When working with couples, establishing a meaningful relationship with both spouses is a must. In most cases, the stage prior to an intergenerational transfer is an interspousal transfer of wealth.William_Potter/iStockPhoto / Getty Images
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With $1 out of every $5 in Canadian household wealth due to change hands because of intergenerational wealth transfers in the next decade, advisors face both a threat and an opportunity in adapting to the change of wealth ownership.
Intergenerational wealth transfers can often have an initial negative impact on the size of an advisor’s book of business because some inheritors decide to spend part of the newly acquired wealth or use it to pay down debt. Yet, with about $1.3-trillion in motion between generations, there are also many opportunities for advisors to grow their businesses by focusing efforts on legacy and estate planning services.
Developing a sound, service-oriented approach to estate planning will be crucial to capture the next generation of clients. That’s because of the underlying dynamics in intergenerational wealth transfers – only 8 per cent of those who will be transferring assets account for almost 75 per cent of total assets that will be passed on. The inheritances of this affluent segment include significant financial assets, which makes catering to the needs of high-net-worth (HNW) households critical.
The needs of HNW clients usually call for a comprehensive approach involving legacy and estate planning, taxation, insurance, product reallocations, debt management and more. The concentration of inherited wealth and the considerable effort involved in proper legacy planning suggests that the asset size of the relationship needs to be meaningful enough to pay for the high-touch services required.
Engaging spouses and beneficiaries early on
To be able to address the complexities of each client situation and minimize the risk of losing them, advisors must plan well ahead of a transfer event.
When working with couples, establishing a meaningful relationship with both spouses is a must. In most cases, the stage prior to an intergenerational transfer is an interspousal transfer of wealth.
Engaging spouses and beneficiaries is often a challenging endeavour for advisors. But without proper engagement with inheritors, there’s little hope for business retention once a transfer of wealth occurs. This requires strong relationship management skills to establish a solid connection between advisors and inheritors, and for advisors to facilitate difficult conversations between all the parties involved in the estate.
Giving while living impacting asset retention
Transfer mechanisms are also changing rapidly, reinforcing the need to address estate planning early on.
The death of the transferor is increasingly the last of multiple steps in the transfer of wealth. Inter-vivos transfers – those made during a person’s lifetime – are growing in popularity with beneficiaries usually spanning several generations.
The destination of some of these assets may not be for wealth accumulation. Some of this money may be used for a down payment on a property or to pay down debt. But even when asset retention is not possible, there are opportunities for advisors to refer inheritors to other specialists within their organizations.
Insurance and staying invested
Insurance is a key component in wealth transfer planning and offers a wide array of alternatives for investors to bypass estate probation, provide certainty to beneficiaries and even deal with charitable giving.
The good news is advisors are not alone in their mission to deliver comprehensive estate and insurance planning solutions. Teams of experts and training for advisors are increasingly available at financial planning and brokerage firms. This should also result in more scalable operations, bringing the service to less affluent clients over time.
Managing the inheritance process is the first part of the business retention conundrum. The second part is for advisors to adapt quickly to the needs and preferences of inheritors. A common reason to change advisors after an inter-spousal transfer is a disagreement with the proposed approach to investing, coupled with a lack of flexibility from the advisor.
However, the chances for inherited assets to remain invested are usually high. ISS Market Intelligence data show many inheritors – in aggregate accounting for almost $800 -billion in transfers – will be already in or approaching retirement when they inherit. Drawing income from these assets will rank as a high priority for them. But, the generational or gender change in asset ownership may bring changes to investment preferences, a higher propensity to spend or the need to pay down debt.
Advisors who offer a high-touch service with the right amount of empathy, trustworthiness, and personalization are far more likely to thrive as wealth is passed on.
Carlos Cardone is managing director at ISS Market Intelligence in Toronto.
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