Wealth Transfers on the Horizon
Art by Wenting Li
The generational transfer of wealth from Baby Boomers to their children, sources agree, will challenge advisers’ existing business models and fee structures while providing new wealth management opportunities to advisers and service providers alike.
Investors under the age of 40 are evolving quickly in terms of their wealth management preferences and priorities, says Mike Foy, senior director of wealth intelligence at J.D. Power in Allentown, New Jersey. This finding from his company’s 2021 U.S. Full-Service Investor Satisfaction Study may seem unimportant or not directly relevant to advisers focused on serving wealthier near-retirees and retirees, Foy says, but in reality, the accelerating intergenerational transfer of wealth that will occur in the coming decade indicates otherwise.
“They look increasingly different from Boomers,” Foy says of the upcoming generations of investors. “Not only has the pandemic significantly accelerated their shift to digital-based engagement, but emerging issues such as ESG [environmental, social and governance] investing are also a major priority for them that isn’t seen as much yet among Boomers. Wealth management providers are making a mistake if they assume that the emerging affluent investors will simply evolve into Boomers, over time.”
The Great Wealth Transfer
According to Foy, advisory firms with the ability to recognize and address the needs these changes will create will find—and define—success through what he calls the Great Wealth Transfer. One requirement for success in this future will be advisers’ ability to actually help facilitate and direct these wealth transfers. He implies a potential need for new partnerships or service provider relationships in such cases where the assets will be put into a trust or another form of banking account, rather than a brokerage account or individual retirement account (IRA).
Anton Honikman, CEO of MyVest, an enterprise wealth management technology platform provider in San Francisco, and now a subsidiary of TIAA, says both advisers and their service provider partners must change to meet consumers’ shifting demands.
“The emerging investor expects us to understand not just what’s going on in a given account but also in his whole household’s finances and everything he has held away, across potentially many different accounts,” Honikman says. “This expectation is reasonable. Think about being a provider that wants to offer lifetime annuities or an adviser who needs to provide insight about how much of the client’s assets he should annuitize. Well, understanding your clients’ household access to pension plans and Social Security, for example, will be a critical component to understanding their annuity needs.”
Another critical component of younger clients’ emerging expectations, thanks in part to the pandemic but also to broader, ongoing shifts in the consumer economy, is that more people expect simple and actionable service to be provided on demand. In Honikman’s view, there is no way that advisers and wealth managers—or any professional service provider—can ignore this fact and survive for the long term. “As we look to the end of the pandemic and what comes next, we’re trying to be strategic and not just tactical in terms of developing our own platform and solutions,” Honikman says.
Some additional food for thought comes from J.D. Power’s findings on the topic of fee preferences. According to the researcher’s 2021 investor study, one-time fee-for-service and subscription payment models appear to be those most attractive to younger investors. Nearly three-fourths (74%) of investors under age 40 say they would prefer to pay for full-service wealth management via a one-time fee-for-service model. This is followed closely by a subscription model, which is supported by 73% of investors in that group. By contrast, among full-service investors 40 and older, just 42% support a fee-for-service model and 34%, a subscription model.
Honikman suggests that the rapid pace of merger and acquisition (M&A) activity occurring in various parts of the financial services industry can be likened to an arms race—especially in the retirement plan adviser and independent wealth manager segments.
“The independent advisory firms themselves are almost in a race to get bigger and to add new capabilities,” he says. “My view is that they aren’t seeking scale for scale’s sake. My view is they’re seeking scale to secure better access to the technology and staff resources that will allow them to deliver a modern, dynamic and evolving customer experience. The world is moving so quickly in terms of tech requirements and the customer’s expectations.”
According to the LIMRA Secure Retirement Institute, some $7 trillion could be inherited by younger generations—mainly by Generation X and Millennials, but also by Baby Boomers—in just the next several years. Importantly, nearly three-quarters of these investible assets are held in taxable accounts.
Opportunities Abound
As Foy and Honikman explain, this massive pool of moving assets presents a great opportunity for forward-thinking advisers to grow their book of business, both by securing new clients and by helping existing ones effectuate a successful wealth transfer.
Despite this outlook, research suggests that advisers could do more to pursue this end. Indeed, a 2019 survey from Edward Jones showed that, among Americans currently working with a financial adviser, 64% reported never having discussed estate goals and legacy plans with that professional. Further, only 34% of Millennials and Gen Xers had discussed their estate/legacy goals with their financial adviser, which increased only minimally for Baby Boomers (38%), the generation likely to need estate plans the soonest.
In practical reality, sources say, much of what advisers will be able to do for their clients in terms of supporting wealth transfers will be determined by the financial firm they work for and its specific business model. Clearly, a firm exclusively devoted to defined contribution (DC) retirement plans will have fewer direct services to offer in this area and may typically make referrals to unrelated entities.
Still, even a firm in this position must be able to speak fluently about wealth transfers and help its clients understand the impact of these transactions on their retirement-specific accounts and future investment strategies. On the other hand, practices that do both retirement plan advising and wealth management have a more direct stake in where taxable legacy assets may end up.
One such firm is CAPTRUST Financial Advisors, which, in terms of serving individual clients, offers account aggregation services, cash-flow planning, charitable gift planning and estate/legacy planning. Though it does not aggressively cross-sell these services to its retirement plan clients, it does receive regular inquiries from the client base about the provision of such services.
“When I talk to a lot of our institutionally focused peers, they’re all trying to figure out their relationship with the wealth management space,” says Rick Shoff, managing director of the CAPTRUST Advisor Group in Doylestown, Pennsylvania. “We’re going down the route of doing both private wealth and retirement business because we know that, ultimately, all the people we are helping within the institutional plans, they’re eventually going to have to do something with that money. For that reason, we believe that being holistic and addressing the private wealth side is important for our future and for our clients’ well-being.”