Tags: Industry Trends

Huge sums of money will change hands in the coming years as the Baby Boomers begin to transition their wealth to their heirs. In fact, this wealth waterfall will dwarf the "Great Transfer" from the Silent Generation to their Boomer children and grandchildren, in which some $12 trillion was passed down.

This new cascade, referred to as the "Greater Transfer" in the FA industry, should reach roughly $40 trillion by mid century and ultimately peak at $59 trillion by 2060 or so, according to research by the Boston College Center on Wealth and Philanthropy.

As with any massive wealth transfer, there are both potential risks and rewards for financial advisors. The new inheritors, Generation X (1965 to 1980) and Generation Y, the Millennials (1981 to 2000), have distinctly different attitudes and investing behaviors from their parents and grandparents, and they think very differently about wealth management. 

Firms that strategically focus on the needs and expectations of this new generation of heirs are best positioned to create client experiences that capture a larger portion of these inherited assets.

Understanding the Baby Boomers

Today's Boomers can expect to live another 15 or 20 years once they hit retirement age at 65--and in fact, many choose to work well beyond that age. In addition to being aggressive accumulators of wealth on their own, two-thirds still expect to receive an inheritance from their parents.

Upon retirement, affluent Baby Boomers tend to travel and pursue personal goals, meaning that their heirs will likely be much older than the Boomers themselves were when they receive the bulk of their inheritance.

In addition, Boomers are much more concerned about tax planning strategies in their investment decisions compared to younger generations. Research released by State Street Global Advisors revealed that 74% of Boomers prioritized tax considerations compared to just 24% of Generation X and just 2% of Generation Y. They also tended to be far more conservative and focused on philanthropic goals than their younger heirs. 

For this reason, Boomers employ strategic giving while they are still alive, transferring lump-sum assets to their favorite charities and organizations, as well as their heirs, in order to exert some influence on how the money is used.

The emphasis on careful estate and tax planning creates a stronger bond between Boomers and their advisors, and most Boomers are quite comfortable with the advisor-led wealth management model. Interestingly, while over 80% plan to transfer their wealth, just 45% actually have a plan in place, and the majority, 55%, have not even begun the conversation about wealth transfer planning with their advisors.

A word of caution is in order, however: Firms that rely on the strength of their Boomer bonds to retain management of the inherited assets passed to Gen X and Gen Y will likely be disappointed. The State Street data revealed that just 29% of younger investors kept their parents' advisors once both parents died and they received their inheritance.

The Inheritors Have a Different Approach

There are striking differences both between Boomers and their heirs, and between Gen X and Gen Y, in their approach to investing and wealth management.  

Generation X are the skeptics who watched their savings take a beating during the housing crash and the Great Recession. Despite being proactive about their retirement savings, many are cash strapped and concerned about college education and other family expenses. This generation feels the least financially secure, which is understandable since they are the most heavily in debt (nearly 40% have more personal debt than assets).

Because this generation is perpetually playing catch-up and looking for big returns, they are much less risk averse than either the Boomers or the Millennials; nearly 50% have a high-risk tolerance compared to just 32% of Millennials and 21% of Boomers.

The Investment Management Consultants Association (IMCA) categorizes Gen X into two main investor personas: The Cautious Consulter and the Knowledgeable X.

Cautious Consulters represent about $1.5 trillion in assets and they are drawn to professional advisors to help them reach their financial goals. The bulk of their investing is specifically for retirement savings as opposed to pleasure or purchases. They tend to be buy-and-hold investors who make few trades and have little knowledge about various investment types and strategies. They have a low comfort level making their own financial decisions.

The Knowledgeable X cohort, on the other hand, represents about $5.4 trillion in wealth and are more comfortable with technology, although they still favor FA services. However, low management fees and greater transparency are key to earning their trust.

Millennials are more cautious and mistrustful of the FA industry as a whole. They are very education oriented and prefer to do their research before committing to a course of action; they're very hands-on and tech savvy.

The IMCA describes two Gen Y personas: The Builder and the Adrenaline Techie. Builders are early in their careers and have few financial assets to invest. In fact, they don't prioritize investing and as a result, are not very knowledgeable about financial strategies and investment options. They are extraordinarily fee conscious; costs drive their investment decisions over any other consideration. They have an estimated market size of roughly $270 billion.

Adrenaline Techies are at the other end of the spectrum. With a market size of just under $1 trillion, these Millennial investors are frequent traders and may even trade as a hobby. They consume information differently, through apps and podcasts, and they heavily favor robo-advisors and technology platforms that bypass the traditional advisor role.

A third class of Millennial investor has also emerged, the High Net Worth investor, as a result of the numbers in this generation who expect to inherit significant wealth or have already accumulated their own through membership in the tech entrepreneur class.

