Large-scale transfers of wealth between generations present great opportunities for planners, says Matt Walsh.
Hardly a week goes by at present without a newspaper article drawing analogies between the current global economic crisis and the early stages of the Great Depression. Whether the analogy is right or wrong, don’t the media love dusting off the photos of long queues of the unemployed and hungry?
But there is another time in history that I think provides an even greater parallel to an emergent trend that is likely to be a centrepiece of financial planning over the ensuing decade: the Black Plague.
I can’t pinpoint another time in history when so much wealth transferred between the generations as when large swathes of the population died over a relatively short period of time.
There were many bouts of plague in various parts of Europe and Asia and even the Middle East, between the 1300s and 1600s, usually lasting for up to four years each time and typically killing between 20 per cent and 60 per cent of the affected population. However, it’s not the timing or the biological facts that are relevant here but the economic and financial ones.
Generally speaking, when plagues hit, a large amount of wealth was transferred to surviving beneficiaries. Along with the diminishing population, this injection of wealth into the affected economies typically caused wages to grow and inflation to soar. An attitude of “live for the moment” prevailed, and inherited wealth, carefully accumulated over the generations, was quickly spent, and not always wisely.
Sound familiar (except the plague bit)?
It is estimated that in Australia alone, $600 billion will transfer from the current holders of wealth – the “builders” and older “boomers” – over the coming decade. And we don’t need a plague to set off the transfer – just overlay a life expectancy table on the holders of wealth and it’s a sure and steady flood of money for the next 10 to 20 years.
Yet an irony of our industry is that in the face of this tsunami of wealth transfer, there have been very few inventive solutions to help manage the transition of wealth efficiently and effectively. Superannuation is clumsy when it comes to wealth transfer, because it is primarily, as even our former Treasurer pointed out during the last major reforms, a retirement income solution, not an estate planning one.
Furthermore, traditional legal solutions are archaic, complex and costly, more often than not “cracking a walnut with a sledgehammer”.
There is a further aspect to this burgeoning market for financial planners that is worth exploring. It’s not hard to illustrate, because you’ve probably experienced the issue in your own family. Consider your answer to these questions:
• Has there ever been a dispute over an inheritance in your family?
• Has some inherited wealth been unwisely frittered away?
• Are there members of the family (for example, ex-spouses, estranged children, gamblers and drug addicts) that for some reason or other are to be purposely left out of inheritances?
• Are there other members (for example, beloved daughters, favourite grandchildren, disabled brother, still dependent children of a second marriage) that are the intended recipients of greater generosity in the estate?
• Despite what was or was not in someone’s will when they passed away, was it challenged, and were there unintended and seemingly unfair consequences?
If you can answer yes to any one of these questions, think about the depth of the issue amongst your entire client base. Estate planning is not a niche; it’s a mainstream opportunity in every family of your client base. It’s primarily driven by emotive issues, and requires the sort of skills and processes that already exist in our industry.
Yet there is a dearth of product. It’s as if superannuation and other mainstream products consumed all the oxygen in the room and little has been done to proactively position ourselves to capture some of this staggering and shifting ocean of wealth. Unfortunately for the planning community, the standard solution is to refer clients to legal firms to use their costly sledgehammers and uncertain outcomes.
Furthermore, Lifeplan’s research has shown that planners have generally done little to proactively capture transferring wealth, nor built relationships with the beneficiaries of that wealth. Every planner has a part of their client book that is dying off. Little is being done to harness the true potential of quality professional management of that intergenerational wealth – and at the same time solve the perennial problems every family has.
The challenge is to bring product and advice solutions to the market that can be used by financial planners for most situations and avoid the need to refer clients to a costly legal solution. Ideally, solutions would be packaged into products that can be used “straight out of the box”, within the current scope of a Statement of Advice. Any fees would be retained by the planner and not lost to a third party.
It’s just too massive a market to miss the opportunity – but action must start now to capture, structure and control wealth well before clients pass on and leave their beneficiaries fighting in the courts and frittering away hard-won nest eggs. If done well, dealer groups will turn a dying client base into 30-plus years of funds under advice (FUA) and a growing clientele.
I expect the answers to this challenge will emerge over the next few years.
