I remember the day I realized the future of wealth management was going to be very different from my first 20 years in the industry. I had a conversation with a 65-year-old client on a back-door Roth IRA strategy, and then my 22-year-old niece asked about the same topic—after hearing about it on TikTok.
There has been a significant change in how generations approach wealth management. Access to financial programs, tools and education is more prevalent. An 18-year-old from Gen Z is very different from a Boomer at 18. While their role may shift, a high-quality advisor remains a critical component of a successful wealth management strategy for all generations.
The Golden Age of Generations
There are five generation groups living today—Silver, Boomer, Gen X, Millennials and Gen Z—and the greatest generational wealth transfer in history is about to begin. With an estimated $73 trillion passing to heirs by 2043, according to Cerulli Associates, today’s advisor can support multiple generations at once, providing an incredible opportunity in the short term.
Yet there are nuances that need to be considered within this transfer period to position advisors for long-term growth. There has been a major shift among women who have an active role in their finances, and I have seen studies that suggest anywhere from 50% to 70% of the transferred wealth will be controlled by women. Different from prior generations, I have yet to meet a 20-year-old woman today who has no interest in creating and managing her personal wealth. Additionally, communication norms, social media, remote and hybrid work environments, and the ubiquitous TikTok video have a lasting effect on the way younger people consume and share information.
Advisors working with older clients need to start considering how to keep assets that will transfer on their books. Each of these generations demands different approaches to wealth management and understanding the shifting needs and communications preferences are critical.
How my 65-year-old client and 22-year-old niece asked about the same thing provides us with a perfect example.
Cheugy got his Roth Ratioed (What?)
Much like the slang used on social media platforms, personal financial and retirement planning information is presented without translation. In fact, a vast majority of these resources are geared toward investment advice—buying ETFs instead of mutual funds for example—not money management, and certainly not managing money in a tax-efficient way. As such, there is less focus on tax planning or tax savings than accumulation of money.
That’s unfortunate because the tax code is more complicated now than when I started my career. (Still, I don’t find it as complicated as the coded language utilized on TikTok.) According to the Brookings Institute Tax Policy Center, over 35 tax acts have been passed since 2020, and that number is growing.
Within this context, there are a significant number of millennials between 25 and 40 years old who make more income than the Roth phaseout of $153,000 as an individual or $228,000 as a married couple. While it’s great that individuals have productive careers that generate that kind of income, it makes people increasingly ineligible to make direct Roth IRA contributions, a critical tool to mitigate tax exposure on investment growth. For that reason, many believe they can’t participate or take advantage of the compounded tax-saving opportunities in a Roth.
So how do advisors guide this group in alternative tax-efficient strategies? For some, it’s suggesting a back-door Roth IRA — the strategy I introduced to my client and my niece came across on social media. For others, it’s the novel “mega back-door Roth” available in some retirement plans.
Both are nuanced strategies that have specific requirements and rules to avoid triggering penalties or other tax issues and require expert support. But explaining this to the next generation will require a different set of communication and presentation tools than many of those employed today.
Follow the Masses
Younger generations want basic information on choices and will need expert guidance from financial advisors to help make these decisions. They may be more educated and engaged than previous generations, but they still need the support of professionals to maximize wealth, minimize tax burdens and costly financial mistakes, and ultimately achieve their goals.
Advisors don’t have to engage, or indulge, in every social media platform, but they should be aware that younger generations have wider access to financial services and strategies, and critically, engage with information differently.
It’s no surprise that social media is having an impact on financial education. Just about every platform has someone posting about an investment strategy.
Wealth managers working with those influenced by social media must help these clients understand this wave of information and navigate these choices. Advisors must meet these clients where they are today and empower them to make the right decisions with complete information.
Kitt Murphy is Senior Director of Wealth Management at Choreo.