The $100 Trillion Inheritance

The $100 Trillion Inheritance

Anu Rajakumar: What does it mean when $100 trillion changes hands? Over the next 20 years, the Silent Generation and Baby Boomers are expected to transfer an estimated $124 trillion in assets to their Gen X, millennial, and Gen Z family members. It's an unprecedented inheritance with huge implications for how wealth is managed and preserved across generations. How are shifting generational attitudes shaping investment and legacy strategies? What steps can families and financial advisors take to navigate the risks and complexities of this historic wealth transfer?

My name is Anu Rajakumar, and joining me today is Stephanie Luedke, Head of Private Wealth at Neuberger Berman, to share her perspective on preparing for and managing this transition. Stephanie, thank you for coming back to the show.

Stephanie Luedke: I'm delighted to be here, Anu. Thank you.

Anu: Great. Stephanie, I've been looking forward to this conversation so much because I think the topic is just so relatable. In your seat as the head of Neuberger Berman Wealth, you get to speak to such a wide range of investors. I'd like to begin today's conversation asking you about what you have noticed between generations in how people view money, investing, and legacy, whether it's the boomers, Gen X, millennials, Gen Z. They've all gone through such different formative experiences in their lives that affect the way they view investing. What are some of the things that you have noticed?

Stephanie: Well, Anu, differences in generations form business activities across probably every single industry and is, of course, incredibly defining for wealth management and investment management for individuals. We think about generations in two different categories. We have our existing clients and increasingly the children of our existing clients, which I know we'll get into in this discussion. They are really the Silent Generation, boomers, and even some of the older Gen Xers.

Then we have people for whom we are building wealth management and our advisory capabilities for the future. Those are millennials and the younger millennials in particular, and Gen Z. They all have different characteristics. Those characteristics, of course, naturally change over time.

If we think about boomers, they really built their wealth during an age of 401(k)s, started to get more involved in asset allocation and a variety of different asset classes, have also enjoyed a lot of very strong equity markets, and have tended to have a lot of advisor loyalty, have focused on asset preservation, are now, of course, increasingly focused on legacy. We may say younger generations aren't, but they will be someday.

The boomers and the Silent Gen as well have also focused on investing in a more buy-hold approach, especially as they've aged. We'll talk about that, I'm sure. The Gen X generation, which I am a part of, is apparently more cautious and more pragmatic, having experienced more market crashes, but they, too, were really formed by the 401(k) generation. That is borne out in their investing. They're also really pulled between caring for parents and caring for children at this phase in their lifetimes. We are engaging with them around their parents a lot.

Then we have millennials. Everyone likes to talk about millennials. We know they're burdened by debt. We know they're skeptical of Wall Street. We know they're eager to express their values in every way, shape, or form, and that comes out in investing. We know they are more digital than the older generations.

Then Gen Z, which is super interesting and I think really going to be definitive for the future, they've learned a lot about finance through social media. They've learned a lot about a lot of things through social media. They've entered the markets through things like cryptocurrency and other digital assets, and the meme stock phenomenon. I think some of those things will mature over time as that generation matures. Certainly, we have to think about those perspectives and preferences as we simultaneously serve our existing clients and build for the future, and really try to figure out how to navigate both audiences.

Anu: Now, Stephanie, I understand there's a growing trend towards actively managing tax-efficient strategies, particularly among younger investors. How is NextGen Wealth management evolving, and what practical approaches are families taking in this instance?

Stephanie: Anu, that's a great question, and I actually think some of the older generations might take issue with the perception that younger generations are more focused on actively managing tax-efficient strategies. I just think the generations think about it and have approached it a little bit differently. The older generation has been more inclined to minimize capital gains taxes by having more of a buy-hold approach and being more comfortable with concentrated portfolios over time, and managing to lessen taxes or to be more tax efficient that way.

Given the great innovation that we've seen across the industry and what's available today, some of the younger generations are going to take advantage of more systematic approaches to tax-efficient strategies. What do I mean by that? Having regular, very active harvesting of losses to offset gains so that the underlying portfolio can be managed more actively over time and maintain greater diversification over time. There are lots of strategies to do that, and certainly Neuberger has an entire suite of capabilities to do that.

I think both generations care about taxes. The way they've approached it have been different. You've also, just in terms of NextGen wealth management evolving, there are also new asset classes that have emerged or asset classes that are more accessible by more generations or earlier-stage investors. I would just give a shout-out to two. There's a whole bunch of them. One, an area that we focus on a lot is private market investing, and that can be in private equity, private debt, private real estate. It's just a fact that younger generations are more comfortable with and more interested in private market investing.

That whole area of asset management has really grown and matured over time and is more accessible. That's certainly a trend that we're seeing. The whole industry is seeing it, and where we're also seeing innovation to make those capabilities available to the younger generations or rising investment generations, if you will.

