The biggest beneficiaries of the generational wealth transfer

Women will be the largest beneficiaries of Australia’s $3.5 trillion intergenerational wealth transfer. The transfer isn’t something that’s 20 years away either. Much of it will happen this decade.

There hasn’t been enough discussion about how this could transform markets as well as the wealth management and financial advice industries. This article is an attempt to right that wrong.

The future is female

There’s been a lot of overseas research into the issue of how women will soon inherit much of the largest wealth transfer in history.

Several years ago, McKinsey did a report on how women control about a third of the $35 trillion in US household assets, and that could increase by another third by 2030. It says the biggest driver of the shift is demographics. About 70% of investable assets are controlled by Baby Boomers in the US. And two-thirds of those assets are held by joint households.

As men pass, many will cede control of these assets to their wives, who tend to be both younger and longer lived. In fact, women outlive men in the US by an average of five years.
McKinsey says that by the end of the decade, women are expected to control the majority of the $35 trillion in household assets, and that it’s a potential wealth transfer of such magnitude that it approaches the annual GDP of the US.

Schroders has published similar findings in the UK. However, the wealth transfer would appear to be more imminent there, as it estimates that women will control 60% of Britain’s wealth by next year!

In Australia, the research has been sparser. Recently, JB Were investigated the issue in a report entitled ‘The Growth of Women and Wealth’. The report estimates that the potential wealth transfer in Australia isn’t $3.5 trillion as suggested by the Productivity Commission, but closer to $5 trillion. And of that money, women are set to inherit 65%, or $3.2 trillion in the next decade.

Like McKinsey, JB Were believes demographics will be the main driver, with women outliving their partners. It cites statistics that in the 70-plus age group, there are 16% more women than men, and this widens to 33% for those aged over 80.

It isn’t just demographics, though. The research found that control of the family finances at the point of wealth transfer is most likely to be managed by the oldest daughter in the family.

Women won’t just be the beneficiaries of the wealth transfer. They’ll also claim billions in existing wealth via divorce and separation. There are more than 50,000 divorces in Australia each year, with couples aged 50 and over being one of the fastest growing cohorts.
The children may not get as much as they expect

While women may inherit more, children may get less than they expect. A report from AMP this week suggests most retirees believe their children face similar or harder financial challenges than they did growing up, amid rising housing unaffordability and rents. Though they’re keen to support their children, 70% of them are reluctant to compromise their lifestyle to provide financial assistance.

Also, four out of five of retirees aren’t prepared to downsize to release funds to their children, according to the report. However, about half of them will consider passing home equity value to their children if they can stay in the family home.

Women will manage their money differently to men

How will women manage all their money? The McKinsey US research suggests they’ll do it in a very different manner to men, with four key attributes:

Greater demand for advice. Female financial decision makers are more likely to have an adviser than men. And they’ll be more willing to pay a premium for in-person financial advice. These findings are consistent with the JB Were report, which highlights that high-net-worth women already seek more advice than men, as the chart below shows.

Lower financial self-confidence. McKinsey’s survey found many women report lower confidence in their own financial decision making and investment acumen. Only 25% are comfortable making investment and savings-related decisions on their own – 15% lower than their male counterparts.

Less risk tolerance. Women are less likely to take big investment risks for the potential of high returns, says McKinsey. And there much more likely to manage their money through passive instead of active management strategies.

Greater focus on real-life goals. Women are less concerned with outperforming the stock market and more worried about having enough savings for retirement.

The JB Were report in Australia gets more granular on current high-net-worth women’s portfolios and what pointers they may have for the future. Most of the women surveyed invest their money in Australian residential property, Australian equities and cash. They’re less enamoured with bonds and alternative assets.

From this, it appears that women are investing in mostly what they know well versus what they don’t. Whether that changes with inheriting greater sums of money remains to be seen.
Switching financial advisers may be on the cards

While women wanting greater advice would seem positive for the financial advice industry, it doesn’t tell the whole story.

The biggest shock comes from Schroders UK research which says that 70% of Baby Boomer widows will leave their partner’s adviser within a year of their death. There’s been no comparable research on this in Australia, though if it’s true here too, then it means that hundreds of billions of dollars might be up for grabs during the remainder of this decade.

What it does highlight is that women often don’t have close relationships with their partner’s advisers. The overseas research also emphasises that women want a different type of advice to their partners. They prefer hyper-personalised, outcome-based financial advice that meets their real-goals.

Implications

The implications for funds managers, super funds, financial advisers and wealth managers are obvious – they had better get to know their female clients (or partners of their clients as it may be), and quickly. Because the needs of women are likely to soon reshape the entire financial industry.