Generation next and the great wealth transfer

By any measure, the numbers are staggering. Washington-based investment manager United Income reckons $36 trillion will be transferred by baby boomers to their children in the US alone by mid-century. Cerulli Associates puts the number at $68 trillion over the next 25 years.

Wealth-X’s Family Wealth Transfer report, published in June 2019, focuses on families with $5 million to $30 million in investable assets. It tips $8.8 trillion to be inherited by America’s next generation in the 2020s. That number falls, albeit from the gigantic to the merely colossal, in Europe ($3.2 trillion) and Asia ($1.9 trillion).

Some of this money will be pledged to charities or siphoned off by the taxman. But most will flow into the pockets of two demographics: Gen-Xers, those born between 1965 and 1980; and millennials, the age group born before 1996. It will be, says Viola Steinhoff Werner, head of global next generation and families department at Credit Suisse, “the biggest transition of global wealth in history.”

With this in mind, it’s worth taking a good look at those set to inherit to inherit this wealth. Who are they? What do they want from life? And how do they perceive the private bankers keen to get their business?

It’s worth starting by exploding a few myths.

First, this handover will not happen overnight. It is a process that will last years and even decades. The top line numbers might be huge, but far less passes from one generation to the next in any given year. United Income put the total value of all inheritances in the US in 2016 at $427 billion.

Second, wealth transfer is not easy. Every culture and country struggles with the same set of challenges. The shirtsleeves-to-shirtsleeves parable, where one generation amasses a fortune only for the next one to fritter it away, still resonates. “Around 70% of UHNW [ultra-high net-worth] families fail in the process of transferring wealth and responsibilities,” says Steinhoff Werner. This leads to families losing their harmony and, in turn, control of their wealth.”

And third, just because you inherit a lot of money, it doesn’t mean you are good at managing it or are comfortable with your status.

It can be argued that it’s as hard to transfer a fortune to one’s offspring as it is to make it in the first place. So, what mistakes does each generation tend to make – and are there cast-iron ways to make sure these blunders are avoided?

A good place to start is with an open mind. Older and younger often look at one another in bemusement. Each side is often quick to make assumptions about the other.

By definition, self-made baby boomers worked hard to get where they are. “They built their business on a lot of hard work, grit, determination and commitment,” says Maya Prabhu, who leads JPMorgan Private Bank’s wealth advisory business for Europe, Middle East and Africa.

Many of those who build their wealth from scratch spend surprisingly little of it. They remember having nothing, so the habit of pinching pennies sticks. In turn: “There is a fear their kids will do the opposite – working too little and spending way too much,” says Alexandre Gartner, private bank head at Bradesco Bank Europe in Luxembourg.

Pointing to the example of families he worked with in Latin America, Gartner adds: “Business founders are often concerned their children will lose focus and that they will simply wait to inherit their wealth and then spend it.”

It’s the classic conundrum: a wealthy parent, born with no or little personal wealth, raises a child that only knows financial plenty – and comes to fear it will never find its own route in life,

For their part, millennials have their own set of fears and grievances. As a demographic, they see an industrial and financial legacy of climate change and inequality. “Next-genners think the status quo of their parent’s generation isn’t good enough,” says Money K, global head of next generation and global client services Asia Pacific at Citi Private Bank.

Nowhere are the divisions between the generation that made the money and the one set to inherit it starker than in the case of global warming.

“While older generations are sometimes divided over issues such as climate change, with the new generation of HNWIs [high net-worth individuals], they are all aligned on climate change a) being real and b) needing to be addressed,” says Frederic Rochat, a managing partner in Geneva at independent Swiss private bank Lombard Odier.

No one ever said money is easy to talk about and often the more you have, the harder it is to have a serious financial dialogue.

“It is difficult to speak openly about money,” says Credit Suisse’s Steinhoff Werner. “Inheriting is inevitably an uncomfortable topic, because mortality becomes part of the conversation. Hidden conflicts often also emerge in these difficult discussions. As human beings, we try to avoid painful or uncomfortable issues. But all families have to face them and tackle them.”

There is no evading that fact. She points to Justin Rockefeller, an American impact investor and global director of family offices and foundations at investment management technology firm Addepar, who likes to say that while: “Every family is unique... the problems they face are not.”

