Adapt or die – the significance of ‘next gen’ clients

What do we mean by ‘next gen’ and why is this demographic significant to the future of the wealth management landscape? Graham Marsh, Private Wealth Director discusses ‘the great wealth transfer’ and its likely impact on advisors and beyond.

Let’s start with a bit of background. ‘Generation X’ refers to those born between 1965 and 1980 - they followed the Baby Boomers and preceded the Millennials. After Gen X and before Gen Z, we have the Millennials (aka Gen Y), born between the early 1980s to the early 2000s. It’s those in the Generation X and Millennial categories that are most often, although not exclusively, referred to as what has become known in shorthand as ‘next gen’.

So, what’s in store for next gen clients?

It is estimated that $70 trillion (that’s a 7 with 12 zeros) will transfer to the next generation over the next 25 years. It sounds like a very big number because it is, but how big is it? For context, in 2021 UK GDP was by comparison a mere $3.3 trillion, so yes, the size of wealth heading towards the next gen is enormous - and already we are seeing a less ‘traditional’ approach from this group when it comes to their preferences.

To attract next gen clients, building a deep understanding of their concerns and desired outcomes is a must and understandably, this can be transformative in attracting and retaining clients. It’s particularly worth considering the added complexity of next gen behavior when it comes to the incumbent advisor. It’s a sobering thought for many advisors that, according to Cerulli Associates, a mere 13% of heirs retain their parent’s advisors after receiving their inheritance. As noted in The Next-Generation Wealth Advisor Report by Broadbridge, this is a generation that not only represents the future of the industry, but it’s also one that is highly influential over the attitudes and expectations of older generations. And it’s not just the demographics of the clients that are changing. Couple this shift in behavior and influence with the fact 40% of advisors are expected to retire in the next decade (Capco Top Wealth Management Trends 2022) and it’s easy to see why commentators believe this wealth transfer will change the face of wealth management for the foreseeable future.

What does this mean for advisors and how should they respond?

What’s important to remember is that the fundamentals of business do not need to change. Successful advisors will adapt to their client’s changing preferences, making the next generation a priority, and developing relationships based on a deep understanding of their preferences.

The meteoric rise in family wealth over the past 50 years has resulted in around 3,000 billionaires in the world (Forbes Survey, 2021) which further increases the demand for good quality advice and advisors who fully understand the family’s requirements. Firms who continue to operate ahead of trends, anticipating their client’s behavior will remain at the forefront. 

Concerns and responsibility

People buy lottery tickets because there is a small chance of winning an incredibly large jackpot. But imagine winning the lottery without even having to purchase a ticket. Then imagine knowing all along that one day you would win that jackpot. Being the unexpected recipient of a ‘jackpot’ size inheritance may well be an emotional as well as stressful process, but the same can be said when that inheritance is all too expected.

In some situations, the inheritance of said ‘jackpot’ can create concern or become worrisome for the unsuspecting next gen heir. The phrase ‘with great wealth comes great responsibility’ may well be something the next gen heirs were not prepared to deal with, therefore the knowledge and experience of an external advisor working through this process is invaluable. This can be achieved by connecting with other next gen families who have been through the stresses and strains of succession and can help answer questions and mitigate areas of concern.

Shifting priorities

All families are different, however there will be some similarities particularly with business and trading assets, investable/invested asset classes, family ethos and so on. But typically, the next gen family will have different investment priorities from their parents and may have greater knowledge in areas such as ESG, cryptocurrencies and new and emerging technologies. To meet with this demand, it is crucial for the next gen advisor to be able connect with clients on such topics, demonstrating valuable and personalised insight.

It’s often the individual personalities within the next gen family that make a big difference in family governance and family structure. Aside from any jurisdictional or cultural challenges, it’s important to understand the personality dynamics within the family. For example, do they regularly communicate with each other and if so, how? Do they trust one another and is there a harmony with an agreed ‘family ethos’? There are many other questions to consider before it’s possible to understand the ‘best’ approach and to build a plan of advice and structuring that will add value and be appreciated.

It is imperative to have a clear understanding of each individual family member including their knowledge, experience, priorities, likes/dislikes and both short-term and long-term objectives. In building knowledge and understanding, the advisor will be of real value to the whole family.

A next gen advisor might be more effective in attracting next gen clients when they are collectively aligned. This might be considered as being either from the same demographic group as the family members or holding a shared understanding of priorities and the view of the world. The advisor may consider for example the advice on the known pitfalls to avoid when structuring entrepreneurial ‘start-ups’ and preparation for potential ‘liquidity’ events, may be welcomed and timely.

The role of technology

It’s important to note that not all ‘next gen’ clients have inherited their wealth. Technology and social media have made a lot of younger people very wealthy indeed. Elon Musk, the world’s richest man, is only 51 after all. It might be the case where a next gen entrepreneur has created a product or service that has rapidly become very popular which has attracted angel or private equity investment interest. Aside from the business exit strategy, advice will also be required to structure the client’s private wealth. While the client may be familiar with the minutiae of business growth strategies, the appropriate private wealth strategy may include several unfamiliar concepts, such as trusts and foundations. This is where the next gen advisor can help by providing an education in the nuances of private wealth structuring, and over time help to make personal structuring and governance advice better understood with the requisite perceived value.

So where does all this leave us? Looking ahead, it’s clear to see cultivating relationships with next gen clients must be high on the agenda for advisors and wealth managers alike. At Equiom, we have a keen focus on coaching our up and coming next gen advisors, pooling our experience and investing in future proof infrastructure e.g. digital investment portals that this next generation of clients will be comfortable with and respond to. To succeed as a next gen advisor, one must evolve with the times, never get stuck, and never think you have all the answers. Adapting to the shifting preferences of next gen clients isn’t going to be a one-off exercise, nor is it optional, and the sooner you realise that the better.

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This article was first published in the ThoughtLeaders4 Private Client Magazine Issue 8.