experiences tied to taking market risk. But, she says, “Somehow they’re more willing to take risk in the impact space than in the traditional space because it’s sort of a twofer.” They also “reject out of hand the notion of a trade-off [of return for impact],” she says. “I think it’s because they’ve grown up in an age where they’ve seen it work.”

Wetherby Asset Management uses outside managers and strategies. It has used impact-oriented firms Parnassus Investments, Aperio Group, Walden Asset Management, Boston Common Asset Management and Generation Asset Management.

Wetherby and Lai note that there are many impact-related strategies in the public equity space. Private debt is also relatively easy to invest in, they say, because the instruments are straightforward and simple to understand. For example, their firm has used private notes from Root Capital, Calvert Foundation and MicroVest.

Younger wealthy investors tend to do limited investing in private equity and private real assets because it’s less likely to fit their illiquidity and risk budgets, says Lai.

Ellis, the consultant, says high-net-worth investors are asking for more impact products and driving their advisors to participate in venture capital, sustainable farming and opportunities in developing countries. As more dollars flow into sustainable investing strategies, he says product availability will continue to expand and become more accessible to people with less money to invest—including millennials.

One of the best ways to develop millennial clientele, he says, is through a retirement plan practice. That’s because millennials often say the only place they can currently afford to save money is in their retirement plans. As he sees it, this also lends itself well to getting more involved in the impact investing space.
Advisors can help millennials and other clients approach their employers about integrating more impact strategies into their retirement plan offerings. Those who coach clients about impact and accompany them to talk to employers about adding these strategies could also end up landing the employers’ personal investing and retirement plan business, says Ellis. He did this in his own practice.

He encourages advisors to work with established portfolio managers in the impact space, such as Pax World, Trillium Asset Management, Calvert Investments and Domini Social Investments. “They’ve researched it inside and out,” he says.

The key to success in impact investing, he says, is for advisors to build strong relationships with product companies. “This is not rocket science,” he says. “Advisors have done this in the traditional investing world already.”

Behind The Scenes
Millennials don’t just want to invest for impact—many are jumping at job opportunities for impact leadership roles. That doesn’t mean they’re qualified. According to the 2015 “Impact Investing Human Capital Survey” from executive search firm Korn Ferry, most candidates aren’t. But Korn Ferry and others are guiding employers on how to attract and retain impact-investing talent and expertise.

Meanwhile, more business schools are offering courses and hands-on training in impact investing and social enterprise.

Impact investing has been a natural fit for Avi Daman, the 28-year-old co-founder and CEO of New York City-based Edco, an online fund-raising platform that helps schools raise funds for student programs and equipment. He is a principal at Stax Development Corp., which launched Edco in 2014 and is the business-incubator affiliate of strategic consulting firm Stax Inc.

“I found that my business background, from my college education to my professional skill set, could really be put to use in my philanthropic pursuits and have an outsized impact,” says Daman, who has a degree in finance and has been involved in community efforts since high school.

What he likes—which resonates with many millennials—is that measuring impact and the bottom line drives much more effective allocation of resources and much more effective and targeted programs. “It’s also driving everyone around a core set of tangible, quantifiable goals,” he says, “instead of just a core mission, which is often a little more difficult to steer an entire ship towards.”