Talking about my generation

According to Karl Cheong of First Trust, the investment community can’t afford to ignore millennials, considering the major generational transfer of wealth that’s in the cards

Talking about my generation
It’s a common criticism of financial planning that the makeup of the industry is far too old, male and white. While Wealth Professional’s Women of Influence and Young Guns features show that this perception isn’t entirely true, the fact is that this can be a difficult industry to really build a reputation in before the grey hairs set in.

With 14 years in the industry to his name, Karl Cheong is far from a novice, but he is a good example of the new breed of wealth professionals making a name for themselves. The generation gap in the industry, he explains, means that younger investors are largely being ignored. “When I think about the financial services industry, there is no real leadership speaking for millennials,” he says. “One of the largest transfers of wealth in history will be going to millennials, but firms are only now starting to really target them as a consumer base.”

The millennial investor
At First Trust, where Cheong is head of ETFs for Canada, clearly there is a different view. In Cheong’s opinion, the fact that much of Canada’s wealth will be passed down through the generations in the decades ahead means advisors can’t afford to put off building those relationships.

“This generation is very heterogeneous,” he says. “Myself, I am biracial; my family is from China and South America. I’m bilingual; I grew up in Quebec. When I see a lot of the students coming from universities that I want to hire, I can relate to them because a lot come from immigrant families.”

Another characteristic of millennials, and one that’s contrary to their political and social leanings, is how conservative they tend to be as investors. Having much less wealth than older generations tends to affect your proclivity for spending, of course, but Cheong also points to the fact that the 2008 crash still looms large in the memory of this generation.

“Millennials have been shaped by events in their lives,” he says. “The older ones went through the tech crash, so they have experienced two massive market corrections. This generation tends to be very risk-averse, and they often carry a lot of student debt.” Being in the red – or having just escaped from that state – means this generation tends to hold the purse strings tight – and so, on the whole, they favour less costly investment options.

“ETFs are low-cost, which fits with the mindset of millennials,” Cheong says. “They are frugal with their money and like to shop around. Think of the growth of companies like Amazon. ETFs are the best offer out there when it comes to fees. They are also very transparent – they publish holdings daily.”

Dawn of the ETF era
Cheong broke into industry in 2002 with AIC and later built his reputation in ETFs with Claymore Investments. At that time, there were a handful of ETF providers, but that number has since ballooned. The first-ever ETF was, in fact, traded on the TSX: the Toronto 35 Index Participation Fund (TIPS), which still trades today, albeit under a different guise (XIU). The US followed suit with its first ETF in 1993 (SPY) and since then has outpaced Canada’s growth considerably – ETFs account for $2 trillion in the US, versus $100 billion here.

It was Cheong who brought Canada its first US dividend ETF, first European ETF, first managed futures ETF and first broad commodities ETF, so he is well placed to discuss how the industry has grown from a niche product when it was born in Canada back in 1990 to the $100 billion it accounts for today.

“The industry only really started to grow after the financial crisis,” he says. “The ETF structure held up extremely well during that time, and there has been even more growth since then. If you look at them compared to mutual funds, it’s a no-brainer. ETFs are to mutual funds what the internet has been to newspapers.”

It’s a bold statement to make, considering mutual funds in Canada still account for more than $1 trillion in assets, about 10 times the amount of ETFs. Regardless, Cheong is confident that ETFs will continue to gain ground on their more established rival – thanks in no small part to the next generation of investors.

“Millennials don’t have hundreds of thousands of dollars to invest,” he says. “When you have an ETF that packages a full industry for you and gives you that exposure, it helps as a learning tool as well. One stock does not give you that diversification or that instant gratification that millennials like so much.”

According to a recent ETF study by Charles Schwab, the numbers are striking: “A recent study I read showed that 41% of millennials’ portfolios are in ETFs; that compares to 21% for all other investors,” Cheong says. “When you think about it, ETFs are millennials, too – they just turned 25 this year.”

Another feature of the changing face of investment in Canada is the emergence of digital advisors. Similar to ETFs, Cheong believes this development will be embraced much more by the millennial generation.

“Robo-advisors and automated investment services make a lot of sense for younger people,” he says. “[Millennials] are somewhat forgotten by advisors, who only want to focus on client accounts of over $500,000. Robo-advisors will help these people grow their wealth. Younger people want an online option for everything, so that is transferring to investments, too.”