What inheritors want to invest inóand how money changes people.
In our last column, we took a second look at individuals who recently inherited millions of dollars based upon a survey of 334 inheritors that we completed in early 2003 (we conducted a similar survey back in 2001). With the end of the bull market in 2000, these inheritors may well represent the most fertile territory for new affluent clients in the near term-baby boomers are estimated to inherit trillions from their parents in the coming decade-so the more that financial advisors know about them, the better.
Our survey of 334 people who had inherited at least $1 million in the previous two years reinforced many of the trends we noted from our initial survey in 2001. The percentages, however, in some instances understandably had changed in response to the subsequent and prolonged downturn for the stock market and the economy. When we asked inheritors about their relationships with financial advisors, a full 97.9% said they wanted an advisor because they themselves weren't up to the challenge of managing their own wealth (Exhibit 1). A similar number, 96.1%, only wanted to work with financial advisors that had experience handling wealthy clients. And better than two-thirds of the inheritors, 68.9%, said their advisor must also have access to otherwise unavailable options-the money managers, hedge funds and private equity deals-that are often reserved for the affluent.
Advisor Turnover
As a direct consequence of these opinions about advisors, particularly the fact that they didn't think their old advisor was up to the task of managing their new wealth, 79.6% of inheritors switched primary advisors after inheriting their money. Surprisingly, only 0.3% of inheritors planned on working with their parents' primary advisor after they got the money. This implies that many inheritors would be looking for new advisors but, if one of those inheritors was among your current clientele before they became wealthy, you were not likely to retain them.
We previously recommended that one way to reach these clients was to create strong working relationships with the lawyers and accountants who manage estates. That's because inheritors who are newly wealthy rarely know where to look for higher-end advisors, and they often turn to the financial professionals at hand for guidance. In short, it makes sense to build an extensive advisory network.
This time, we're going to review some additional survey data to see how else advisors might be able to reach this group of investors, looking specifically at their emotional state after inheriting and which financial products they're most interested in.
Money Isn't Everything
From King Midas to Richie Rich, "the poor little rich boy," the fact that money isn't everything is an ingrained part of our culture. As much as we'd all like to be wealthy, money, especially a windfall like inheritance, usually makes life more complicated. They even have a name for it-"sudden wealth syndrome." And more than half of the inheritors said their lifestyle had changed "dramatically" after they received their inheritance.
Those who have been brought up wealthy may do a better job of handling sudden affluence, but as we saw in our survey, that was rarely the case with our inheritors; only 15.3% said that their parents provided them with a financial education. That helps explain why their inheritance caused so much friction with their family and their spouse (Exhibit 2).
More Money, Bigger Headaches
We further divided the inheritors into three groups based on how much they'd inherited, with 40.2% having inherited $1 million to $2.9 million, 31.7%, $3 million to $5.9 million, and the remaining 28.1% more than $6 million. Perhaps, not surprisingly, the biggest inheritors appeared to have weathered the most change and endured the most stress (Exhibit 3). Furthermore, for this group, almost a quarter of the respondents quit their job, a pretty dramatic step to have taken.
Given these responses, it's clear that one way to connect with prospects who have recently inherited money is to explore, and be able to refer, such resources as psychologists and family counselors. These professionals are not normally in an advisor's network alongside the money managers and tax specialists but, for these affluent prospects, they could be. There are plenty of places to start looking for such resources, including your parent company, advisors you may know who work with the wealthy and such organizations as The Inheritance Project.
Where the Money Goes
Knowing where the inheritors want to invest their money is another way to reach them. As you can see from Exhibit 4, inheritors have been shying away from stocks and mutual funds, investments that are broadly available, and moving toward the more esoteric, sophisticated investments which tend to cater to the more affluent, such as funds of hedge funds and managed accounts.