Over the next 20 years, the industry’s great wealth transfer is expected to put more than $84 trillion in the hands of new family members and other beneficiaries as Baby Boomers increasingly enter their 80s. This large migration of assets could also signal a great client exodus for advisors, if they aren’t able to connect with the new stewards of this wealth.
The transition marks a critical shift in wealth management, with 41% of U.S. advisors saying the generational transfer poses an existential threat to their practice, an April survey published by Natixis Investment Managers found.
Of note, advisors said they retain assets 72% of the time when inheritance passes to a spouse, but that figure drops to 50% when assets move to next-generation heirs, the report said.
Among U.S. individual investors who were polled and expect to inherit assets, almost half (47%) said they do not plan to retain the advisor of their spouse or parents, according to the survey.
Rethinking AUM Minimums
Marguerita Cheng, CEO of Blue Ocean Global Wealth, says the wealth management industry could be doing itself a disservice by focusing too much on asset minimums during these critical transitions — especially when working with first-generation wealth builders.
Advisory firms may too often get caught up in AUM growth, and not how they can continue to preserve wealth within families, she explained.
Cheng notes that many advisors can have concerns about how to tell someone that they don’t meet the practice’s minimum assets requirement.
“I would encourage people to instead start conversations and see if there’s ways you can engage (younger family members). I understand that many of us get paid by assets under management, and some firms penalize people with low assets. But talk to your manager or sales team,” about how you can educate these relatives, she suggested.
The Needs of the Next Generation
One of Cheng’s longtime clients was first introduced to her in 2009 by other family members that she advised. At the time, the client — who was then in his early 30s — had unexpectedly lost one of his parents.
What started out as Cheng just helping him handle financial paperwork following his mother’s death, turned into a long-term business relationship of more than 15 years.
“He had a lot to do and was concerned about the paperwork (related to) his mom’s pension and 401(k),” Cheng explained. “He found himself a millionaire overnight,” she said, noting he ultimately ended up receiving payouts for his mother’s life insurance policy as well her retirement accounts.
“Some advisors might have said, ‘I’m not helping someone fill out paperwork if I’m not getting paid,’” Cheng said.
The Natixis report noted that asset retention in wealth transfers often came down to trust.
Among U.S. investors who planned to keep their family member or benefactor’s advisor, 30% said they would stay because they already know the advisor and trust their advice.
Not Just ‘Your Parents’ Advisor’
One mistake advisors can make when first communicating with new family members is positioning themselves as just the “parents’ advisor,” Cheng said. Instead, advisors need to instill trust with the next generation, treat them as individuals, and prioritize confidentiality when possible, she said.
They should pitch themselves as the “family’s financial advisor,” not just someone who works for their parents or grandparents, she added.
“A lot of younger people like self-directed investing, but there are still ways in which you can help, such as tax planning, buying a home or getting life insurance,” Cheng said. “This is where I think the industry should take pause. Instead of just focusing on the assets, focus on the people. Who are they? What are their priorities and passions? What do they wish to accomplish in life?”
Advising the Next Generation
Natixis’ report found that Millennials are more likely to want an active role in their investments.
Some 68% of Millennials said they prefer to either partner with their advisor or have full control over their investments, while 25% of Millennials said they preferred a mix of digital and financial professional advice (compared to just 18% of Gen X and 7% of Baby Boomers), the report said.
“It’s important to understand that younger people want to engage with advisors in a different way than older generations. And don’t feel threatened by that,” Cheng said.
“Don’t feel like you need to work with everybody, but don’t just discount people because they are young.
Everybody deserves access to competent and ethical advice, and that’s not just applicable to (investment) management,” she added.
See more by Danielle Walker:
Danielle Walker is a freelance journalist with 15 years of business reporting experience. She previously worked at Business Insider and Pensions & Investments, among other business publications. Her work has been published in the Financial Times, Barron’s and Chief Investment Officer. Danielle is currently based in Norfolk, Virginia.
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Over the next 20 years, the industry’s great wealth transfer is expected to put more than $84 trillion in the hands of new family members and other beneficiaries as Baby Boomers increasingly enter their 80s. This large migration of assets could also signal a great client exodus for advisors, if they aren’t able to connect with the new stewards of this wealth.