For many financial advisors, as generations shift and wealth changes hands, it will be a business building opportunity.
For others, it could lead to a loss of assets. This means proficiency in wealth transfer is more important than ever. Developing expertise in this area not only helps ensure that your clients’ retain more of their wealth — it can also help your firm can attract and retain your clients’ heirs.
According to Jefferson National’s latest “Advisor Authority,” a comprehensive study of 1,400 RIAs, fee-based advisors and individual investors conducted by Harris Poll, attracting and retaining heirs is a top practice management concern and one of the most important drivers in advisors’ pursuit of greater profitability. The most successful advisors — those who earn more and manage more AUM — are even more focused on attracting and retaining clients’ heirs as a means of prospecting and adding a younger generation of investors.
Generations shift and wealth changes hands
Peaking at 78.8 million in 1999, the baby boomers’ presence has radically changed the financial services industry. Many RIAs and fee-based advisors have found success by catering to boomers’ financial needs as they accumulate wealth for retirement. Roughly 10,000 Boomers will turn 65 every day until 2029 according to the Pew Research Center. Much of their wealth will be earmarked for the next generation.
And as more boomers are exiting the workforce, Gen X investors are entering their prime earning years, projected to peak in 2018 and to outnumber boomers by 2028, according the U.S. Census Bureau. An even larger shift is taking place as the number of millennials is on pace to surpass both boomers and Gen X — and will remain the largest cohort for the next three decades.
The transfer of wealth to these younger generations must be managed with care. Without an estate plan for the effective transfer of wealth, your clients’ heirs may be subjected to a number of challenges, such as probate, creditors, lawsuits, judgments and legal fees — all of which can compromise the value of the legacy that you and your client worked hard to create. The wrong plans could trigger losses for your clients, their heirs and your firm.
Wealth transfer is especially relevant for the growing number of high net-worth households. According to the survey “U.S. Trust Insights on Wealth and Worth,” published by Bank of America, there are now nearly 2 million households in the U.S. with investable assets of $3 million or more. And while nearly six in 10 wealthy investors believe it is important to leave a financial legacy to the next generation, this study shows how the goal does not always translate into action, as 72 percent of high net worth investors surveyed do not have a comprehensive estate plan.
Foundation for your firm’s future
Recent studies across the industry have revealed the massive challenge advisors face in retaining clients’ heirs. According to a number of recent studies, between 65 percent to as much as 95 percent of heirs fire their spouses’ or parents’ advisor after receiving an inheritance. Heirs leave because no one was thinking about them. It’s that simple.
In the face of these overwhelming odds, it is clear that advisors must take a more holistic — and more family-centric — approach to financial planning in order to attract and retain clients’ heirs. Wealth transfer and estate planning is one way to engage the entire family, to successfully deepen the relationship with clients, as well as with their spouse and their children. Every member has a vested interest. It is crucial to help your client leave an enduring legacy for future generations. It is crucial for heirs to retain more wealth in the future. And it is crucial to help your firm secure a future generation of clients.
Related: Cultivating clients: millennials
Innovative solutions for wealth transfer
An effective estate plan can create clarity and control around the transfer of wealth and distribution of assets. It helps clients decide how assets will be used to care for family members who are minors or disabled, determine which charitable organizations will receive a share of assets, and who will be responsible for overseeing other decisions related to the estate.
In addition to these traditional “governance” issues, tax planning and preservation of assets are becoming increasingly important. To maximize outcomes for clients and their heirs, your expertise in holistic financial planning and investment management is essential. You can partner with an experienced estate planning lawyer and tax planning expert to develop the most effective estate plans and wealth transfer strategies.
As you and your clients navigate the challenging dynamics of ongoing volatility, record low-yields and higher taxes, there is a growing demand for innovative wealth transfer solutions — simple, transparent and low cost. One solution adopted by more RIAs and fee-based advisors is a new category of Investment-Only Variable Annuity (IOVA). Designed to maximize tax deferral with lower costs, no commissions and a broad choice of underlying funds, IOVAs can provide the competitive advantage, whether for funding trusts, stretching assets or charitable giving.
A new take on funding trusts
Trusts can offer many advantages, helping to reduce estate and gift taxes, avoid probate, and protect assets from creditors and lawsuits. According to a 2015 survey by Jefferson National, nearly three-fourths of advisors use trusts as a vehicle for wealth transfer. And 47 percent of advisors say that trusts are their primary wealth transfer vehicle, substantially outpacing all other options.