Strategy & Practice Management

WM industry must prepare for ‘Great Wealth Transfer’

According to a recent study by financial researcher firm Cerulli Associates, the wealth management industry could be in for a major shock. In what’s being called “The Great Wealth Transfer”, inherited wealth that will change hands over the next 25 years is estimated at USD68 trillion globally.

Asia is expected to account for significant part of that. What's concerning wealth management experts is that only 13 percent of affluent investors polled by Cerulli said they would choose to work with the same advisor that their parents used. Among the remaining 87 percent who report not using their parents’ advisor, 88 per cent of them said they had not even considered doing so.

While studies differ on the percent of beneficiaries firing their advisors when the estate transfers, most agree that advisors who ignore the inheriting generation, including spouses, are at a serious risk of losing them. Yet the same study found most advisors have failed to seriously engage the beneficiaries.

Cerulli reported that 45 percent of high-net-worth practices have had limited interactions with their clients’ children, while only 59 percent have established relationships with clients’ spouses.

One predictor of a family’s wealth transition success can be measured by its likelihood to lose control of assets and family cohesion within three generations of estate transition. A well-publicized study by The Williams Group, a family coaching consultancy, confirmed that 70 percent of the time the wealth didn’t successfully transfer beyond the wealth creator’s grandchildren, hence the age-old adage of “shirtsleeves to shirtsleeves in three generations.”

A central issue is the age of advisors. Cerulli Associates reports that the average age of financial advisors is almost 51 years-old, with fewer than 5 percent of advisors under 30.

According to Amy Castoro, president and CEO of The Williams Group, “A financial advisor’s focus is very much on preparing the assets for the family, but it’s also important to prepare the family for the assets.”

She goes on to add that while advisors should’t be expected to assume the role of family psychologist, with proper training, advisors will gain a skill set that includes value-based generational wealth transfer advice and services for wealthy client families.

Advisors clearly need an effective client family retention strategy that include engaging the clients in conversations that bring about clarity on how to successfully transfer family wealth without causing conflict among members, offering new resources like a family coach, the ability to recommend when to use skilled third-party facilitator, along with other communication-based techniques.

It’s also important to note that people are living longer and fuller lives, and parents and grandparents want to see their descendants benefit and learn from family wealth. The notion of giving while living adds a sense of urgency for advisors to offer guidance and tools to help families prepare the inheriting generation.