As a fifth-generation scion of the oil tycoon and philanthropist John D. Rockefeller, he should know. Wealth does not traverse its way across three centuries without a lot of communication, financial flexibility and professional external help.

But sitting down to talk about wealth is never simple. Each generation comes to the table with its own set of hopes and fears. “The message we hear from parents is: ‘How can I give my children motivation in life and ensure my money doesn’t detract from their fulfillment?’” says JPMorgan’s Prabhu. “What their children say in turn is: ‘I’m very different to my financially successful parent. How can I live up to their expectations?’”

There is rarely such a thing, where money is concerned, as an easy conversation. Issues like a son or a daughter’s choice of partner often get dragged into the debate. A parent “might fear half of their money disappearing through the side door if the relationships don’t work out – money they have worked so hard to earn,” adds Prabhu.

“The challenge is to have that conversation with your child without making them think you have no trust in them. This starts with creating a shared family vision for the wealth.”

For many millennials and even some Gen-Xers, discussing wealth with one’s peers or even with an experienced relationship manager can be just as hard.

“Sometimes I can’t even use that word [wealthy] as the children find it very difficult to say, so we use terms like ‘financially comfortable’,” says Prabhu. “But then we talk about what wealth means to them and often it is issues like: ‘Should I feel obliged to buy everyone’s drinks?’ or ‘Should I tell my friends I have been on a private jet when they are all broke?’”

Money K at Citi Private Bank says it can be: “Hard for the next generation of UHNWs, including millennials, to be as close to people who aren’t of similar wealth. When with peers, they can be more candid about family business matters, about anxiety over personal and family issues relating to career, wealth, succession, marriage, and tensions with siblings and other family members.”

There is no single agreed way to educate the next generation about wealth.

“Every family is different,” says Bradesco’s Gartner. “We see some who openly discuss wealth with their children from their late teenager years and others where a child only discovers their personal wealth when a father or mother passes away; and they are totally surprised by how much they have inherited.”

In some parts of the world, there’s good reason to keep talk of wealth out of the public domain. Gartner points to “security concerns [in Latin America], which are a reason why people are relatively closed about their wealth.”

But that shouldn’t stop a family discussing financial matters behind closed doors. These days, rudimentary information about a super-wealthy family, including your own, is rarely more than a few clicks away.

“Google is an amazing source of information,” says JPMorgan’s Prabhu. “If you Google your family name, there you are, your net worth, available for everyone to see. Your children may not discuss your wealth with you, but some information is probably out there.”

The process of dealing with this starts early.

“If your seven-year-old comes home and says: ‘Mummy are we rich,’ because someone told her that in the playground, you need to have an answer prepared,” says one private banker. “You don’t need to physically show them a yacht or your private island – at this stage in their life. It’s enough to be honest and to have the conversation and to role-model about your family values.”

JPMorgan’s 54-page ‘Children and Wealth’ report helps kids as young as three to answer simple questions like ‘how much is this coin?’ and to grasp the difference between saving, investing and sharing.

It then navigates those tricky teenage years, helping the reader to budget at college, read financial statements and engage with civic causes. The report “has been super-popular with clients during [the coronavirus] lockdown,” notes Prabhu.

In the introduction, the bank spells out its aim of teaching “rising generations to use money in a productive, rather than a destructive, way.” It shows how embedded philanthropy is in the minds of millennials and how seriously private banks take the financial education – and, they hope, the long-term retention – of clients.

There may be no unified way to teach a child how to cope with wealth and to be good with money. But there are some pretty reliable rules of thumb about how to instil in them the right financial values and sensibilities.

Do, for example, communicate when the next generation is in their mid to late-twenties, an age when they want to be trusted and involved in the family’s finances.

“The key moment in a transition process is when a new-generation family member attends a family office meeting and starts to realize what is happening,” says Victor Matarranz, global head of wealth management and insurance at Banco Santander.

“They start to learn and to ask questions. Often, the older generation looks at them like: ‘What is this person talking about?’ but they always want to know more. This is how the process of wealth transferral starts.”

