Intergenerational wealth An introduction - Part 2

Last time we looked at what intergenerational wealth is and why everyone is talking about it. As we saw, Australia is on the brink of a vast shift in assets, unlike any that has been before. Thanks to a number of reasons (such as property, equity markets and longer life expectancies) $3.5 trillion will move hands in Australia over the next two decades. Savvy advisers need to start thinking TODAY about how this shift in assets will affect their clients and their bottom line.

The Great Wealth Transfer - Opportunities for Advisers

Assets under management and business value have a big potential for growth

As we have seen, there a number of reasons why the Great Wealth Transfer of the 21^st century is something that advisers should be planning for. But, the race is on. For example, already, between 2002 and 2012, approximately 5.8 million Australians received one or more cash transfers from a parent or other relative, averaging $79,000 per person for each inheritance.¹ Spouses, children, grandchildren (and nominated persons) are going to receive large bulk sums of cash money, all in one go. With this change in asset ownership comes great opportunity for advisers. A new set of clients, a new set of objectives.

Given the slowing property market and economist's expectations of recession being around the corner, inheritors are likely to seek alternative investment solutions. This could see a substantial and weighty shift for the amount of assets under management by financial advisers.

The Great Wealth Transfer - Risks for Advisers

Client bank and changing objectives

As with any great change to the status quo, there are risks and considerations to be managed, along with regulatory requirements. Over the next few decades, your portfolio of clients will change significantly and so will your clients' risk profiles. In addition, as clients age and approach the end of life, the number of so-called 'vulnerable clients'² will increase, bringing with them a whole host of new needs and challenges. Critically, many benefactors haven't fully thought about, or made thorough plans, for even the most basic form of wealth transfer. Only 26% of people have a full strategy in place to transfer their wealth to the next generation, while 1 in 3 indicate they have done nothing at all to prepare for passing on wealth to the next generation.³

By the same token, advisers need to consider how aligned their existing client's investment propositions are with their future clients'. Engaging with inheritors today will give them (and you) a much-needed head start – may that be 'the Sandwich Generation'⁴ or the younger generations.⁵ Future clients will have different objectives, such as university funds or house deposits. Savvy advisers should be encouraging benefactors to engage with the family as a whole, and plan for how these objectives can be satisfied now, rather than on death.

Asset and client retention

Current client retention rates following asset-transition after death are disappointing and indicate that soon-to-be inheritors are unlikely to stick with the same adviser as their parents/grandparents. Indeed, According to Victor Preisser, co-founder of the Institute for Preparing Heirs:

"Over 90% of heirs promptly change advisers when they receive their inheritances,⁶ and 70% of families lose control of their assets when an estate is transitioned to the next generation"⁷

Advisers' asset bases, and the value of their firms, are at risk of plummeting if they don't put the hard work in now to ensure that their client segmentation plans are up to scratch. For many practices, this means approaches used for today's existing clients, may not be appropriate for their future clients, or their offspring. So, with this shift in mind, now is the perfect time to make adaptations to your current advice and business model.

360° degrees of financial advice

Tackling intergeneration wealth from all angles

At Russell Investments, we know that just around the corner, the Great Wealth Transfer will bring about great change. But it isn't too late. Connect with us to discuss the numerous ways that financial advisers can prepare.

In the meantime, contact your Russell Investments relationship manager who can help plan, build and expand your business against the changing market backdrop.

¹ AHURI research 2017 using Household Income and Labour Dynamics in Australia – HILDA data.
Based on HILDA dataset from 2001-2013, 5.5% of all Australians received intergenerational transfers in the form of inter-vivos (parental gift/transfer) while 1.5% received transfers in the form of bequests.
² Defined by the UK Financial Conduct Authority as “someone who, due to their personal circumstances, is especially susceptible to detriment, particularly when a firm is not acting with appropriate levels of care”. E.g. elderly, sick, those with disability, low income earners, carers.
³ Royal Bank of Canada, ‘Wealth Transfer Report 2017’. 2017, p. 3.
⁴ Those who support both their children and their parents covering both Generation X (early-mid 1960s to early 1980s) and Baby Boomers (early-mid 1940s to early mid 1960s)
⁵ Millennials (early 1980s to early 2000s), also known as Generation Y
⁶ Cisco Wealth Management Survey, 12 2013
⁷ The Williams Group