Merrill: Put 'Sharing' Ahead of 'Possessing'
Advisors need to realize their clients don’t always yearn to own everything they buy these days. In fact, recognizing such an emerging consumption trend – and coming to grips with the so-called sharing economy – is a savvy way for FAs to link today’s family household budgeting needs with tomorrow’s investment goals.
At least these are two key takeaways from Merrill Lynch’s latest research on the rise of consumers opting to “share” goods and services rather than buying or possessing them outright over the longer term.
In a report made public last week, the wirehouse offers a “primer” for advisors and their clients about how to capitalize on “sharing” upstarts like Uber, AirBnB and Spotify.
The study makes a case that such companies are part of a transformation of business and social attitudes promising to reshape a dozen key sectors across the globe.
“We’re estimating this emerging sharing economy represents a $2 trillion market that’s only going to grow over time,” Sarbjit Nahal, a Merrill strategist and co-author of the report, tells FA-IQ.
But it’s still in the early innings, he adds, for a sharing economy that encompasses everything from peer-to-peer and on-demand to collaboration services.
The research piece points to seven different “entry points,” or segments that investors might want to consider. It also comes with a list of 50 “advanced stage startups” that Merrill figures are prime candidates to track.
At the same time, Nahal isn’t suggesting advisors make any wholesale portfolio changes as consumption trends turn to a mindset of sharing – rather than possessing – goods and services.
“In talking to different types of investors, advisors might want to bring to their attention listed companies that are creating new partnerships in this space and doing M&A deals as a way to get more involved in the shared economy,” he says.
It’s a message likely to resonate with a cross-section of clients, Nahal adds. He notes that studies show 75% of millennials prefer to spend “on an experience” instead of “material possessions.”
And while such a “sharing attitude” is a major force in dealing with younger investors, the Merrill analyst also points to research indicating that two-thirds of all global consumers – both young and old – are now willing to share services.
Phoebe Venable, president at CapWealth Advisors in suburban Nashville, Tenn., is noticing the same trends.
While younger family members are the most receptive to such a “sharing” dialogue, she says older clients are also asking more these days about shifting market tides.
“It’s a subtler shift – they’re paying more to have meals delivered and renting more services instead of paying for them all at once,” says Venable, whose indie RIA manages about $800 million.
No matter how small of a demographic change is taking place in spending behaviors, she adds, clients seem to appreciate her attention to both a changing economy and their shifting personal consumption behavior.
“In a lot of cases, they don’t even realize how big of an impact a shared economy might make in shaping their long-term savings outlook,” Venable says.
The rising fortunes of goods being shared rather than owned is also being addressed in her firm’s portfolio building process.
Analysts and portfolio managers at CapWealth have created a special filter to uncover stocks primed to take advantage of the shared economy, according Venable.
“This is a huge fundamental shift in consumer markets and investing strategies -- we think it’s going to result in margin compression across the entire retail space," she says. "So we’re making our clients aware of these changes and how their portfolios might be impacted in the future.”
David Karp, founding partner at PagnatoKarp in Reston, Va., is also urging advisors to think differently about how to talk to clients in the midst of an “absolutely transformative” sharing economy.
“We need to realize as an industry that this sort of technological evolution can lead to significant changes in our clients’ short-term and long-term investment planning goals,” he says.
At PagnatoKarp, which manages $3.4 billion, Karp tries to keep investment discussions about tapping into a sharing economy centered around broad asset classes rather than sectors.
Karp points out that many pure-play “sharing” competitors remain either privately held or relatively small in terms of daily trading volume and market-cap size. Such new-line companies, Karp observes, can also be difficult to value and categorize.
“We think it’s important to keep our investors out of hot water in trying to take advantage of this emergence of a sharing economy by keeping their portfolios concentrated on business fundamentals,” Karp says. “And that’s leading us to more in-depth discussions about the importance of a healthy allocation to highly diversified and global stock portfolios.”