A staggering £1 trillion will change hands over the 2020s in the UK alone as Baby Boomers age1. In this article, we take a look at how advisers can navigate the risks and opportunities associated with this great wealth transfer. For the valuation of an advice business, the cost of doing nothing could be significant.
Many advisers work with clients within the ‘at retirement/in retirement markets’. These are areas of advice that are buoyed by wider market demographics, the democratisation of financial risk, and the rise of drawdown as a mass-market retirement income solution. It’s a great time to be in advice.
While this is a positive backdrop for the immediate future, it is important that advisers are aware of the opportunities and risks that wealth transfer represents. With the passage of time and ageing client banks, the potential of losing advised assets, clients and therefore value is acute if there is no engagement strategy in place with the beneficiaries of existing clients.
As we can see from below, when we consider some wealth transfer statistics, the potential risk to adviser businesses is clear.
- Only 26% of investors have a wealth transfer strategy in place2
- The average age for inheriting from grandparents is 29 (Millennials)2
- The average age for inheriting from Parents is 44 (Generation X)2
- Research on wealth transfers shows up to 90% of heirs change their advisers3
If advisers are considering exiting the industry and selling their business, it’s important to understand that wealth transfer can impact the valuation of their business. Increasingly, acquirers are now asking questions on this theme, such as: what is the demographic of your book? What segmentation has taken place? How does the adviser engage the beneficiaries of the existing clients? If advisers do not have a retention strategy for those assets it will decrease the valuation they can achieve for their business.
Putting a plan in place
Advisers wanting to put a plan in place should consider how they can forecast the longevity of their client bank, any concentration issues and mortality risk. By doing this, beneficiary segments can also be defined, which in turn can lead to considerations as to how the adviser might plan to engage and service these potential future clients.
Advice businesses wishing to assess the risk (and opportunity) could consider the following:
- Forecasting the longevity of the client bank
- Mapping beneficiary segments i.e. women / Generation X / Millennials
- Defining the risk for your business
- Ensuring your proposition meets the needs of the beneficiaries (including vulnerable clients)
- Reviewing adviser recruitment policy
- Considering what you need to do to create a family ecosystem
Estate planning discussions with existing clients provide a useful opportunity to discuss new propositions and services. They also naturally lead to conversations about a client’s beneficiaries. Advisers can use this to their advantage and bring beneficiaries into the dialogue. This can allow for new client conversations with those beneficiaries, boosting the retention of any assets passed down generationally.
The sustainability 'pull' factor
Research shows that the likely recipients of wealth transfers (women/Generation X/Millennials) have a greater interest in responsible investing compared with other groups4. With this in mind, the topic of sustainability can potentially help advisers engage the beneficiaries of their Baby Boomer clients.
We’re hearing from advisers that the wider societal narrative around sustainability is creating a 'pull' factor, and increasingly clients will want to have conversations on this theme. In our view, the growing selection of financial products and solutions in this area could well be supportive of engagement opportunities.
The great wealth transfer poses risks for advisers that fail to adapt. It also represents a significant opportunity to provide existing clients with compelling propositions and services, and engage with their beneficiaries to secure future business.
- Standard Life Future of Retirement paper 2018
- RBC Wealth Management – Wealth transfer report 2017
- Deloitte 2016
- abrdn Women, ESG & Investing