As the saying goes, “The first generation makes money, the second generation spends it, and the third generation blows it.” And there is in fact data to substantiate that. The Williams Group wealth consultancy has found that a stunning 90 percent of wealthy families lose their wealth by the third generation, as reported in Money magazine.
We are just entering the largest era of wealth transfer ever. The oldest baby boomers are now age 69, and 10,000 baby boomers reach age 65 every day. The average life expectancy of someone who reaches 65 today is 84–86, so most of these wealth transitions are probably still over a decade away. Still, each year this becomes a hotter topic, and advisors—particularly boomer advisors—continue to struggle with retaining the next generation of clients.
Most children of wealthy parents will have established their orientation to money well before the time wealth is actually transferred. By then, they will have (or have not) learned to value financial responsibility, established a tendency for saving instead of spending, and lived independently of their parents’ wealth. So advisors have a twofold challenge before then:
- Connect with the heirs and help establish (or reinforce) good financial habits
- Maintain that relationship through the transfer process, even as heirs move away from home to start their own lives
This means that advisors will increasingly need to be competent at forming and maintaining relationships with two generations of clients simultaneously, adjusting their interactions to address the most significant concerns of each. Specifically:
- Boomers need to ensure that their legacy wishes are clear and that mechanisms are in place to drive wishes into reality.
- The next generation needs to grow into the responsibility of being born into wealth, accepting the legacy wishes of their parents, and understanding the fundamentals of wealth management mechanics so that they make wise financial decisions, ideally in concert with their financial advisor.
How Can Advisors Position Themselves?
Hire for the next generation. Managing a next generation of clients requires a next generation of advisors. Every week, we hear about the need for next-gen advisors—and for good reason. Next-gen clients will want to work with someone who will be around for them, and when they look at boomer advisors, they may not see past the gray hair.
Many ensemble firms are positioning themselves to capture the trillions of dollars of wealth that will transition between generations over the next 20 years by hiring multiple generations of advisors to work with multiple generations of wealthy families. Everyone is searching for young, talented advisors, who have the luxury of being in demand.
Improve your tech savvy. There is a rumor that next-gens may actually trust technology more than they trust humans. Whether that’s true or not, there is no doubt a practice needs to maintain a norm of technological savvy to deal with next-gen clients, who expect you to work online quickly and efficiently and be available 24/7.
Hold family meetings. Many advisors talk about family meetings, but few actually have them. That may be because boomer parents aren’t ready to disclose their personal financial situation to their children before they have to. But the fact that most wealth is gone within three generations should communicate that something is wrong with either the value system or the knowledge of one or both generations.
Educating kids about wealth transfer often starts with educating parents, who won’t want to see their sweat and tears squandered by their kids. The facts should motivate families to understand that they need to talk! The family meeting is the logical intervention, and the advisor is the logical person to manage it. Learning to do this well is a requirement for the advisor who wants to retain the assets of wealthy clients.
Offer next-gen training. One opportunity for parents, children, and advisors alike is a test period for the next generation, asking:
- What would children do with a bucket of money, albeit money given to them by their parents?
- What decisions would they make about investments?
- What would they do to demonstrate stewardship for the legacy over a period of time?
Imagine a training opportunity where the advisor works with the clients’ children for a length of time to address those questions, sharing the results with the parents at the end of the period. This would not only provide a solid experience for the advisor and the next generation, but it would also allow for the formation of a relationship with those poised to inherit wealth.
Many advisors blame geography—the fact that clients’ children move far from home and want a local advisor—for their struggles to retain the next generation of clients. But is that a reason or an excuse? It’s not uncommon for advisors today to have clients scattered throughout the U.S. If the relationship is solid, location is no obstacle to advisors and clients sustaining their partnership through generations.
Joni Youngwirth is managing principal, practice management, at Commonwealth Financial Network®, member FINRA/SIPC, an independent broker/dealer–RIA.