Investment & philanthropy
Since 1945, baby boomers have emerged to become the largest and wealthiest generation ever seen in the UK. Many of the group previously identified as the working middle class now sit firmly in the high-net-worth category, each owning over £1 million of assets including residential property to their name. They hold 80 per cent of the United Kingdom’s net wealth, and around 70 per cent of this wealth will be passed on to the next generation. Additionally, the United Kingdom is currently home to over 16,000 Ultra High Net Worth individuals (UHNWIs) who each own assets of at least £30 million, and globally the Ultra High Net Worth population looks set to grow 27 per cent over the next five years, according to the Brooks Macdonald intergenerational wealth transfer report.
Clearly, there is a vast amount of wealth coming down the line to the next generation. So after such a tumultuous year, it is no surprise that succession and transfer of wealth to the next generation now sits high on their agenda and there is a whole advice industry around them.
Knight Frank’s 2021 Global Wealth Report recorded marked recent shifts in attitudes towards succession planning involving the next generation. 60 per cent of UHNWIs interviewed had reviewed their succession planning in light of COVID-19, with the number of people reviewing their Will tripling in 2020. Knight Frank found that 28 per cent of UHNWIs and HNWIs interviewed cited the transfer of wealth to the next generation as one of their top three concerns (after COVID-19, geopolitical and tax issues), and 23 per cent cited the transfer of wealth to the next generation as one of their top three opportunities. With divorce and dementia rates both on the rise and regard for health at the forefront of people’s minds, clients are clearly considering the question of the protection and transfer of their wealth, and their succession, more than ever.
Simultaneously it is becoming apparent that millennials and generation Z’s have different expectations, aspirations, and priorities to their forbears. They are more technologically focused and often less risk averse than their parents and grandparents, with diverse priorities and interests which include cryptocurrency, AI, and digitalisation. The next generation are also increasingly concerned by the ESG agenda, motivated not just by huge returns and reward, but by climate change, philanthropy and sustainability. They are engaged, particularly in the context of entrepreneur clients. According to PwC’s 2019 Global NextGen Survey, 70 per cent of next generation adults are already very engaged in the family business, with almost a quarter holding an executive director position and almost half running significant internal operations.
We have watched all this with interest at Farrer & Co and firmly believe it is critical for both the client and the adviser to involve the next generation in discussions about the transfer of wealth and succession at an early stage, and not simply to involve them in the business or family philanthropy. By 2035 over 25 per cent of the United Kingdom’s population will be over 65, and by 2040 one in five individuals will live to be 100. As a result, the older generation may feel disincentivised from starting the path to succession to the next generation; they are living longer, and working longer, and they are often reluctant to hand over the reins.
Wealth protection and preservation is one of the key facets of intergenerational wealth transfer. It has long been the case for the private client adviser that the intergenerational transfer of wealth can mark a sea-change; according to Christina Melling in the FT Adviser, one third of children will change advisers on inheriting. The private client adviser must, therefore, handle the transition carefully and sensitively to ensure continuity and satisfaction amongst a new generation of clients who will have different aspirations, priorities and expectations of their adviser than their parents. The old adage “shirtsleeves to shirtsleeves in three generations” frequently sees wealth created by one generation and lost by the third. One of the main causes for this is family members who are ill-prepared to take on the responsibility which comes with wealth. They are often familiar with growing up surrounded by wealth, and certainly how to spend it, but removed from the hard work and motivation of the people who built the family fortune in the first place. By allowing the next generation to become involved in not only the creation of wealth – by engaging them in the family business, for example – but also in the preservation of it, we will help them to grow into the wealth owner and protector rather than simply the “spender”.
Private client professionals can assist families in navigating this education process for the next generation, showing them that there are tools and structures available which will empower them to become a sustainable wealth owner rather than restrict them. One example would be the use of trusts – trusts have long been seen as a mechanism which enables the older generation to protect wealth from the younger. In fact, we can teach the younger generation that trusts can be a hugely helpful tool if the right people are involved. The appointment of trustees who are familiar with both generations and their needs and priorities will be important, rather than allowing the old guard of advisers to remain in situ until long after the settlors and elder generations have died.
Additionally, putting together a team of advisers who can manage the transition of wealth and advise the beneficiaries on matters which are relevant to them will be hugely important. Most investment managers and banks now incorporate an ESG strategy into their investment policies, which is just one of the benchmarks which will be expected by the next generation. The creation of family charters, succession plans and regular family meetings, with all generations invited, will be important for larger family groups. Crucially, it is becoming clear that for the intergenerational transfer of wealth (and with it, the transfer of control) to be successful, advisers need to spend as much time preparing the next generation to receive the family wealth as we do investing, protecting and managing it today.
This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.