According to young investors, progress toward goals matters most

Key takeaways

• Research demonstrates that serving younger clientele leads to higher growth for advisory firms.
• Younger investors measure the performance of their investments based on progress toward their goals and are willing to accept larger short-term drawdowns on their investments.
• By targeting the size, value, and profitability premiums, advisors can help young investors make more progress toward their long-term goals.

Younger and older investors are likely to have different preferences in music, movies, and fashion. How about investments? And if so, what does it mean for financial advisors serving different generations?

Dimensional Fund Advisors regularly conducts a Global Advisor Study and a Global Investor Study, collecting survey data from advisors and advisors’ clients (the investors) to help advisors better understand their businesses and the industry at large. A review of the Global Advisor Study from 2015 to 2019 identified an aging client base as one of the most meaningful challenges and strongest detractors from growth for a financial advisory firm.^[1]

Naturally, many advisors may therefore be seeking to win over and retain more younger clients. For many firms, the focus on younger clients will kick in as they seek to engage the future beneficiaries of their older clients or seek to create opportunities for their younger advisors. Understanding how younger investors view investing and the value they place on planning can support this effort. But what differentiates younger clients from older?

A recent examination of results from the Global Investor Study reveals that younger investors tend to care most about seeing progress toward their goals, whereas older investors are more interested in absolute return. We classify “younger investors” as those younger than 40 and “older investors” as those older than 60. Middle-age investors fall in between.^[2]

From 2017 to 2019 and from 2021 to 2023, the Investor Study collected 38,976 responses to the question “When I look at the performance of my investments, what is it most helpful to see?” Exhibit 1 shows the percentage of each age group that selected “progress toward my goals” as the first choice.

Of young investors, 33% selected “progress toward my goals,” compared with 26% of middle-age investors and just 18% of older investors. To put it another way, young investors were almost twice as likely to prioritize progress toward their goals as older investors. The most frequently selected first choice by older investors was “percentage return over a given period.”

Exhibit 1 Preferences by Age Cohort

Notes: The Global Investor Study is sent out each year to the end clients of participating third party advisor firms that use products of Dimensional Fund Advisors and is administered through an online questionnaire. The study gathers highlevel demographic information, including client age, gender, and investable assets, and it features rotating themes. Firms can choose from a set of optional questions to accompany the standard study questions and customize the study for multiple client segments. For the purposes of this article, data are pulled from the Investor Study from the years 2016– 2023. The table reflects 38,976 responses to “When I look at performance of my investments, it’s most helpful to see” from survey years 2017–2023 (the question was not asked in 2020) and 87,173 responses to “I primarily measure the value received from my advisor based on” from survey years 2016–2023. There are instances in the data where respondents have answered one question but not the other. Percent responses are defined as the percentage of respondents within a given age bucket that selected a given choice.

The results are consistent when survey respondents were asked how they primarily 2 Dimensional Fund Advisors Please see the end of this document for important disclosures. measure the value they have received from their advisor. Of the 87,173 responses collected from 2016 through 2023, 31% of young investors selected “progress toward my goals,” whereas just 13% of older investors selected that response. In this case, young investors are more than twice as likely to measure the value of their advisor based on progress toward their goals. For older investors, the first-choice measure of the value of advice is sense of security/peace of mind (selected as the first choice by 39% of older investors). Like with tastes in pop culture and clothes, the generations can differ.

Data from the Investor Study also reveal that younger investors tend to have a high tolerance for drawdowns. When asked, “At what level of negative returns would you call your advisor to make a significant change to your investments?” responses indicate that if the market drops by up to 15%, only 14% of young investors will call their advisor, while 21% of older investors will do that. The difference remains similar if the market were to drop 30%.^[3]

The emphasis on goals-based investing and a willingness to accept drawdowns creates an opportunity for advisors to better serve their younger clientele through targeting equity premiums while maintaining a broadly diversified portfolio.

Research by Dimensional shows that taking advantage of reliable equity premiums can improve retirement outcomes.^[4] The research compares a hypothetical plain total market portfolio with a hypothetical integrated core portfolio that emphasizes the size, value, and profitability premiums. Efficiently targeting these premiums can reduce the likelihood of running out of money in retirement and can lead to larger bequests.

The results also highlight the value of holistic wealth management. Goals-based models, for example, are another tool available to help investors build solutions focused on financial goals rather than just short-term investment returns.

It turns out music, movies, and fashion aren’t the only things dividing generations. When advisors understand the distinct preferences of younger clients, they can refine their service models and engage planning technology that helps drive discussion around goals and financial well-being. Specifically, recognizing and adjusting to younger investors’ focus on progress toward goals may make it easier for advisors to win over the next generation of clients.

By Gordon Titman, Associate, Research

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Notes:
[1] Wei Dai, Marco DiMaggio, Kaitlin Hendrix, Wiebke Lamping, Savina Rizova and Trey Roberts, “What Drives Growth for Financial Advisors? Evidence from a Multi-Year Survey” (white paper, Dimensional Fund Advisors, May 2023).The study shows that every percentage point increase in the number of clients over 70 years old is associated with AUM growth that is 21 basis points (bps) lower for that year, whereas the reverse is true for clients under 40. Every percentage point increase in clients under 40 is shown to be associated with a 30- basis-point increase in AUM growth for that year. Based on a sample of 1,369 firms.
[2] Age is provided by survey participants answering a multiple-choice question with age ranges. The age range changed across survey years. In survey years 2016–2020, the age range choices were 18–34, 35–44, 45–54, 55–64, 65–74, and >74. In survey years 2021–2023, the age range choices were <40, 41–50, 51–60, 61–70, 71–80, >80. Younger investors include those age 44 and below in survey years 2016– 2020 and those below age 40 in survey years 2021–2023. Older investors include those over age 64 in survey years 2016–2020 and those age 61 and above in survey years 2021–2023.
[3] Results are based on a sample of 6,778 responses from survey years 2018–2020.
[4] Mathieu Pellerin, “How Targeting the Size, Value, and Profitability Premiums Can Improve Retirement Outcomes” (white paper, Dimensional Fund Advisors, April 21, 2023).

• Profitability premium: the return difference between stocks of companies with high profitability over those with low profitability.

• Size premium: the return difference between small capitalisation stocks and large capitalisation stocks.

• Value premium: the return difference between stocks with low relative prices (value) and stocks with high relative prices (growth).