The inter-generational wealth transfer is in full swing; for advisors, this could mean more opportunity to better serve existing clients and retain new business, according to a new report from the Spectrem Group. 

Many believe the ”great wealth transfer” is the passing of wealth from baby boomers to millennials, but in reality, boomers are still receiving the majority of the wealth, according to the report. Many in the WWIII generation are still alive and transferring assets to their children, who are in most cases baby boomers.

The study, “The Legacy: How Investors Are Impacted by Inheritance,” explores the effects of inheritances on inheritors. Sixty-three percent of inheritors said they use a financial advisor today.  One third of investors with a $5 million to $25 million dollar net worth said their inheritance was a significant factor in their current wealth status, according to the report. For 12 percent, receiving an inheritance was the starting point in developing an advisor relationship. About 40 percent already had advisors and 37 percent did not use one even after getting an inheritance.

Inheritors rarely switched advisors. Only 4 percent reported making a switch after receiving their inheritance, while 3 percent said they added the advisor administering the inherited portfolio to their existing group of professionals.   

The Impact

Most investors said receiving an inheritance had a low impact on their lifestyle. Overall, on a scale from 0 to 100, investors said the impact of the inheritance was just 18.14. Similarly, lower-net-worth individuals said the impact of the inheritance was also not very significant (25 percent), although the impact was higher than high-net-worth respondents.

The Emotional Connection

Spectrem qualitative data found that older and wealthier investors have a more emotional connection to their inherited assets. Most planned to save their inheritance to leave for younger generations, according to the report.

Financial advisors need to understand the importance of establishing relationships with the next generation and the emotional component attached to the transfer of wealth. Many older investors chose to save for future generations because they understood how hard elder family members worked to attain it.  Farther removed inheritors often have a different connection to the assets and tend to spend more carelessly or pay down debt, said Randy Wostratzky, director of the Spectrem Group.

Spending Habits Of Inheritors

Inheritors who did not have a financial advisor were more likely to spend their inheritance, the study found. Developing relationships with the beneficiaries of existing clients can aid in preserving the wealth while creating an additional generation of client relationships.

Advisors need to have the proper conversations with the next of kin. Advisors can share what they can do for the overall financial plan of future inheritors -- debt management, help with home buying, etc. This includes help with managing the inheritance relative to their overall financial blueprint, said Wostratzky.

“One of the most differentiating findings in the study was that the likelihood to spend the money was much greater among those who did not have a financial advisor,” he said.

Inheritors who did not previously use a financial advisor were more likely to pay off debt than inheritors who had an advisor. They also reported increased levels of personal spending and reported taking vacations, buying a more expensive home, or purchasing a second home, according to the study. The majority of this group was the under the age of 55. Twenty-percent of investors said they used a portion of their inheritance to pay off debt, according to the report.

Lower-net-worth inheritors were also more likely to spend their inheritance or pay bills with it, according to the report. The majority of investors invested at least a portion the funds they received.

The majority of inheritors (91 percent) who had a financial advisor prior to receiving their inheritance said they invested it. Thirty-one percent of that group reported that they also saved some of their inheritance for their children/grandchildren, according to the study.

Working With An Advisor

Older inheritors were less likely to have an advisor. Inheritors who did not choose to use an advisor represented 37 percent of the total group who inherited assets. Forty percent of those individuals were over the age of 71. Thirty-five percent were between the ages 56 and 70, according to the report.

There was significant variation in the types of advisors inheritors chose to work with. Inheritors with greater wealth and a larger inheritance were more likely to use a full-service broker (43 percent). Older inheritors were also more likely to use a full-service broker. Younger inheritors were more likely to use either an independent financial planner or investment manager.

Inheritors valued specific qualities when choosing an advisor. The majority of inheritors, (36 percent) said honesty and trustworthiness were the most important factors in the decision making process. Referrals (15 percent) and investment track record (16 percent) were also significant determining factors, according to the report.

Younger inheritors (55 and under) are most concerned with whether the advisor has up-to-date online services and an updated website (29 percent), the study found. Older inheritors, (age 71 and over) said trustworthiness was most important to them (43 percent).

Client Satisfaction

The majority (81 percent) of the inheriting group who worked with an advisor said they were generally satisfied with the experience. Individuals with an inheritance of $500,000 - $999,999 were the most satisfied overall, while those who kept the same advisor were most satisfied with their individual professional.

Most inheritors (33 percent) who switched to an advisor upon receiving the inheritance said they were likely to seek that advisor’s services in the future. Twenty-two percent of inheriting individuals said they would seek that advisor’s help for planning for long-term care or establishing an estate plan (21 percent), according to the study.

The study was fielded between August and December 2017 via online survey. There were 706 respondents who were selected to represent the affluent population in the United States. They were required to have at least $100,000 in net worth (outside of the value of their primary residence). Participants had to have received an inheritance of at least $100,000 in the recent past.