Finally, just because it's notable not an area that we do a lot in today, I am sure an area that everyone will be doing a lot in the future is digital assets, and the number one digital asset there is cryptocurrency. Given that the younger generations are more digitally native, are much more comfortable with crypto, and in fact, the younger generations in a lot of cases are, and the statistics show this, show that the first investment some of the younger generations are making is in cryptocurrency.

Anu: Wow.

Stephanie: Which is shocking. Lots going on and lots of different approaches, and we're seeing all of this across our client base.

Anu: Well, and maybe just to react to that, as a millennial myself, there probably is some skepticism that just being in stocks and bonds can get you to your long-term investment objectives. Particularly for folks like myself that have grown up through the great financial crisis, where if you time it poorly and some unexpected situation happens, and you lose 10%, 20%, 40% of your stock and bond portfolio, there's a severe concern, having seen our parents or others get into a real pickle in that situation, that having access to evergreen private equity vehicles or other ways that you can diversify your assets I think it's a gift to us that we're able to access other tools to hopefully get to our long-term investment objectives.

Stephanie: Anu, you are a perfect representation of what we're seeing across millennials. You're absolutely right.

Anu: Stephanie, I want to talk about longevity and how longevity, knowing that people are living for longer, that's really changing the time horizon of inheritance. What are some of the unique challenges posed by people living longer, and really, what are the risks of not planning far enough ahead?

Stephanie: I think, Anu, this is really interesting and something that I don't think we as an industry are spending enough time on. We talk about this great wealth transfer as if it's a moment in time, as if all of a sudden assets are going to go from one generation to the next generation in a very clean manner.

The fact of the matter is, this transition phase is getting longer and longer due to longevity. The older generations, current clients, the Silent Gen, boomers, older Gen Xers, they've had this approach of really buying and holding their investments to minimize capital gains taxes, in anticipation, in many cases, depending on how the assets are held to get a step up in the cost basis of those assets upon death, and be able to pass them on. Wouldn't it be nice if it always happened that cleanly and that specifically, that one day you could go to sleep when the markets are really strong and your portfolio's in great shape and everything's in order and the next day, the assets transfer.

Anu: Nice, clean transfer, yes. Probably not going to happen.

Stephanie: Haven't seen it once. People are living longer, they may need liquidity longer. I think more importantly, they start to need help with managing their financial affairs in that final transition period. That's where we're starting to work a lot more with adult children. The adult children are in their 50s, 60s, maybe even early 70s. They bring, as we were just discussing, their own unique perspectives and preferences to the table. They're starting to get involved with their parents' affairs.

We, as wealth advisors and investment managers, are in a position where we can be very helpful, but it's very complicated to help these two generations work together during a very significant and prolonged transition period. At Neuberger Wealth, we're actually working on a bunch of things that are interesting that can be done during this time period, that again, I don't think are getting enough attention. I can give you a few examples.

I mentioned earlier, the innovation that we're seeing and having more systematic approaches to tax loss harvesting. Taking that traditional portfolio that has been intentionally a little bit more buy-hold toward the later stages in life could be transitioned to one of these systematic tax loss harvesting strategies to start to get some diversification and start to gradually offset some gains with some losses.

Another area that is particularly interesting right now are 351 exchanges, which is also something that, as an organization, we've been focused on and engaging with clients around. That is when you can take-- If you meet all of the qualifications, investors can take a pool of diversified assets and contribute them to an ETF alongside of or commingling with other investors to create an ETF that is actively managed by a professional.

Anu: Like in kind transfer of sorts?

Stephanie: Correct. What the benefits are is now, a portion of your assets are commingled with other investors, and you are an owner of a portion of that vehicle, so you can realize that diversification and then ongoing diversification over time. Again, you can get unstuck from this buy-hold approach to a more diversified approach during this prolonged transition period.

Other more traditional approaches can be writing cover calls on existing concentrated positions to make those assets more productive, to generate income, for example, during this transition period, or for some of those concentrated positions, just hedging them to minimize the volatility that the markets often present from time to time, and can be challenging again during this transition period. Just a few examples of ways to think differently and not just wait it out over this time period, and be more active. We're finding that our clients and those who are helping our clients are eager to work with us in these ways.

Anu: When you were speaking about bridging these two generations together in these situations, I'm wondering at Neuberger Wealth, do you position yourself as the mediator or as the educator, or is it a bit of both when it comes to bringing these two generations together that sometimes might have differing views on asset allocation or risk tolerance, or what role do you find that you often play?

Stephanie: We play whatever role we can where we can be most useful with our clients, and it can take a variety of different forums, but I would say giving high-quality advice, providing lots of education, explaining to our clients their options, and guiding them toward making decisions that make them most comfortable and give them the highest probability of reaching their goals and objectives. Oftentimes, we say in this business, we all studied finance and investments and got our CFAs and our MBAs, and then everyone shows up at the door, and now we're like, "We all needed degrees in psychology."

Anu: Exactly. No, that's so true.

Stephanie: It's a very different business today than it was decades ago.

Anu: Absolutely. No, that's a great point. