For financial advisors, the intergenerational wealth transfer between oldsters and youngsters could be a growth opportunity or a potential loss of assets, depending on their role in the process and their ability to retain client assets that get passed on as inheritances.
According to a recent report from Boston-based asset manager State Street Global Advisors, we’re in the midst of the greatest wealth migration in U.S. history: $12 trillion in assets has already been transferred in the form of inheritances from the “silent generation” (1928-1945) to baby boomers, while an additional $30 trillion to $41 trillion in assets is forecast to change hands from boomers to Generation X (1965-1980) and millennials (1981-2000) between 2011 and 2048.
In its report, Roadmap For A New Landscape: Managing the Transition of Wealth Across Generations, State Street interviewed 400 financial advisors, 560 individual investors and various industry experts, collected their comments and concluded that advisors could stand to do a better job of talking about the issues surrounding the intergenerational transfer of wealth.
One of the problems is that most clients don’t find it enjoyable to talk about death or plan what to do with their stuff when they’re no longer on this planet. And families typically don’t like to talk openly about their wealth. But advisors who take a proactive role can overcome avoidance behavior by clients and facilitate the planning process for the inevitable wealth transfer from one generation to the next.
The challenge faced by advisors is twofold: First, they must help boomers smoothly transition into retirement by providing distribution-phase solutions. Next, they need to connect with the next generation as it accumulates more assets and yields so-called “ideal” clients (at least as far as investable assets are concerned).
For advisors, the issue at hand is asset retention. “Thirty-eight percent of investors retain the same advisors when their spouse dies,” said Brie Williams, head of practice management at State Street Global Advisors. “And that number drops to 29% when both parents have passed and children inherit their assets.”
According to State Street, planning ahead is the most crucial factor in wealth transfer. “Opportunities will be missed if the client waits until they are in poor health or beyond a certain age to take advantage of the time needed to put a strategy in place,” the report said.
Advisors can help create a wealth-transfer mind set in the following ways: by encouraging their clients to think about the long-term goals they have for their families; by starting early and bringing family members into the discussion; by centering the planning process on life-affirming themes to create a more meaningful conversation; by explaining the benefits and making the scenario real, using the names of family members in examples; and by using checklists and introducing shorter-term goals with targeted completion dates to help clients feel organized and well-informed about the process.
These various steps can help forge a shared vision for the family, and in the process bolster an advisor’s role as a lead wealth manager for the entire family. According to State Street, 65% of investors report they are looking to their financial advisor or family office to play an instrumental role in educating the next generation financially, while 56% of investors said they won’t have sufficient knowledge to know what to do with the family assets.
In other words, the intergenerational wealth transfer could be the ticket for financial advisors to retain the assets of existing longtime clients and gain the assets of their offspring.