Why financial advisers fear the ‘great wealth transfer’

Baby boomers will collectively pass on an estimated $3.5 trillion dollars to the younger generations in the coming years but, counterintuitively, financial advisers aren’t celebrating.

Rather than seeing the generational transfer of wealth as a potential windfall, many financial advisers view it as a major threat to their business.

Financial advisers have never been so in demand. And with Australians getting older and wealthier, you’d think they’d be feeling pretty confident about the future. But not so, it seems.

At least part of the reason is due to the so-called great wealth transfer. This intergenerational wealth shift will result in $3.5 trillion dollars being passed from Australia’s baby boomers to gen Y and gen Z in the coming years.

But rather than seeing it as a looming windfall, many advisers now view it as a major risk. And they’ve got some early evidence that backs up their fears.

All up, four in 10 Australian advisers now see the great wealth transfer as an existential threat to their business, according to new research from Natixis Investment Managers provided exclusively to The Weekend Australian.

Even worse, advisers are already experiencing the negative impact as wealth moves from one generation to the next. While 71 per cent of Australian advisers retain the client relationship when a spouse dies, just 38 per cent manage to keep next-generation heirs as clients when their parents pass on.

This is much lower than the global average of 50 per cent.

Close to half, or 45 per cent, of advisers now say they are increasingly worried they will not be able to retain family relationships once the primary account holder dies, the research shows.

The drastic decrease in retention rates between a spouse and child inheriting wealth points to the differences across generations, Natixis country head for Australia and New Zealand Louise Watson says.

“It’s no surprise that busy gen-Xers are more likely to have immediate needs for an inheritance – for example for school fees, and mortgages. Similarly, millennials, known for having to pick between avocado toast and homeownership, and gen Z, who are at the beginning of their financial planning journey are likely to have different more immediate needs,” Watson tells The Weekend Australian.

“Retaining assets relies on strong personal relationships not only with clients but also with their families. Appealing to a gen Y and a gen Z audience will become a core priority for advisers.”

To that end, a cohort of advisers is already taking action to build relationships within families. One in five now runs financial boot camps to educate the next generation. But, again, this is lower than the global average of 33 per cent, showing overseas advisers are ahead of their local peers when it comes to building those crucial family relationships.

“A full service offering such as ancillary services like trusts and estate planning is key, and the 19 per cent of Australian advisers running financial boot camps to prepare the next generation for strong financial futures could be the new best practice,” Watson says.

To be sure, advisers know the importance of client-family relationships; 80 per cent say including heirs in financial planning conversations with primary account holders is crucial to retaining the family’s assets, according to the study.

While some are running boot camps to build that relationship, others have gone in a different direction. They’re hiring younger advisers to match up with younger clients.

This strategy, of having multiple generations of advisers under one roof to look after the wealth of multiple generations in a family, is a good idea, says Financial Advice Association Australia general manager Phil Anderson.

“It certainly has merit. Quite clearly, communication preferences differ from generation to generation, and thus require different skill sets. A younger adviser, who’s more comfortable with using digital tools, may be more appropriate to deal with younger clients,” Anderson says.

So what sets the generations apart when it comes to wealth? For a start, younger generations are all about flexibility, according to Watson.

“They don’t want to wait for retirement to enjoy their money. They want a work-life-balance, the comfort their parents have, and to know they’ll be financially secure in the future,” she says.

“Younger generations also want an adviser who can meet their needs through a mix of face-to-face and digital channels. Younger generations are more tech savvy and accustomed to doing most things online and on apps.”

As advisers grapple with the great wealth transfer, they’re also battling the high-return expectations of their clients. While advisers see annual returns above inflation of 9 per cent as achievable for their clients, the clients themselves are expecting to earn 11 per cent a year above inflation, according to Natixis.

While trying to temper client expectations, 39 per cent of financial advisers say the biggest risk for their clients is chasing returns by trying to time the market.

In some good news, even if advisers can’t manage to hang on to next-generation heirs, there’ll likely be others ready to take their place. The number of Australians with complex financial advice needs is set to grow by 70 per cent in the coming 25 years – from 4.3 million to 7.2 million, according to the Financial Services Council. That’s a lot of potential new clients.

Originally published as Why financial advisers fear the ‘great wealth transfer’