For a family scion to attend a meeting like this is a big deal. A good rule of thumb for anyone on their first day is: if you’ve nothing helpful to say, just listen.

That was the approach taken by Karam Hinduja when he attended his first board meeting of Hinduja Bank, a private Swiss bank founded by his grandfather SP Hinduja in 1978.

After graduating from New York’s Columbia University, he spent time outside the family bubble for a few years, founding a media firm, investing in environmental, social, and governance projects with other impact investors and managing assets for the $50 billion Hinduja Group. In August, Forbes put the London-based family’s collective net worth at $13.5 billion.

Then came the call from his father to attend a board meeting. “I brought a lot of the lessons I learned in the world,” he says. “Those early experiences were invaluable. I listened a lot, I never raised my voice – that just strokes one’s own ego and it doesn’t help. My aim was to understand what it was that made the bank a success.”

It clearly worked. Karam was named chief information officer in January 2020. Five months later, the board promoted him to chief executive. A month after that, in July, he made his first big decision, renaming the Geneva based lender SP Hinduja Banque Privée.

He says he won the board over by bringing in: “A new lens and perspective to the CIO role. I had learned a lot by this point and I reported back to the group board, suggesting ways the bank could improve. It gave them a sense of confidence – that I might be the right person to lead the ship.”

He adds: “I don’t believe next-generation HNWs are looking merely for ‘services providers’ offering marginally better pricing; what they need is an institutionalized family office that happens to have a banking licence and a significant capacity to lend. That is critical to what we do.”

Likewise, there are plenty of mistakes to avoid when imparting wealth management advice. It isn’t a great idea to foster rivalry among one’s children – for example, by giving each a sum of money and seeing how well they invest it. “That often ends up with siblings competing with each other in the boardroom and weaponizing money against each other,” says JPMorgan’s Prabhu.

Another no-no is to use money as a control mechanism by dangling it in front of a young adult to induce a certain outcome. “That approach results in you infantilizing your children, so you end up with 40-year-olds who still feel and think like children,” she adds. “If you aren’t treated like an adult, you won’t act like one.”

A far better approach, reckons Bradesco’s Gartner, is to ease them in slowly. “You can have them manage an individual account with a small sum of money in – that will help them decide if they want to be in the driving seat of this wealth,” he says. That has the added benefit of enabling a wealth management provider to make its full range of services available to the client in question.

This is important. A battle is underway – albeit quiet and diplomatic – to retain the business of each family group during key moments of transition.

A generation ago, a global lender or an independent Swiss bank tended to do business solely with a family patriarch. When the torch was passed, it was usually to a single family member, whereupon financial allegiance would shift to the new generation. It was often, though not always, seamless.

That old-school approach to private banking has been replaced over the past 15 years by a sophisticated marketing machine.

On one level the basics of private banking haven’t changed much. “Most wealthy clients seek a partner who is solid in these stormy times,” says Lombard Odier’s Rochat. “Older generations care overwhelmingly about the preservation of wealth in this very volatile environment. But what they care about deep down beyond performance is the successful transmission of wealth to the next generation.”

But at the same time, this is an industry that is almost unrecognizable to the one that saw in the new millennium. Credit Suisse’s Steinhoff Werner has seen the changes first hand.

She joined in 2005, as director of the bank’s UHNW marketing programmes. Two years later, she founded, and is still general manager of, the Young Investors Organization (YIO), an independent body sponsored but not owned by the Swiss bank. It aims to foster lifelong personal and investment relationships between wealthy young adults.

“If I compare the YIO classes of 2007 and 2020, I see a huge difference,” she says. Back then: “Travel was more of a rarity. It was still special to visit a different country for a week or to go abroad to study. Some YIO members from Spain or Italy weren’t that confident in another country and speaking English also remained an obstacle for some.”

All that has changed, she adds. “The new generation emerging now is different. They are more independent, travel widely, speak English, are confident in terms of what they want and need and have a basic or a good understanding of finance.” For now, of course, Covid has put a stop to most journey plans, but air travel will return.

This is the millennial effect. Private banks have had to adapt to the demands of a demographic that is not only big in number but set to inherit much of the baby boomer generation’s vast wealth.

