Millennials are on the brink of experiencing one of the largest wealth transfers in history, as their parents pass on their businesses and fortunes valued in the trillions globally.
This so-called ‘Great Wealth Transfer’ is set to make wealthy millennials the richest generation in history, but it also presents significant asset management challenges, according to analysts.
Projections from firms like UBS suggest that over the coming decades, a global wealth transfer of approximately $83 trillion will occur, as outlined in their “Global Wealth Report 2024.”
Global Wealth Transfer in the Coming Decades
In the Americas, the transfer is estimated at $50.6 trillion, in Asia-Pacific at $11.4 trillion, and in Europe, the Middle East, and Africa at $21.4 trillion, according to the Swiss financial institution.
In this context, projections indicate that Brazil, Mexico, and Chile will together create over 177,000 new millionaires in Latin America within four years, as the global wealth transfer progresses (individuals with a net worth of $1 million or more).
“Families have been transferring assets to the next generation for millennia based on various factors like birth order or gender. However, the amount being transferred has never been so substantial,” said Ben Rizzuto, Wealth Strategist at Specialist Consulting Group at Janus Henderson, in an interview with Bloomberg Línea.
In 1990, Rizzuto noted, Americans over 70 ‘only’ controlled $4 trillion, but that figure surged to nearly $47 trillion by 2024.
“The convergence of aging populations and increasing wealth has created this unique situation we call the ‘Great Wealth Transfer’,” he added.
Challenges of the Great Wealth Transfer
The wealth transfer poses challenges for managing these substantial fortunes for the new affluent generations.
“Although the asset management sector has been discussing the ‘Great Wealth Transfer’ for years, I believe there are a number of issues that may persist for financial advisors, families, and asset management firms,” Rizzuto said.
It is crucial for financial advisors to recognize and address these challenges to remain relevant to wealthy families.
This is significant given that only 19% of children choose to work with their parents’ financial advisors, according to Janus Henderson.
Rizzuto believes this occurs because advisors have not taken the time to build relationships with their clients’ children, which could result in them being overlooked by the heirs.
Therefore, it is vital to ensure that clients’ children understand exactly how the advisor works with their parents and how they add value to their investment portfolios. Advisors should also offer training and resources on topics that interest the clients’ children, such as ESG investments, saving for a home, paying off student loans, general financial education, and even career counseling.
It is estimated that 88% of wealth transfers on average occur to children after the surviving spouse’s death, so most of the millionaire resources will go to this group in markets like the U.S.
UBS estimates that globally, approximately $9 trillion of wealth will be transferred intragenerationally – or horizontally – between spouses.
Participating in the Global Wealth Transfer
The global wealth transfer also involves active participation from families, ensuring that members agree on the most effective process to preserve resources over time.
According to Janus Henderson, 70% of wealth transfers fail due to issues such as lack of trust and communication or inadequate preparation of the heir to receive the wealth.
“Financial advisors can play a central role in these discussions by introducing the concept and then helping to create and potentially facilitate those meetings,” Rizzuto said.
Potential Pitfalls in the Global Wealth Transfer
Rizzuto also pointed out that the projected sum of the wealth transfer may ultimately be lower due to factors such as taxes and life expectancy.
“For example, an AARP study found that it can cost more than $415,000 to care for a person with dementia in the U.S. during the last five years of life. This highlights the importance of planning for such possibilities to ensure that parents receive care as they age and that the wealth is preserved as much as possible,” he noted.
Asset managers should be aware of the potential changes resulting from this wealth transfer and act accordingly.
This could include offering investment options that meet the needs and interests of younger investors.
While ESG investments may be popular, other areas such as technology or alternative assets might also attract their interest, according to Janus Henderson.
Other considerations might include investment tools and apps that facilitate access to investments while helping investors reflect on their true goals and start saving to achieve them.
The Growth of Global Wealth
Andrew Amoils, Head of Research at the wealth intelligence firm New World Wealth, tells Bloomberg Línea that particularly ultra-wealthy individuals, with over $100 million in liquid assets, often keep their money in private family offices.
These family offices typically have a foundational branch and a venture capital branch, usually managed by the children and extended family of the principal HNWIs.
“This allows HNWIs to pass on their wealth without directly giving it to their children, offering a range of advantages (tax, labor, and social),” he explained.
Additionally, the family office usually owns all related assets, such as homes, vacations, domestic staff, and children’s cars.
The number of wealthy individuals globally is expected to increase by 28.1% over the next five years until 2028, according to The Knight Frank Wealth Report.
“Although positive, this rate of growth is slower than the 44% increase seen in the past five years,” said Liam Bailey, Partner and Global Head of Research at Knight Frank.
Bailey noted that the main issue is the impact of higher interest rates acting as a drag on global economic expansion in the short term.
While a rate cut may start in late 2024 in major economies, rates will remain high compared to previous years, he said.
“This will slow the pace of wealth creation,” Bailey added.
Nonetheless, despite the upcoming challenges, he projects that “wealth creation will remain a constant in the global economy over the next five years.”
According to Knight Frank, a total of 626,619 people worldwide were classified as ultra-high-net-worth individuals (UHNWI) as of the end of 2023, marking a 4.2% increase from the previous year, reversing the decline seen in 2022.
For 2028, it is anticipated that wealth creation in Latin America will increase by 18.2%, with 15,556 individuals having ultra-high-net-worth (with a net worth of $30 million or more).
Source: Bloomberg Línea
