Is Wealth Management Ready For The Next Generation?

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We’re all familiar with idea of an ageing society, and the upheaval it will cause to politics, economics and culture has been widely discussed. We often think of it as something that is coming, almost continually, over the horizon, but never quite reaching us. The reality is that these changes are already happening and impacting our lives. I want to explore what this means for wealth managers, whether enough is being done to plan for how wealth will be accumulated and held in a shifting customer base.

A large sector of wealthy individuals have been steadily entering retirement age in the last 15 years. The ‘Baby Boomers’, and before them the ‘Greatest’ or ‘Silent’ generation have battled against huge disasters, wars and societal upheaval. A lot of them have also seen huge increases in their assets, and for those that were able to invest or buy property, they now are able to retire and enjoy the fruits of their labour. These current and future retirees will be looking forward to a long and rewarding period of their lives, which will for many involve a relatively high amount of spending. For others, and this is by no means universal, will also be spending a high proportion of the wealth they have accumulated on care. The rest is likely to be passed down to future generations and we are therefore due to experience a huge transfer of wealth between generations, whether that is directly through gifting and inheritance, or indirectly via spending.

We must remain that this transfer is not going to be a panacea for all of the problems we currently face with inequality, this transfer will be unequal, benefitting many of the next generation’s wealthier individuals more than others. It will also not fully address the inequalities of wealth and opportunities between generations that we already see. At the moment there is only limited calls for policy intervention from governments for the distribution of wealth either before or during inheritance, and with the current distribution of voting power within these societies any change in direction is likely to face stiff competition. At the moment it is not politically viable to look at a mandated distribution of wealth from one generation to the next, or between generations.

So, what then, should we consider when we view this shift through the lens of wealth managers? The assets go beyond simply property, though this is often where we focus. Holdings in pension funds, ISAs, and other wealth products are in scope of this transfer of wealth, and a lot of the homes will be sold off and passed on in cash as inheritance. The amount varies, depending on the way the model is constructed, but this has been dubbed ‘The Great Wealth Transfer’, and is anticipated to be the greatest transfer of wealth between generations in human history. For wealth providers, the question should be, how do we make sure we retain, or grow the assets currently under management or administration as this transfer takes place.

I have not yet seen enough attention paid to this. I think it is too simplistic to say that the younger generation will want a digital proposition. Yes, that is the case, but what will differentiate when every provider has digital propositions? Automation and fee reduction are again legitimate aims, but this will just force a race to the bottom with little innovation taking place.

Where that innovation needs to focus is seeking to understand more about the next generation, what their needs are going to be when it comes to wealth management, and how the products and propositions can be shaped to meet their needs. Will the ones built and adapted for those of the older generations still be relevant?

• The wealth will be spread against a wider cross-section of society. Are wealth providers appealing to a diverse audience or are they staying close to their traditional market that has served them so well over the last few years?
• The way, and the timeframes for, accumulating wealth over the a person’s life is changing. Most of the key life events are on average moving later in life. Home-ownership, marriage, starting a family all impact on the ability to open and contribute to wealth products. Are wealth products providing a solution?
• Is there enough engagement with wealth accumulation. Future generations will have a different relationship with wealth than previous generations. They will likely to using a higher proportion of their income of other things, is there effective communication to show how and why investing is important.
• We have more complex family structures which may involve parents living in different households, step-children, multi-generations living together. The demise of the nuclear family has had many impacts, are wealth providers doing enough to innovate in this space?

My own view is that Wealth Management as an industry has become too inward looking, too focussed on playing it safe. I don’t think many wealth providers can answer the above questions positively, and the worry is that if the industry doesn’t prepare then it will become less relevant and will face a crisis of high outflows from the retail market. The other aspect of this is that the changes are already happening now, and there is a considerable amount of advantage for those that do move early on this. Whilst those platforms and managers targeting the younger generation may be seeing increased inflows, but at the moment, this is more related to fees and marketing than offering a true propositional offering that appeals.

So what would the changes to propositions offer? There are many avenues, but I would suggest that some of the services that could be offered would be:

• A more holistic robo-advice service that harnesses data from Open Banking to offer a wider range of solutions tailored to the individual;
• The ability for products to manage inter-generational wealth and inheritance planning automatically;
• A product, or more likely a range of products, which assists an individual, couple, family etc through the various life stages, and allows for flexibility for life stages such as house purchases, starting a family, receiving inheritance;
• Integrating ESG and green credentials into the providers business offering and operating model to align closer with the next generation’s priorities

The adviser and distribution stage has started to adapt to these changes, it is time now for the rest of the wealth management industry to start as well. If they don’t we could see threats to their business model coming from new directions from Fintechs, but from other companies such as Google and Amazon who are already used and trusted by the next generation, and with the vast amounts of data they have access to, could move in to Wealth Management with the potential to disrupt traditional models and propositions.