The Millennial HNWI has distinct characteristics from his peers. RBC Wealth Management described this investor as highly knowledgeable about financial strategies and investments and possessing a strong sense of responsibility about managing their financial affairs wisely. About 60% of Millennials in this category conducted their own research about investment strategies and 46% either actively managed or plan to manage their assets on their own. Only 23% used their benefactor's FA. Over half said they consulted their family when making important financial decisions.  

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Preparing for the Shift: What FAs Should Be Doing

Many WM firms are frankly unprepared for this massive generational wealth transfer. There are two separate challenges: Attracting and retaining the Boomers and their assets and creating a unique value proposition that addresses the goals and ideals of their younger inheritors.

In response to the first, wealth management firms need to approach family estate management from a holistic perspective, which means engaging not just the Boomers, but also their heirs, to prepare them for wealth transfer. The more an advisor knows about his clients, the better able he is to offer the type of value that retains assets after money changes hands.

Private banking institutions serving ultra high net worth families employ powerful predictive analytics to identify both the most valuable clients and the assets most at risk of attrition. These analytics have not been successfully deployed in the Affluent and HNW firms, but they are readily available and could easily be used to provide more valuable advice and portfolio management services.

In addition, FAs should focus on addressing and relieving Boomers' most pressing concerns when it comes to wealth transfer. The State Street research identified the following issues that worry older investors, in order of importance:

  • The heirs won't have the necessary knowledge to manage the family assets.
  • The heirs' financial decisions will be influenced by someone of whom the benefactor does not approve.
  • The heirs will not understand the value of money and squander the assets.
  • They heirs will not seek enough input from the benefactor's advisor.
  • The heirs won't engage in philanthropy with the gift.

Providing these value-added family estate planning services will help WM firms attract desirable Boomer clients.

When it comes to retaining inheritors, the focus is on policies and services that align with the ideals of younger investors. Research by Cerulli Associates and Phoenix Marketing International shows that fewer than half of all WM clients under age 39 who stand to inherit from a Boomer is happy with their benefactor's financial advisor. These assets are at definite risk for attrition.

The Cerulli research demonstrated a strong correlation between the client's age and the age of his or her advisor. This suggests that firms should place a high premium on attracting younger FAs and giving them the right training and compensation package to retain them.

Recognizing, as well, that these younger investors who stand to inherit may not currently have the type of assets that make them attractive clients today, should lead WM firms to re-evaluate their offerings and fee structures to align with the current needs of inheritors. Fee-based service models, asset allocation structures that enable an element of self-directed asset management along with managed assets, and technology-supported platforms are all steps in the right direction.

Through it all, advisors need to be aware of the life triggers that prompt wealth transfer planning in order to provide the right services and strengthen the client relationship.

State Street research showed that investors and advisors have very different approaches to triggers, with investors being more reactive while advisors are more proactive. For example, the top two triggers for advisors were a health scare or a death in the family, while investors were triggered by reaching a certain age and starting a family/discussing family legacy and values.

FAs should be alert to other triggers to engage clients in wealth transfer planning, such as a liquidity event or changes in tax or trust laws. Again, technology platforms give FAs the tools they need to stay on top of their clients' life events and any market situations that affect current and future WM needs.

Final Thoughts

The “Greater Transfer” is driving a re-evaluation of the future of the wealth management industry, which itself is undergoing The Great Transition. Consider that this massive wealth transfer to a younger, more hands-on and tech-savvy generation is occurring at a time when an overwhelming majority of today’s financial advisors are preparing for retirement themselves. 

The new class of younger FAs has failed to materialize, at least in the necessary numbers to serve the needs of the wealth accumulators and inheritors of today. Few firms are prioritizing their recruiting and retention activities to address these needs—research shows that less than one-fourth of FAs are under age 40 and a dismal 5% are 30 or younger. Even more alarming, just 19% of the nearly half of all current advisors who plan to retire in the next decade have even begun succession planning. 

If personnel is a major concern in The Great Transition, technology is also disrupting the industry. Again, firms have been startlingly slow to embrace the technology platforms and new business models necessary to attract both the new generation of inheritors and the FAs needed to help them manage their wealth. Research suggests that 60% of HNWIs will use robo-advisors to manage at least a portion of their wealth by 2020; estimates are as high as $8 trillion in AUM. While several major legacy firms are stepping up their robo-offerings, smaller firms are far behind the digital curve. 

Finally, rule changes and increasingly burdensome compliance costs are driving an unprecedented wave of mergers and acquisitions. Broker-dealers and RIAs, squeezed by compliance costs, see shrinking margins and an unsustainable business model. 
The future of wealth management is barreling down on an industry unprepared for the changes. It’s time for FAs to look to new business models, readily available technology tools, and a forward-thinking culture to get in front of the forces shaping the Great Transition.

You May Also Be Interested In Watching: The Great Transition Webcast

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Disclaimer

The above article is meant for information purposes only and is not intended in any way to provide legal or other advice for any specific situation.  Readers always should consult their own tax, accounting and legal advisors before taking any action related to the above article or subject matter.

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