A whole lot of money should change hands in the next few years, as inheritances get passed down to the next generation, according to the Institute For Preparing Heirs. The industry buzz word for this: intergenerational wealth transfer. Today, approximately 20,000 estates worth over $20 million each are transitioned every year and, thanks to aging baby boomers, trillions of dollars in assets will be transferred over the years to come, says the Institute.
That’s the good news. The bad news: Over 90 percent of heirs promptly change advisors when they receive their inheritances, and 70 percent of families lose control of their assets when an estate is transitioned to the next generation.
It’s a problem that is very much on the minds of financial advisors and wealth management industry executives. Last fall, Sallie Krawcheck, president of Global Wealth and Investment Management for Bank of America and one of the financial service industry’s top executives, sent around an internal memo that addressed the subject. “If the client passes away and the assets go the spouse, our industry keeps the assets 45 percent of the time, and if they go to the children, it’s just 2 percent,” Krawcheck wrote in the memo. “Add to this the complementary fact that our industry’s client base is aging at a pretty good clip, and it underscores our strategic imperative to ‘get it right’ when it comes to intergenerational wealth transfer and building our next generation of clients… or we run the very real risk of long-term erosion of our business.”
So what’s a wealth manager to do?
How to Engage and Retain
Last week, about twenty wealth managers paid $3,000 to take a three-day training course on “Engaging and Retaining Heir Families” held by the IPH at Pepperdine University in Malibu, California. The Pasadena-based Institute says it has noticed increasing interest in the subject. It has sold out six training sessions in the past year, and has plans to introduce a certification and designation program based on the material, according to founding director Vic Preisser [registration required].
“Advisors are very concerned about this, and interest is only increasing,” said Preisser, co-author with Roy Williams of Preparing Heirs. “They know that money can be both made and lost.”
To keep a family’s business after an intergenerational wealth transfer, advisors need to “find a way to open a conversation with heir families,” according to Preisser. And the best way to do that, he said, is to get a family’s attention by letting them know about the risks involved in wealth transfer in general, assessing the family’s own situation and suggesting courses of action they can take, such as improving family communication and crafting a family mission statement.
The centerpiece of the IPH approach is a “private briefing” for clients and potential clients held in conjunction with local accountants and attorneys. Such a briefing is essentially a sales pitch, and is meant to precede any intimate sit-down meeting with a client’s entire family. Marketing such events is critical, according to IPH, which provides “turnkey” press announcements, ads, newsletters and letters to clients, prospects, lawyers and accountants, Preisser said.
This approach clearly has its boosters, including Matt Assini, a consultant for Wealth Preservation Architects of Greenwood Village, Colorado. Assini took the IPH training course earlier this year and recently put together a briefing for five wealthy families that he said “broke a logjam” and resulted in several families beginning to take steps toward transferring wealth after years of procrastination.
IPH funding director Roy Williams attended the briefing and it was his stories about wealthy families who struggled with wealth transition that turned the tide, according to Assini. “The families at the briefing could relate to those stories,” he said. “Roy described one family where the daughter of a very wealthy CEO said at a family meeting that she didn’t trust her father after he kept canceling appointments to talk with her. At first the CEO didn’t pay attention to what his daughter was saying, but when the advisor asked him to repeat what she had said, he started to cry. Everyone at our briefing was leaning forward and paying attention when he told that story.”
Other professionals who work closely with wealthy families caution that financial advisors need to be extremely diplomatic when approaching the older generation, especially if their net worth is under $20 million.
In an era of low interest rates, even couples or a surviving spouse with millions of dollars may feel they are “income poor,” and, after setting money aside for grandchildren and charity, may be reluctant to discuss transferring their wealth to the next generation, said attorney Arthur Field, who runs an eponymous consulting firm for wealthy families in New York. What’s more, he added, people are living longer and wealthy families remain spooked by the money they lost in the financial crisis, despite the market’s recovery.
“You have to size up the senior generation,” Field said. “If they are sophisticated and accept the fact they are not going to be around forever and are open to sitting down with the second generation—terrific. But if you press them too hard and they are not ready for this type of discussion you can alienate them—and they are your meat and potatoes.”
The key issues for the older generation of high and ultra-high-net worth families when discussing wealth transfer are when and how they should tell the second generation; if that generation is ready for the wealth and how it will affect them, said John Benevides, president, family office services for Harris myCFO in Chicago.
When the time is right, said Benevides, a former top executive at the Family Office Exchange, Harris turns the discussion to what he calls the family’s “human, intellectual, social and financial capital and making sure financial is last.”
And when the second generation does become engaged in the process, the firm assigns someone who is the “generational equivalent” of the heirs. “It’s human nature,” Benevides said. “People are comfortable with people of their own generation.”
Harris also looks for how the two generations are different and similar in areas like philanthropy and investing, said Benevides. While a common assumption might be that the older generation would be conservative investors, and the younger generation more willing to take risk, often the reverse is true, according to Benevides, especially in families where the older generation created the family fortune.
“They took risks to make the money, and that mindset is reflected in their portfolio, while the second generation is using the money to consume and doesn’t have as great a risk tolerance,” Benevides noted.
In addition to trying to retain a wealthy family's business, wealth managers also want to add new clients from other families in transition. Preisser advises wealth managers to include those families in private briefings with current clients. Benevides said Harris will send articles and books to heris of non-client families in transition, as well as send over introductions to local experts and resources such as academics or attorneys.
“We want to educate them in the spirit of, 'we don't care where they go,' and generate enough good will so that even if they don't become clients, they may refer other families to us,” he said. “And for today's socially networked generation, that good will is even more critical to success.”