$4 trillion wealth transfer sparks battle for kids

It is set to be one of the biggest intergenerational wealth transfers in history. When baby boomers, who are now in their 60s and 70s, pass their money on to younger family members, millennials will be large beneficiaries. And private banks are desperate to keep them as clients. Millennials – the tech-savvy, environmentally aware generation born in the 1980s and 1990s – are affecting the way wealth managers target the so-called Next Gen.

With an estimated $4tn expected to be passed down within a generation in the UK and North America alone, according to a wealth transfer report earlier this year by Royal Bank of Canada, private banks are in a race to retain the millennial children of wealthy families and improve their offerings to entice those in their 20s and 30s to sign up.

That means bankers who want to ensure that large sums of money stay with them as the wealth transfer takes place have to listen to what millennials desire.

“One of the concerns many wealth managers are trying to address today is leakage arising from the transition of wealth between generations,” says Iraj Ispahani, chief executive of Ispahani Advisory and a 10th-generation member of the Ispahani group, which began in 1820 as a supplier of tea to the British empire.

“The Next Gen does not want their custom taken for granted. They are more disruptive, less concerned about historic family loyalty to a company, are price conscious and will shop around.

“How advice is made available to them is really important. Online digital delivery is more important than the personal high touch of the traditional wealth manager/private banker their parents are probably used to.”

Private bankers say millennials are more likely to be interested in sustainable investing and more likely to have done their own research on both cost and investment strategies, given their facility with technology.

A paper by Credit Suisse this year identified millennial values as one of the main drivers of investment themes in the coming years, with sustainability, clean energy and impact investing expected to gain even more importance for investors as a result.

Investable assets required to access UBS’s SmartWealth, compared with a £2m minimum for the private bank

“What is very clear to me is that millennials’ values are distinctively focused on making the world a better place, using financial capital for social return, having an impact and supporting sustainable development,” says Burkhard Varnholt, deputy global chief investment officer at Credit Suisse.

“Millennials are better educated than generations in the 1970s or 1950s. They might not be more opinionated – people were always opinionated – but the level of understanding of what wealth can do is certainly different today than it was a generation ago.”

“Very often millennials want to invest in themes they feel will shape the world in years to come – and for those purposes we have seen a very substantial increase in interest in themed funds around robotics and cyber security as well as sustainable investment funds.”

Millennials also expect strong tech capabilities from a private bank.

“Client behaviour is changing dramatically,” says Nicolas Commerot, head of advisory at Société Générale Private Banking. “Technology will be a means by which the younger generation and a new generation of Europeans are very different from the previous one, and are not expecting the same thing.

“There are more banks and the competition will only increase, leading to pressure on prices and increased attention on the added value that the bank is giving.”

Michael Maslinski, a partner at Stonehage Fleming, the family office, says managing intergenerational wealth transfer is a “very big problem” for private banks.

“A lot of banks and wealth managers tend to focus entirely on the person giving [millennials] instructions. If you don’t join in and help with this transfer, you are typically seen [by millennials] as their parents’ people,” he notes.

He says there are often huge differences within generations on the purpose of the family wealth. Millennials are more likely to want to use wealth effectively to make a contribution to society or environmental causes and wealth managers need to be attuned to that.

Many private banks, including Citi, UBS, Pictet and Credit Suisse, run so-called next generation days, where the children of clients are invited to learn about investing and the challenges of inheriting wealth, as well as getting the opportunity to network with their peers. Such events help retain the next generation, private bankers say.

There are many millennials who are simply not that interested in investment; a lot of people find it quite dull. The great thing about impact investing is it’s inherently interesting and can engage people in the family wealth via a theme they find compelling

UBS focuses its educational days on teaching younger clients how to invest wisely as well as with impact, such as investing in mainstream asset classes including green bonds, not concentrating their wealth in one area, such as start-ups, and tips on how to use impact investing when setting up a private equity portfolio.

“It’s a great tool for engaging Next Gens,” says James Gifford, who set up a programme for very wealthy millennials at Harvard University and is now head of impact investing at UBS Wealth Management.

“There are many millennials who are simply not that interested in investment; a lot of people find it quite dull. The great thing about impact investing is it’s inherently interesting and can engage people in the family wealth via a theme they find compelling. I have seen countless examples of millennials who were not interested in the family business at all becoming really engaged through sustainable investment.”

“Every generation has a trend,” notes Gregoire Imfeld, head of Pictet’s family office. “The generation before wanted to be tech people, the generation before [that] was banking or trading, [and] before that it was lawyers.”

Impact investing is the trend for millennials, he agrees. Pictet tries to help those with family offices to identify their core values as a way of engaging all generations with the investment strategy.

Pictet also creates advisory boards to help parents of children evaluate projects that they may wish to put forward for investment. The boards help create a professional process within the family that does not just involve the patriarch or matriarch saying yes or no and gives the younger generation more of a sense of agency.

Other banks are targeting younger potential clients who may not yet have the required standard of wealth to be a full-blown private banking customer. Bill Holroyd, entrepreneur and founder of OnSide Youth Zones, the charity, says that when he came into his wealth he was “initially very wary” of the wealth industry, feeling “like prey, with vultures circling ahead.”

“At the time I thought it would have been better if they had been working with me for a few years before the financial ‘event,’” he says.

This year UBS launched SmartWealth, which offers a purely digital means of managing money with long-term goals. It requires assets of just £15,000, though co-head Nick Middleton says the target market is people with £100,000 of investable assets. That compares with a £2m minimum for the private bank. “We’ve seen a lot of advisers using it for the children of their clients,” says Mr Middleton. “The key point from our point of view is that it’s a proposition being delivered in a way millennials can engage with.”

Banks also have to make sure they are hiring the right people to deal with younger clients, according to Caroline Burkart, a director at Scorpio Partnership, the wealth consultancy.

“A 25-year-old does not necessarily want to speak to the banker his father has dealt with,” she says. “We are not suggesting a bank puts a 25-year-old in front of a 25-year-old, but it would make sense for a 35 or 40-year-old to take over the relationship.”

The retail sector is very good with technology and digital, and the wealth sector certainly needs to take a leaf out of their book.

And she says private banks are struggling to attract new talent. In fact, they need to target millennials to work for them just as they need to target millennials as clients.

“The industry is not great at positioning itself with the next generation of advisers. Financial services are competing for talent much more now than 10 years ago. If you want to attract a hungry and ambitious young graduate, they want an organisation where the technology and platforms are up to speed.

“The retail sector is very good with technology and digital, and the wealth sector certainly needs to take a leaf out of their book.”

Mr Maslinski believes one big area private banks or family offices can add value is to bring practical experience to the handling of complex family circumstances, rather than over-emphasising investment expertise to millennials who have more ability to research such things online than previous generations.

“Most staff are trained to manage investment portfolios rather than to talk about the purpose of life and how things fit with different aspirations of family members and resolving family issues,” he notes.

“Very few private bankers have got any experience of that sort, and so I think that, funnily enough, the advent of technology is going to force people to take much more seriously what they call the softer issues but have actually always been the harder heart of the offering.”