When Facebook launched the third-largest initial public offering in history last year, to the tune of $104.2 billion, the deal created a handful of newly minted billionaires and turned hundreds of fresh-faced tech wizards into millionaires overnight. With Twitter's upcoming IPO estimated at $1.5 billion, the nouveau riche are about to get a boost yet again.
Despite unprecedented student debt, an underwhelming job market, and being the first generation to accumulate less wealth than their parents according to The Urban Institute, a significant portion of today’s young adults are faring well. According to IRS data compiled by The Tax Foundation, approximately one in five people earning $1 million or more annually is under age 45. There are currently 16.6 million people under age 35 living in households with income that’s more $100,000 per year, according to research by advertising firm Digitas.
"There are new channels and new avenues for Generation Y to create wealth that simply were not available to the Boomer generation," says Dan Sudit, a wealth advisor with BMO Private Bank's Seattle office who estimates that 15 to 20 percent of his clients are millionaires under age 35. "But the Boomer generation had a greater likelihood or greater ability to create more modest wealth, not significant wealth."
Many Gen Y millionaires didn't create all of their wealth. Nearly half chalk up a significant part of their wealth to inheritance, while 35 percent stated that "family connections" made a substantial contribution, according to a study by Spectrem Group, a market research and consulting firm for the wealth management industry.
But that's not the whole story, says Bob Oros, executive vice president of Fidelity Institutional Wealth Services. "Nearly all young millionaires are actively employed, making a significant annual income," he says, citing research from Fidelity. "Inheritance may be getting them started, but they're accumulating significant amounts of wealth on their own."
For many, inheritance plays no role at all. Tales of Zuckerbergian twenty- and thirty-something self-made millionaires and billionaires dominate Gen Y culture so much that some believe it's providing young entrepreneurs with unreasonably high expectations. But it's hard not to be impressed by cases like millionaire Josh McFarland, the 36 year-old CEO and co-founder of predictive consumer data platform, TellApart. Hailing from a blue collar household in Wyoming, McFarland graduated from Stanford then spent five years as a lead product manager for Google before cashing in his stock options to branch out on his own. Since launching TellApart in 2009 with the help of venture capital. That company has grown to 50 employees and is projected to bring in over $50 million in annual revenue.
It's not just that the younger cohort is accumulating wealth differently; they're spending it differently too says McFarland.
"The former patterns of conspicuous consumption are much less in vogue now,” he says. “Experiences are what it's all about. I have a two month-old at home and so we've hired a night nanny. For the equivalent of $200 a night, my wife and I both can have incredible restful, restorative sleep. From my parent's perspective, we have nothing to show for that $200 per night. On the other hand, from my perspective and my peers, it is so incredibly valuable to just get that sleep and that sanity back. "
Adam Nash, Chief Operating Officer of Wealthfront, the largest software-based financial advisory firm that caters to young investors including McFarland, says that the emphasis on experience echoes in Gen Y's financial planning strategies too. He routinely hears questions like, "'Can I take three months off to travel? If I want to start a new company, can I live ok for a year or two without being paid and if so, how would that work?,'" he says. "It’s not the traditional, 'Will I have enough money at 70 to retire with this income?’'"
Research from Fidelity shows that young millionaires are three times more likely to own boats and vacation homes as Baby Boomers; four times more likely to join a country club; and more than seven times more likely to fly first class. They also have different investing habits than their parents. Young millionaires are more diversified in their asset holdings and more inclined to invest in "alternative asset classes" like hedge funds and commodities than Boomers reports Northern Trust.
A NEW APPROACH TO INVESTING
They also have a different relationship with financial advisors. "Young millionaires really want to make sure they're receiving value from the advisor," says George H. Walper, Jr., president of Spectrem Group. That means advisors can expect more questions about fees and more scrutiny on their investment strategy "They also are very focused on hiring an advisor that fits them as opposed to perhaps someone their parents said was a good advisor."
Nearly six in ten millennials want to be involved in the daily management of their investments (versus half of the Boomers), and almost one in three is highly educated about financial and investment products, according to Spectrem research.
They're also investing both time and money in socially conscious endeavors. Nearly 40 percent give more than $30,000 annually to charity, reports Fidelity, versus six percent of the Boomers, with average yearly charitable donations hovering at $54,000. Eight in 10 millennials donate time as well.
They’re also more aware of their position in relation to their peers. "It's really important to realize that the proactive and voluntary redistribution of wealth has got to be a strategy for those of us who are put in this incredible and lucky position," says Josh McFarland. "Whether that's through charitable gift-giving or socially-consciously investing, or the sponsorship of scholarships for the next generation."