As a group, it is different to any that came before. Lombard Odier’s Rochat describes its constituent army as being invested: “Personally and professionally in projects and in the way they live their lives. They are very demanding with themselves: their lives have to make sense and be compatible and coherent with their overall worldview. They are looking for a financial partner whose values fit with their worldview and who will act alongside their values.”

Millennials query everything, particularly if an investment decision negatively affects people or the planet. “They ask questions like: ‘Why that stock?’ or ‘What is the climate footprint of the stocks in that portfolio?’” says Rochat. “That type of question always comes from the younger generation.”

Credit Suisse’s Steinhoff Werner says the next generation: “Wants a true partner in their bank, who takes them seriously and really cares about getting to know them and what makes them tick.”

She adds: “You have to listen very carefully [to them]. You can’t just assume you know who these individuals are, what they want, what their life purpose is.”

This isn’t easy, although the best institutions have learned to adapt. In much the same way that commercial lenders came to see digital as vital to their survival, private banks embraced the challenge of remaining relevant – and profitable – by embedding themselves in the daily lives of wealthy clients.

In a way, this returns private banking to its roots as a relationship business. At the heart of this process is financial education and at the core of that is a generation that came of age wired into social media and with heads full of data.

Education itself is not the issue. Whether a next-gen HNW or UHNW is born in Brazil, Nigeria or China, their formative years are usually mapped out long in advance: private school in the US or UK and then an Ivy League education. That doesn’t necessarily mean they understand how money works, what makes a business tick or how to structure an investment.

“No one is born understanding money,” says JPMorgan’s Prabhu. “You need to learn the financial nuts and bolts, and to be prepared mentally. You need to be able to ask and answer questions: What is my relationship with wealth, my identity with it, maybe with wealth I have not earned?”

It’s a key reason why so many wealthy next-gens also attend business school and then spend time working at a big corporate or financial institution.

In some parts of the world, this is less an option than a pre-requisite. “For Asian families who are prepping next-gens to take over, many prefer their children to work in banking or asset management to gain hands on knowledge and experience, before returning to their family businesses,” says Anton Wong, head of key client group, Asia, at BNP Paribas Wealth Management.

Money K at Citi Private Bank notes that in some cases: “It’s written into the family constitution that you have to work outside the family business after college or [an] MBA”.

Of course, a thorough grounding in finance is not for every wealthy young man or woman. For every second-generation financier or industrialist, keen to use father’s money to buy the world, there’s a sister or brother who’d rather be a humanitarian, a schoolteacher or a socialite.

Lombard Odier’s Rochat offers a simple piece of advice to the next generation: don’t rush into anything.

“Think about what you would like to achieve in your life, in which field you will want to fully seek to realize your potential,” he says. “If your decision is to join the family business, work hard. Nobody will make it easy for you.”

“Not everyone is financially literate,” adds Money K at Citi Private Bank. “There are some next-genners with MBAs... who just don’t see finance as their cup of tea.”

Some of those tagged as a natural second or third-generation paterfamilias can spend years winging it, pretending they know how a family business works. But eventually, everyone has to listen and learn.

“I had a situation where a next-genner in his twenties and who is earmarked to run a family office, sidled up to me and said: ‘I have literally no clue what a family office does,’” says Money. “So, I arranged for him to meet up with our family office advisers and connected him with some of his peers.”

For every private bank, this is a challenge but also an opportunity. All families keep a keen eye on their finances. In its Global Family Office Report 2020, UBS surveyed 121 of the world’s largest family offices to discover how they rode out this year’s financial storms and kept portfolio performance in line with objectives.

It points to six factors, with UHNW family offices closely involved in strategic asset allocation, succession planning, sustainable investing, impact investing and – a key driver of returns – private equity. Factor six was opportunism, with two thirds of family offices “trading up to 15% of portfolios tactically” as they rebalanced their portfolios in March, April and May, UBS found.

That kind of comprehensive financial planning – dealing with higher taxes, multiple properties and a large investment portfolio – happens at a centralized level, overseen by boards that include family and, increasingly, non-family members.

But beyond that, wealth planning at the highest level is more than ever a bespoke process, with private banks moving heaven and earth to serve the specific needs, not just of the family unit, but of its component parts – each individual child.

