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wealth-transfer

How advisers can protect against losing assets when wealth is transferred

Financial advisers who work holistically with families to understand better the needs of the principal members and the individual members will be at an advantage when wealth changes hands, says Daryll Welsh, the head of product for Ninety One’s investment platform.

A significant transfer of wealth from the Baby Boomer generation (born between 1946 and 1964) to Gen X and Gen Y (broadly aged between 25 and 56) is likely to occur over the next decade. However, Welsh says the dynamics of NextGen heirs may result in advisers losing assets when inheritance takes place.

Generally speaking, NextGen investors have access to digital capabilities and with that, unlimited access to investment and wealth management information.

“Since they are digitally savvy, at the very least they will do some research online before committing to a new financial relationship or investment product. Millennials are likely to take it a step further – they may gravitate towards on-demand digital services and look to digital brands they trust or social media ‘investment experts’,” says Welsh.

NextGen investors may have different investment preferences to their parents. These could range from seeking investments that help to affect social and environmental change, to investing in crypto. As such, they may perceive the adviser’s investment proposition as being out of touch with their requirements.

He says the risk of advisers losing assets on inheritance increases when the first interaction with the next generation follows the death of a parent or where the beneficiaries have a relationship with a different adviser.

Research by NMG Consulting in South Africa in 2020 showed that 53% of accounts serviced by financial advisers are single-member accounts (the adviser deals with a single member’s investments in a household).

“The research also found that only 22% of advisers actively focus on holistic financial planning at the family level. This means that, in the main, advisers have little connection to other members of the family, and as a result, are at risk of losing assets when the principal member passes away. On the other hand, it presents a significant opportunity for advisers to grow their assets under management within the family ‘ecosystem’.”

Establish relationships early on

One way for advisers to protect their business and potentially grow their asset base is to establish relationships with potential heirs well before inheritance takes place, says Welsh. Key life events such as marriage or a child’s graduation can provide opportunities to engage at the family level and develop relationships with other family members.

Employing a younger financial adviser in the practice can also help create a connection with the next generation.

On the financial planning side, ensuring that product structures are appropriate and provide a seamless transfer of assets to beneficiaries can help to bridge the gap. Living annuities and certain underwritten investment products, such as sinking fund policies, allow for the nomination of beneficiaries and alternative beneficiaries, says Welsh.

A further consideration is the split between local and offshore investments, particularly if children are studying or living overseas. Setting up an offshore investment to fund these expenses or to allow for the nomination of a beneficiary can ensure that funds are available promptly in the event of death.

“One of the stumbling blocks that advisers often face is that a client’s investments are spread among several product providers. This makes it difficult for the adviser to have a consolidated view of a client’s investments. At the family level, this becomes even more challenging, which is why advisers often tend to focus exclusively on the parents’ investments. Furthermore, there is often little incentive for both the investor and the adviser to go through the hassle of transferring investments.”

Welsh says Ninety One Investment Platform’s family office development aims to address this challenge in two ways:

  • It allows advisers easily to set up family groups online and to get a consolidated overview of the family on the family dashboard.
  • It provides an incentive for investors to consolidate their family investments on a single platform by aggregating the value of all family assets in determining the administration charge.

For advisers, the family office provides the opportunity to engage with the principal member about other family investments currently not included in their mandate.

“Deepening client relationships across generations will become essential to the long-term health of adviser practices,” says Welsh.

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