Your IndustryMar 31 2022

Why inherited wealth is a ‘lucrative’ business opportunity

Supported by
Schroders
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Supported by
Schroders
Why inherited wealth is a ‘lucrative’ business opportunity
Credit: Maria Lindsey Content Creator from Pexels

The Resolution Foundation estimates that the value of inheritances is set to double over the next 20 years, amid rising levels of wealth, an ageing population and the increasing difficulty for younger adults to accumulate significant wealth.

“Advisers may have worked their whole career to build up their client bank and their client’s wealth. But if they fail to put into place strategies to ensure that inheritors see their value, there is a very real risk that this wealth will go elsewhere,” says Gemma Harle, managing director of Quilter Financial Planning.

“While many advisers do have a relationship with a client’s spouse, it can be less common for them to also know their children. Unless an adviser has made an effort with an inheritor to illustrate the value of advice, there is a strong possibility that an inheritor will look elsewhere for their advice.”

Neil Clarke, director and independent financial planner at Lucas Fettes Financial Planning, agrees that without a strategy to retain inherited wealth, businesses risk losing assets under management.

“[This] makes it more important than ever to encourage and facilitate financial conversations between clients, spouses and their beneficiaries. This is exacerbated by the growth of direct-to-consumer platforms, as well as the natural scepticism of younger generations surrounding the value of professional financial advice, given the level of general information now available online.

“Demonstrating value early on, and encouraging ongoing conversations, is the key to retaining future clients and the associated AUM.”

At Continuum, clients are encouraged to involve their family in the estate planning process as early and regularly as possible, says Simon Reeve, head of operations at Continuum.

“By doing this, not only can we make sure the estate planning is tailored to the needs of the extended family, but it also offers our advisers the opportunity to build a strong and lasting relationship with the whole family.

“This often leads to our advisers having multiple generations of one family as clients. Through this relationship, and the recommendations our clients give us, our advisers are able to educate the wider family as to the benefits of financial planning.

“At the end of the day the inheritor may well choose to take advice elsewhere, or go it alone, but at least we know we have shown them what a good financial planner can offer them.”

Efficient wealth transfers: a ‘pillar’ of good advice

At Progeny, the business finds that in practice the majority of a client’s financial decisions are motivated by family. Therefore, intergenerational wealth planning should be a significant part of a business's approach and proposition, says Ian Browne, chief of advisory services at Progeny.

Considering how wealth may be passed efficiently to the next generation is also a key pillar of good financial advice, he says.

The real value of inheritance tax revenue has grown from just over £3bn in 2000 to more than £5bn today, and is set to rise again to £7bn by 2026-27, according to analysis by the Resolution Foundation, with the think tank attributing the higher revenue to both more people passing on inheritances and from the growth in the value of the average inheritance. 

“Clients are generally driven by two factors when it comes to gifting in lifetime: reducing the value of their own estates to mitigate IHT and/or simply helping the next generation plan for their own futures,” says Alex Loydon, private client director at St. James’s Place.

“If the right planning hasn’t been put in place and/or the family haven’t been properly engaged, a significant percentage of wealth passing hands could be subject to IHT at 40 per cent. A good adviser can help mitigate this.”

An opportunity for advice

Research from LV highlights the opportunity for advisers to support intergenerational wealth transfers. The provider’s survey found that more than half of parents (57 per cent) had spoken, or were considering speaking, to a financial adviser about the best way to pass on wealth, but only 13 per cent had done so.

“Given the level of wealth transferring hands, advisers have a vested interest in keeping this business,” says Loydon. “But let’s look at it from the client's perspective. Depending on how long the funds have been invested with and managed by the adviser or business, it may be detrimental to the client to move – a ‘decades, not days’ mindset.”

Browne at Progeny says that while generation X may be the primary beneficiaries of inherited wealth at the moment, in time this will pass to millennials and beyond, with the risk of regulated advice being relinquished increasing with each generation.

Loydon similarly cites a proverb that wealth does not last beyond three generations. “I’ve seen [this] play out many times. The first generation makes it, the second maintains it, the third spends it. So for the benefit of preserving family wealth, advisers have a role to play.

“There’s probably also something in the fact that increasingly the younger generations will have smaller pensions, so less opportunity for advisers to manage pension funds and so inherited wealth presents a lucrative opportunity – one worth doing everything possible to hang onto.”

Retaining client relationships with inheritors

Gillian Hepburn, head of UK intermediary solutions at Schroders, says that if widows or the next generation are changing advisers, this presents a problem for retiring advisers.

“This is a particular challenge for any adviser looking at an exit strategy and trying to maximise the valuation of their business, which is essentially based on a multiple of income and therefore assets. Having a good wealth retention strategy in place is about future-proofing the business.”

New client acquisition can also be costly for a business, says Scott Morrison, director of financial planning at Charles Stanley’s Aberdeen office. This could be financially, in terms of marketing and advertising, or in the investment of time to develop relationships with professional introducers.

“Opening a client relationship to allow access to the next generation can be a cost-effective method of client acquisition, and can be seen as future-proofing the business,” says Morrison.

“Establishing and maintaining a relationship with an intergenerational client is the same as any other, in that there needs to be that element of trust and the ability to get along well together.

“However in addition to this, the amount of prior contact you have had with them, and perhaps more importantly the feedback they have heard from their parents over the years, will be key.”

Selecting an adviser is a very personal decision, adds Loydon at St. James’s Place. “It’s not just professional qualifications, experience, expertise and credibility that’s important, but also how you get on with the adviser. Do you trust them, do they understand you and your needs and do they respect your wishes?

“It also depends on how they inherit the wealth. If it’s through an instrument such as a trust, they’re likely to need advice to understand how to manage and access the funds if they are the trustees or beneficiaries respectively.”

Chloe Cheung is a features writer at FTAdviser