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Fidelity Report Warns Young Investors Have Stunningly Unrealistic Return Expectations

By Thomas Coyle October 17, 2017

Well-off younger investors have outsized expectations for financial returns, a state of affairs that could pose client-relationship problems for financial advisors down the road.

Millionaires in Generations X and Y — between ages 21 and 51 — expect yearly investment returns of 16%, Fidelity Investments says in its 2017 Millionaire Outlook study. That’s opposed to annual return expectations of 7% among baby boomers.

Older investors’ hopes are broadly in keeping with historical results from the S&P 500, after inflation. But even those data are goosed by dividends and subject to an avalanche of variables, making it tough to predict outcomes for generations at a time.

In fact, David Canter, head of Fidelity’s RIA-support business, says historically bullish returns on the S&P 500 since 2009 amount to annual gains of 12.6%, “well short of what young millionaires want” from their securities going forward.

The high return expectations of young millionaires caught researchers at Fidelity off guard.

“We were surprised by 16% — especially from a cohort we thought was conservative” because many of them came of age in the financial crisis of nearly a decade ago, says Canter.

Any client — no matter how young or old — who tells Frisco, Texas-based advisor Ryan Fuchs of Ifrah Financial Services that he expects yearly returns of 16% is in for a serious chat about risk.

“To get a consistent, annualized return of 16% you would have to be taking an excessive amount of risk,” says Fuchs, who manages about $80 million at Ifrah, which is based in Little Rock, Ark. In practice, this means straying out of registered investments and making imprudent allocations across the board. And that may be to no avail, Fuchs adds, since “there are no guarantees in investing.”

Though a return expectation of 16% strikes Geoff Owen of GreerWalker Wealth Management in Charlotte, N.C., as a bit of a fever dream, he says over-hopeful clients can be brought to earth with “tutelage about market history, time-period comparisons, [and] assumption of risk across different asset classes.”

David Canter

Adds Owen, whose employer manages about $400 million: “I suspect the conversation would need to go a level deeper too.” Specifically, he thinks anyone harboring extreme return cravings needs to think about “concentration of stock issues.” That’s a by-product of so many younger clients having done well piling into stocks like Amazon, Apple and Netflix.

“They need to realize the risk exposure of this also,” says Owen.

Brett Anderson of St. Croix Advisors in Hudson, Wisc., agrees talking things out can help.

“There are three kinds of investors,” says Anderson. “School bus” investors don’t like risk at all, while “Ferrari” investors have high risk tolerance and a good understanding of finance generally, he explains. Meanwhile, what he calls “minivan” investors go up the middle.

Trouble is, most investors think they’re Ferrari types, according to Anderson, whose firm charges clients by the hour. “Yet when you start talking about possible financial losses that investors can experience, they all seem to jump in the minivan.”

As a group, advisors seem to be in sync with Fuchs on the best corrective to Spanish-castle expectations. Daydreamers have to be shown “that if they will create a plan, stick to it, and have some reasonable expectations, they don’t need to get 16% annualized to get there,” the Texan says.

Fortunately, millionaires of Generations X and Y want help from financial professionals — especially around planning. To this point, the Fidelity report says 62% of the X and Y cohort “want their financial advisor to provide more comprehensive services.”

For Canter, this suggests an innate desire for input and advice that could counter preoccupations with unrealistic investment returns and open the young affluent to influences that could temper their outlandish expectations.

In another top-line finding about next-generation clients from Fidelity’s Millionaire Outlook report, 53% of investors under age 51 say they would ditch an advisor for not using technology enough and to their liking. Only 29% of boomers felt as strongly.

It’s also worth bearing in mind for hiring practices that younger millionaires are more likely to be female (44% of the X and Y set versus 32% of boomers) and non-white (17% versus 5%), according to Fidelity.

“Investors are getting younger and less male,” says Canter. “And that’s a trend that’s likely to continue through and beyond the tipping point” of 2030, when the X and Y Generations start controlling more private wealth than boomers.