The $84T Great Wealth Transfer
Wealth managers are preoccupied with two data points: $84.4 trillion and 70% to 80%. The first is the estimated wealth that high-net-worth individuals in the U.S. will pass to their heirs through 2045. The second is the percentage of heirs who may switch their business from their parents’ advisor to a new wealth manager.
Cerulli Associates, a financial services market research firm that provided the estimates, forecasts that of the $84.4 trillion, baby boomers will leave only $12 trillion to charity, with the remainder going to family.
Baby boomers today account for 50% of total wealth in the U.S., according to Fed data, dispersed across several asset classes, followed by Gen X (29.5%), the silent generation (11.9%), and millennials (8.5%). And as the silent and boomer generations fade away, the lion’s share of that wealth will fall into the hands of younger individuals.
Yet, despite 71% of adults with children feeling comfortable having generational wealth discussions, only a quarter of Americans (27%) have had the discussion, according to research from Edward Jones, in partnership with NEXT360 Partners and Morning Consult.
Among Americans who have or plan to have generational wealth discussions with their families, roughly 40% have already discussed savings for retirement and managing personal finances (36%); however, not many have discussed important topics like charitable giving (21%) and family business succession (23%).
“With people living longer, the wealth transfer conversation needs to be a dynamic, ongoing dialogue. “’The Talk’ must happen before ‘The Transfer,’” said Joe Coughlin, senior advisor to NEXT360 Partners. “Our research found that there are a lot of assumptions about inheritance, but limited effort to clarify through a discussion.”
So far, this “great wealth transfer” is a relative trickle—about $2 trillion a year, said Chayce Horton, a senior wealth management analyst at Cerulli. However, “transfers are definitely increasing beyond our expectations.”
This has far-reaching implications for how businesses approach all aspects of their operations, including technology, to engage and attract the next generation of investors and clients. It doesn’t help that most advisors are unprepared to work with the future generation.
Shifting Investment Focus
To vie for clients and the fees generated by these enormous wealth transfers, wealth managers may need to shift their investment focus away from traditional stocks and bonds toward private equity and other alternative instruments that are more popular with the younger generation.
Three-quarters of wealthy investors under the age of 43 believe “it’s not possible to achieve above-average returns solely on traditional stocks and bonds,” according to a recent survey conducted by Bank of America’s private bank. The next generation prefers private equity and other personally involved strategies.
According to BofA, those under the age of 43 are disproportionately interested in sustainable investments, with three-quarters prioritizing them compared to one-quarter of all survey respondents. “They are more confident in their ability to direct their own investment,” said Lauren Sanfilippo, a senior investment strategist at BofA.
The enormous wealth transfer will result in a dramatic shift in perception. Most private banks’ clients are wealthy individuals who have developed successful businesses, and most of the generations to come will be heirs.
Losing “Preferred Client” Status
A more difficult aspect is that heirs may lose their “preferred client” designation as wealth divides with succession, entitling them to less extravagant private banking services than their parents. “Different wealth tiers require different services,” Cerulli’s Horton said. “You can’t service four $12 million accounts for the children the same as one $50 million account held by the parents.”
However, baby boomers may not be passing on as much as their offspring believe, and many studies have identified a significant disparity between how much millennials hope to inherit and how much aging boomers intend to leave them.
A survey from Alliant Credit Union, for example, found that 53% of millennials anticipate inheriting at least $350,000 from their parents, while 55% of boomers report that they’re planning to gift an inheritance of less than $250,000, according to Fortune.
Furthermore, a lack of confidence in managing money could be a factor. While the great wealth transfer is taking place, and 15% of American adults expect to receive an inheritance over the next decade, according to a New York Life Wealth Watch survey, only 42% of those who expect to receive an inheritance feel extremely comfortable financially managing the new wealth. Millennials and Gen Zers feel the least confident, at 21% and 18%, respectively, according to Fortune.
The two age groups have grown up “amidst global and financial turmoil,” Suzanne Schmitt, head of financial wellness at New York Life, told Fortune, and having “witnessed economic changes in their formative years”, they “may be more risk-averse when it comes to financial habits than their predecessors.”
In any event, wealth managers should assist their clients in improving their financial situations. And businesses will need to constantly improve their technology to stay up with artificial intelligence and mobile clients.