Wealth “is becoming more of a person-by-person experience,” says Gartner. “We have situations where brothers, sisters and cousins are each served by different private bankers... Even if they have the same amount of money, they will have totally different styles. Some want to pursue impact investing. Others want to sit on their money and retire young. There is a clear trend not to treat people by the size of their pockets but rather by who they are.”

That forces private banks to adapt in two ways. First, every relationship manager will by default have to adapt to the diverse needs of the customer. That in turn will make each relationship manager a slightly different animal from each of their peers, giving them a highly specialized ability in an area such as, say, impact investing or dealing with parent-child issues or sibling rivalries.

Private banking “is not a one-man or a one-woman show anymore,” adds Gartner. “It is about bringing together the capabilities of several professionals within the bank. Every relationship manager has a different style, approach and strength; and it’s becoming more about embracing the client with the different tools we have.”

This tailored approach to serving HNW next-gens has a human cost on both sides of the equation. The single most valuable resource of a wealth management firm – the time its employees spend serving the needs of a client – is not finite.

And while wealth will inevitably transition to a new generation, the process in some cases will take a long time. As UBS wrote in its 2020 family office report: “While the current generation of beneficial owners are mainly in their 60s and 70s, around a third of family offices have no plans for a change in control.”

Banks need to consider this carefully. “As a collective, the next generation might not be the most asset-rich or most profitable clients right now, which presents a very interesting conundrum for our industry,” says BNP Paribas’ Wong. “The challenge we face is how much resource you can devote to a segment of clients that is asset-light.

“They are very wealthy, but they might not yet have personal ownership of the family assets,” he adds. “So, you can spend years maintaining a relationship without bringing in much business in a traditional sense.”

This requires the crunching of a lot of data: to determine which clients to focus on and when the transition of more, or all, of a family’s wealth will take place. But it also puts the onus on a bank to find a way to make itself financially relevant to a valuable client and to make the next-generation feel special.

“We find ways to offer credit lines to next-gen clients, which are less dependent on pledgeable assets or parental guarantees,” Wong adds. “If we ask the next-gen to get his or her parents’ guarantee to approve a credit line, that banking relationship is in fact not as much with that individual but more with the parents.”

Technology enables private banks to find ingenious ways to serve wealthy clients. But the seamless flow of information works both ways. The next generation knows it has the whip hand – the wealth provider needs them more they need it.

It isn’t all that hard for a wealthy millennial to replace a valued relationship manager who has served their family with distinction for years.

Credit Suisse’s Steinhoff Werner believes the loyalty a millennial feels toward a primary wealth adviser is “changing” rather than falling, but it is clear that private banks must work harder than ever to convince young customers to keep the faith.

“A financial institution can create [loyalty] by seeing the next-gen as unique individuals and not just as a linear continuation of their parents,” she says.

Santander’s Matarranz agrees that for the next-generation wealthy, loyalty must be earned, not assumed. “If you let them down in that transition process, you have probably lost them as a client for sure, as they will feel you are part of the generation that their parents were part of,” he says. “Gaining their trust is absolutely vital. Once it’s gone, it’s gone.”

In turn, for those set to inherit millions, even billions, in the years to come, a good relationship manager should be valued, not taken for granted.

Millennials were born into a world flooded with data and fuelled by fears of climate collapse and inequality. They want to use the one to help the other and they see their family’s vast wealth as a golden opportunity, be it by philanthropic giving or by putting money to work in profitable, planet-friendly endeavours – impact investing.

“The next generation wants to make the world a better place, be it by tackling climate change or global poverty,” says Karam Hinduja, himself a fourth-generation scion.

“We are smarter now, we have more information and we aren’t going to ignore the challenges we face... It’s not that the new generation is just granola-eating hippies. The point is that we know – better than any generation – that decisions we make here today are felt on the other side of the world.”

This desire to help “is here to stay”, says Bradesco’s Gartner. It is driven by a data-hungry digital generation that knows more about the problems we face than any that has come before it. More importantly, thanks to the biggest wealth transfer in history, this group, and the relationship managers who serve it, is in a perfect position to do something about it.