The next decade will witness the largest wealth transfer in history. Despite our teachings that hard work is the key to success, last year saw more billionaires created through wealth transfer than through entrepreneurship, and this trend is set to continue.
Private banks and family offices are responding by modernising their investment propositions, recognising that younger generations have different investment preferences than their predecessors. However, successful intergenerational wealth transfer requires long-term planning, often spanning years or even decades.
Living wealth transfers
The largest wealth transfer of all time is taking place in the next decade. While we teach our children that hard work pays off, the hard truth is that last year, more billionaires were added globally through wealth transfer, than through entrepreneurship. And more billionaires are still to come.
Private banks and family offices are already warming up. For instance, by sharpening and modernising their investment propositions: because younger generations no longer want to invest like mum and dad. But intergenerational wealth transfer is mainly a long-term business. Preparation takes years, or even decades.
Interestingly, wealth transfer is now more often done during life rather than after death. The advantage is better preparation for the young, a disadvantage is that different generations have different views. For example, about investing, often the biggest component of the advice given in wealth transfer.
Boudewijn Chalmers, as consulting leader in the wealth & asset management department of consultant EY, looks at client strategies and segmentation. “From that perspective, generational change is extremely important.” He notes that when it comes to investing, younger generations are more concerned with sustainability and making an impact. “Of course, they are also looking for returns, but the balance is clearly different.”
Billions shifting
How much wealth is actually changing hands in the coming years? For the Netherlands, it is difficult to cite figures, but it is certain that the size of inheritances has been steadily increasing since 2015. Globally, EY states in its latest Global Wealth Report that about 18,000 billion dollars will be transferred until 2030. Most will take place in the United States and an estimated 15 per cent or so in Europe. Chalmers: “Also interesting is that by 2023, more billionaires will have joined through wealth transfer, than through entrepreneurship.”
At ING, they are aware of the coming shifts. “We are now facing the biggest wealth transfer in history,” says Jolanda Penninx, who is director of private banking & wealth management at the bank. “And then we are really talking about many billions in the Netherlands. We see that started, our customers have been aware of wealth transfer for generations. Now they are actively working on it, also in the context of financial planning.”
Michiel Dill of multi family office Clavis does not have exact data or numbers, but sees the challenge in his daily practice. He focuses mainly on communication, which is different now than in the past. “In this day and age, the receiving generation says: Shall we sit down together? They themselves are increasingly giving conditions under which they want to receive the assets.’ Dill thinks this is a positive development. ‘If there is involvement from the next generation, that has more effect on maintaining the assets than whether you achieve seven or eight percent investment return.”
Outflow
Chalmers: “At the point when assets are transferred, there is a high risk that some of them will move to another party. Not always because the next generation wants to invest differently, sometimes the digital capabilities of the current manager are not satisfactory. Or children have nothing to do with their parents’ adviser. These are challenges, but also opportunities for private banks.”
‘At the time of transfer, there is a high risk that assets move to another party’
At ING’s private bank, each generation gets its own banker. Penninx: “We offer as an extra service a dedicated contact person for the next generation, especially those between the ages of 18 and 36. These are interesting conversations, because you are dealing with adult children who also want to feel supported and independent in the financial choices they make. Especially when the first house is purchased or the first steps towards investing take place.”
Learning to manage assets
At Clavis, increasing knowledge is an important part of the service. Dill: “In private wealth management, the ‘from generation to generation’ theme is by far the most important. This requires two things: communication and strategy. Everything we do on the hard side with wealth management and reporting is very important. But it has to come together. If that runs well, it creates peace in the family.”
He signals that it can be useful to talk to the peer group: “There is a huge need among families to talk about it with other families. Our knowledge sessions motivate families to communicate more openly about transmission. Of course, such a meeting should take place prudently and in a small-scale setting.”
Other asset classes
What does shifting assets mean for investment portfolios? Many young people seem to want to focus more on sustainability. Does that actually show up in practice? Chalmers does not directly have statistics proving that young people are investing very differently, but he does identify shifts. “In the real upper layer, i.e. from 10-20 million euros in assets, you see that people have started investing more directly instead of in standard financial products. Lots of private markets and alternatives. These are now even less accessible to smaller assets, although that is changing.”
Dill: “In the ideal situation, at some point, the transferring and receiving generations jointly decide what the strategy for the assets will be and so there is a gradual transition. I think that is the right recipe. Our families are above-average entrepreneurial families, they seek out the best investment choices, indeed often in private markets.”
Jolanda Penninx ING private banking is also signalling a preference for less traditional asset classes. Penninx: “We are looking at what we can do to familiarise our customers with those asset classes and the risks and returns underlying them. And we take them through issues like sustainability and impact investing. Because we see that as an emphatic demand.”
Investing is not the main issue
Although investing seems to be the main focus for large assets, clients consider something else much more important. Chalmers points to a quote from the EY survey: “I have been a customer for a long time, but at the bank it is mainly about the investment products. Whereas I was actually looking much more for guidance and structure on how to deal with family assets.”
This is an observation that Dill agrees with: “Important in wealth transfer is: don’t get lost in details, if you haven’t sorted out the essentials. Families like to get very caught up in technicalities or debates about whether or not they should invest in a particular share, when that is not what it is about.”
As for SRI, Chalmers sees that younger generations are certainly more open to it, but it requires patience: “If someone inherits 50 or 100 million euros, they are not going to invest it completely differently in the first two years. That takes time.“ Michiel Dill is therefore in no hurry: “We do not focus on high net worth individuals, but on the high net worth family. And then it is fortunate that another generation is arriving.”
Wealth from family businesses
Over 85,000 family businesses (29 percent) are currently in the process of transferring ownership. Although 50 percent of owners wish the family business to remain in family hands, it is not a foregone conclusion that ownership will be transferred to the new generation. External transfer to a strategic buyer (16 percent) or private equity (5 percent) are real options. This is according to recent research by Nyenrode Business University, in collaboration with RSM and Van Lanschot Kempen among 232 family businesses.
This article originally appeared in Dutch on investmentofficer.nl.