Taking on the ‘Great Wealth Transfer'

Over the next 20 to 30 years, we will see an unprecedented amount of money transferred between generations with £5.5 trillion expected to be gifted or inherited worldwide according to the Kings Court Trust , and £327 billion in the next decade alone to just 300,000 younger people in the UK according to Brooks Macdonald. But what are the challenges that arise with such a transfer of wealth, and what are the opportunities? How can financial service providers best mitigate those challenges and maximise the opportunity?

Challenges

Inheriting generations do not want to use their parents’ advisers. Research by Deloitte on wealth transfers, shows up to 90% of heirs will change their advisers. This itself is a key challenge for advisers as they risk losing market share through the inheriting generations changing advisers. Therefore, advisers not only need to engage with the inheriting generations at an early stage, but also offer services and customer journeys which fit to the new generation to retain them.

The next generation of investors, be that Gen X, Millennials or Gen Y, and Gen Z have grown up in a rapidly changing world with unique expectations and priorities. As these individuals come of age and begin to accumulate wealth, or inherit it from their parents, it is important for the wealth management industry to understand their perspectives and adapt to meet their needs. Indeed, is of little surprise that young investors hold different expectations towards their wealth management service providers compared to their parents or previous generations. Nevertheless, quite a few financial providers continue to use the same strategies for different target groups. In the long term, with a significant wealth transfer on the horizon, there is a big shift in the way advisers should target younger investors.

A study by Fidelity International shows that the UK's younger generations are increasingly counting on intergenerational wealth transfer to fund their financial goals. Around a third (32%) of those who have already inherited or received a lifetime gift have used the money for their retirement savings or pension. One quarter have used it to pay off a mortgage, and more than one fifth (22%) have spent the money on buying property. According to Fidelity, many people plan to use their inherited wealth to achieve longterm financial goals, but less than half (45%) have taken any form of investment advice. A fifth (20%) have sought advice from another professional, 16% have researched online and 15% have consulted an independent financial adviser (IFA). Slightly more than one in 10 have consulted their bank.

Here, we can directly see that the inherited money is being invested, yet the majority have not taken investment advice. So, how can financial advisers create journeys of interest to these new generations and help them to reach their financial goals?

Opportunity

Against this background, the prerequisite for an attractive investment experience for the newer generations is that their investments correspond to their own personal values and requirements.

These new digitally-savvy clients have grown up with social media and in a digitised world where personalised offerings are the norm. Therefore, the toolkit of hyper personalisation needs to be used to meet their modern wealth management needs.

The core idea of hyper-personalisation is precisely the segment of one. Each client receives offers and recommendations that correspond to their values. This cannot be achieved with a traditional model portfolio approach.

A possible use case could be sustainable investing, where investments often align with investments according to personal values - it is, in fact, the same thing from a technical implementation view. In both cases, the foundation (whether it is sustainable investing or investing according to personal values) is to query individual data points as constraints and to take these into account in portfolio construction and portfolio reporting. A report by Natixis supports this thesis. According to its ESG Investing Report the global average of clients who want to achieve a positive social (sustainable) impact with their investments is 71% - in contrast, as many as 81% of clients want their investments to align with their individual values. In this context, it is also worth mentioning the results of Salesforce research, which concluded that 66% of clients expect their financial institutions to understand their individual needs and expectations. However, to round off the investment experience, it is not only necessary to query the personal values of clients and generate corresponding recommendations. Rather, the experience must be a complete round trip. The round trip starts with a survey of personal preferences and ends with the regular personal reporting of investments, which, based on the above findings, explicitly also includes ESG reporting, if a client desires so.

As a result, a wow factor is created in client contact, according to Capgemini and client satisfaction can be increased by up to 20%, according to McKinsey & Company. This, in turn, can provide a boost in sales conversion rates by 10% to 15% and 80% of clients would do even more business with their financial institution so says The Financial Brand. Allowing wealth managers, the opportunity not only to retain existing business but attack those not using their parents’ financial adviser.

Consequently, the basic concept of hyperpersonalisation seems to be a valid approach to bring value adding journeys into wealth management. Coming back to the needs and requirements of the younger and soon-to-be very wealthy generations, the approach of hyper-personalisation seems advisable even without explicit sustainable requirements. A large proportion of Generation Z (95%) and Millennials (83%) can imagine using financial services from Big Techs - in contrast, the share of today’s affluent target group of Baby Boomers is only 30% according to Accenture. This new competition will become a reality for financial institutions in the wake of the embedded wealth trend. The reason for the younger generation to use financial services from Big Techs is precisely that Big Techs make personalised offers easy. Only 20% of the younger generations consider personalisation in investment to be neutral or not important according to Capco. In this respect, hyperpersonalisation supported by an attractive, sustainable experience can be an appropriate measure to reduce vulnerability against Big Techs. This is especially true because, according to current estimates by the Boston Consulting Group, a financial institution can achieve 30 basis points of additional revenue if it enables hyper personalised service offerings. Combined with the increased willingness of clients to pay for green financial services, this appears to be an attractive business model for financial institutions.

The mentioned studies and reports by various financial market participants are also supported by academia. For example, Prof. Dr. Christian Klein (Chair for Sustainability Finance, University Kassel, Germany) and a group of colleagues published an interesting study entitled “On the heterogeneity of sustainable and responsible investors” in the Journal of Sustainable Finance and Investment. The core of the study was formed by a representative group of 1,014 investors, which was very heterogeneously distributed in terms of their attitudes and experiences of sustainable investments. Based on various sectors, industries, sustainability criteria for companies and countries, the respondents were asked different questions. When asked which sustainability criteria in terms of sectors they would like to avoid with their investment, investors chose more than 500 unique combinations. This means that almost 50% of the investors had unique, personal preferences when choosing sustainability criteria for their investments. As a result, they summarise that: “A one size fits all approach in designing sustainable investment offers appears quite unreasonable. It seems to be more important to [...] ask for their individual preferences.”

To conclude, we see the market being driven by the Great Wealth Transfer over the coming years, and in order to not only survive but thrive in this market, wealth managers will have to offer personalised offerings in line with a client’s own values in order to not only retain market share but take advantage of the Great Wealth Transfer.

Senior Solutions Consultant - Global christopher.baxter@aixigo.com