A $72 trillion global inheritance avalanche is approaching. Are private banks and asset managers ready to meet the needs of the next generation?
Two notable statistics keep private bankers up at night: $72 trillion and 70% to 80%. The first is the estimated wealth that wealthy people in the US alone will leave to their heirs over the next two decades. The second is the percentage of those heirs who could transfer their business from their parents’ trusted advisor to a new wealth manager. The figures, adopted as an industry standard, come from Boston-based Cerulli Associates and include liquid assets and the value of businesses that will be passed down.
Cerulli predicts that blood will be thicker than good deeds for wealthy baby boomers as they give away expected inheritances totaling $72 trillion. They will leave only $12 trillion to charity, most of it to families.
So far, this “large wealth transfer” is a relative trickle—about $2 trillion a year, says Chase Horton, senior wealth management analyst at Cerulli. However, “the volume of transfers definitely exceeds our expectations,” he adds.
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Asset managers who are not prepared for the coming flood could be swept away by it.
To compete for clients (and the fees that these staggering amounts of wealth transfer will generate), private banks may have to shift their investment focus from “meat and potatoes” stocks and bonds to private equity and other alternative vehicles that are more popular. with the junior set. And they will have to continually improve their technology position to keep up with digital and mobile customers around the world.
The biggest challenge for banks, however, will be expanding their traditional financial and legal planning skills into a broader, semi-therapeutic role in bringing together the vast wealthy families of the 21st century as they try to share money and business responsibilities.
“Our most important mission is to bring generations together and help them find a common purpose,” says Benjamin Cavalli, head of strategic clients at UBS in Zurich and Singapore. “Strategic clients” for the world’s largest wealth manager means “the top few percent of clients”—that is, the ultra-wealthy. “It’s never easy,” he adds.
The transfer of enormous wealth will lead to a profound change of heart. The client base of most private banks is dominated by wealth creators who have built successful businesses. Most of the next generation will be heirs. “For the first time, we are seeing more wealth that was inherited than created,” Cavalli notes.
If banks are not ready for this transformation, then neither are many of their clients. The right way to structure succession in a wealthy family is to start early by working out an acceptable agreement with the key players and institutionalizing it through financial and legal structures. The wrong way is to keep everyone in suspense until the will of the patriarch or matriarch is broken.
How wealthy families get this right depends on who you talk to, says Cerulli’s Horton. Three-quarters of older parents say they have an estate plan in place in advance. Half of all children report that they will only learn details of their inheritance after the death of a parent.
In any case, banks must help their clients achieve more. Cerulli’s Horton estimates that about half of all heirs are still waiting at their deathbed to learn their inheritance. “The ideal way to transfer wealth is in a trust for children or a spouse,” he says. “Most of the time it’s conveyed in a less than ideal way.”
Dialogue between parents and heirs can be particularly difficult in Asia, says Zita Verbenyi, founder of The Legacy Atelier in London. Contradicting the head of the family is often taboo. The heirs are often educated and live in the West, having absorbed very different cultural values and financial considerations than their older generations. “In the Middle East or India, the younger generation may not have a say in how business is done,” says Verbeni. “This is not a real engagement.”
Independence
A common thread among the next generation of heirs around the world is their passion for independence—personal and financial. The first thing many people want to do is leave the family business built by their parents or grandparents. “We see many examples where the younger generation may not want to inherit the business,” Cavalli says. “They have their own views, preferences and ambitions.”
In these circumstances, the No. 1 challenge for families and their advisors is to sell the business or arrange a passive dividend stream for an uninterested heir without sacrificing that precious unity and common purpose. “Families that are focused on a business or a collection of assets tend to stick together,” Horton notes. For families who lose this, coming together can become more difficult.
The independent orientation of the younger generation also extends to investment relations. It is impossible to simply buy and hold government securities. Three-quarters of wealthy investors under age 43 believe it is “impossible to achieve above-average returns on traditional stocks and bonds alone,” a recent survey by private bank Bank of America found. Only a third of their elders agreed.
Instead, the next generation is gravitating toward private equity and other vehicles they find more practical.
“They are more confident in their ability to manage their own investments,” says Lauren Sanfilippo, senior investment strategist at BofA, at least for now. And they need technology that allows them to do this 24/7 and around the world. “They want everything at their fingertips,” adds UBS’s Cavalli.
According to BofA, people under 43 are also disproportionately interested in sustainable investing, with three-quarters of them citing it as a priority, compared with one-quarter of all survey respondents.
An even more awkward consideration is that heirs may lose their “strategic client” status as fortunes are divided by inheritance, entitling them to less generous private banking than their parents. “Different levels of wealth require different services,” says Cerulli’s Horton. “You can’t handle four $12 million accounts for children the same way you can handle one $50 million account for parents.”
However, adjustments to investment portfolios or service levels are within the established capabilities of private banks. The core mission of uniting generations around a common purpose in today’s world of personal autonomy and endless opportunity will require great effort from wealth managers. They may have to learn skills more associated with historians and curators, not to mention therapists.
The Legacy Atelier’s Verbegni brings together extended families to explore their legacies, accomplishments and “family culture”—a sort of Ancestry.com on steroids that also seeks to determine “what each family member brings to the table.”
One example: When a Middle Eastern clan gathered to celebrate a significant anniversary, Verbenyi took the opportunity to begin work on a family museum, recording memories and cataloging artifacts. A similar project with a family from the Western Hemisphere focused on grandparents forced to flee Europe and explored how they rebuilt their lives and family fortunes in the New World. “Bankers talk about management only from a financial point of view,” says Verbegni. “But if there is no harmony in the family, wealth will disappear.”
Private banks are aware of the problem of wealth transfer. “The percentage of asset management relationships that involve children has shifted from well below 50% to well above,” Horton says.
The global expansion of family offices and their collaboration with private banks could be of great help. The family office revolution first occurred in the United States but has spread throughout the world in recent decades. “When I first came to Asia in the 1990s and 2000s, family offices were the exception,” says UBS’s Cavalli. “They’ve become more of a rule now.”
Family offices can create an institutional framework for intergenerational asset management: boards of directors, investment councils and other decision-making bodies that include both family members and external experts. Such structures can reduce the competitive, winner-take-all aspect of inheritance, with one brother or cousin taking control of the family assets and cashing out the rest, Verbeni said.
“Today there can be many heirs,” she says. “You may not be involved in business, but you may want to become a member of the family council. Everyone can try to find something they are good at.”
Large global private banks may find a competitive advantage as wealthy families become increasingly dispersed and diversified, both geographically and philosophically. At least that’s what the largest of them, UBS, hopes. “Wealth transfer is a tremendous opportunity for a bank like ours,” Cavalli says. “Our global experience is designed to support and guide our clients.”
Horton agrees that established banking companies have a potential advantage in retaining the next generation. They can segment services based on the principle of dividing wealth: one theoretical $50 million account becomes four $12 million accounts. “Private banks are in a good position because they can provide a wide range of services without giving up profitability,” he says.
Larger companies, especially those with retail banking or brokerage branches, also have a larger cadre of younger relationship managers who can better relate to next-generation customers. “It’s difficult to attract entry-level talent to a private bank or family office,” Horton says. “Retail is a great training ground.”
Stereotypes in the TV series “Succession” and other popular entertainment portray wealthy families as capricious, conniving, and destroying what their ancestors built. The best news about the Great Transfer of Wealth is that not all clans are like this.
“Families do face an identity crisis after a liquidity event,” Verbegni says. “But they still have a great opportunity if they make it work: wealth, connections, intelligence. I’ve seen hundreds of cases where they wanted it to work.”