Fintech Corner: Understanding Next Gen Clients and Seizing the Intergenerational Wealth Transfer Opportunity

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Creating a sustainable wealth management firm requires advisors to get a handle on the great generational wealth transfer.

“That means advisors will need to know the next generation of investors, including the heirs of their current clients, at a much deeper level than most do already,” said Adrian Johnstone, president, and co-founder of Practifi, a business management platform for wealth management firms.

“We need to make sure we’re not only thinking about that money and what it means as it transitions to another generation,” Johnstone said in Preparing For The Great Generational Wealth Transfer, a November webinar with Digital Wealth News’s Dara Albright. “We want to be sure we’re not making assumptions—it is safe to assume that the majority of the next generation won’t want to retain the same wealth strategy, but that isn’t just a trigger to change your business.”

Instead, advisors need to make sure they have the skills and tools to collect, store and track data on these clients, said Johnstone.

The wealth transfer is an existential issue for wealth managers. According to Cerulli, 45 million households will transfer more than $70 trillion over the next two decades. This is happening as 10,000 baby boomers leave the workforce every day with an unprecedented amount of household wealth.

“This is happening now. This isn’t something that you can step back from and say, ‘I’ll wait until the end,’ you really don’t want to make your run late, and equally, you don’t want to overreact,” said Johnstone. “It’s important to realize that the changes that you need to make to serve this next generation of clients are usually also changes you need to make within the firm—just as a transfer of wealth needs to happen for your clients, a transfer of knowledge needs to happen within firms.”

Johnstone described five areas of difference between the next generation of investors and baby boomers that advisors should be aware of.

Values

“Advisors should start by thinking about who their ideal client is when they think about the next generation and what motivates those people,” said Johnstone.

“How do you begin to understand their views around some of these topics? How might you respond to a question coming from someone who is due for a large inheritance?” asked Johnstone. “They might want to understand your firm’s views and how you might be proactively taking a socially responsible lens through your business. We are starting to see some of these things determine where they want to be invested.”

In other words, next-generation clients aren’t simply looking to be placed in to an ESG fund or a strategy that matches their values, but to work with advisors that they feel aligned with as well. Political persuasions and social responsibility are already driving consumer decisions in other industries like fashion.

Investment Expertise

“If we go back generationally, access to investment expertise was a specialized function,” said Johnstone, but today, “people can educate themselves and become more informed and financially literate.”

“Due to the increased wealth of the baby boomer generation, financial literacy is starting to be passed down between family members”, shared Johnstone, “and almost anyone can go onto the internet and find information about personal finance and investment management.”

Advisors must be comfortable not only working with a “vastly more informed audience,” explained Johnstone, because “they won’t tolerate a professional who is assuming that they know very little.”

Be prepared for clients to come in with a problem and a list of solutions, and to ask their advisor to tell them which option would work the best for them.

Interests

While it’s nothing new for a client to have a broad set of interests, next-generation clients have an unprecedented ability to pursue those interests, especially where investments are concerned.

So, advisors need to be prepared to deal with clients who want to invest in cryptocurrencies or peer-to-peer lending and who understand the risks involved.

“The risk appetite around those investment choices has changed,” said Johnstone. “Baby boomers took a lower risk profile at the outset and rode the stock market and the property market through their ups and downs… because they started in a post-war era where the family risk appetite was pretty tight… their heirs didn’t grow up in that modest wealth environment.”

Goals

Financial goals are being replaced with values for similar reasons,” said Johnstone. “Rather than focusing on maximizing money over time, younger clients will want their finances to be closely aligned with their personal values and may be willing to sacrifice returns to achieve alignment.”

“Consistently across the last decade, at the point of wealth transition between generations, somewhere between 70% and 90% of heirs automatically turn from advisors. It’s such a huge percentage that it’s important we get into the next generation wealth conversation much earlier so advisors can demonstrate the alignment between their values, preferences and expectations,” elaborated Johnstone.

Expectations and Preferences

“The next generation is about ‘how will you work with me to achieve this’ as opposed to ‘how will you do this for me?’,” said Johnstone. “In terms used across the industry, baby boomers were delegators, while millennials and Generation Z are validators.”

While boomers were happy to hand tasks and information over to advisors and allow a professional to go forward and make sure they had sufficient assets to achieve retirements, next-generation clients are more likely to want to make decisions and take action themselves, using advisors to guide them to optimal choices.


To learn more about Practifi, visit www.practifi.com.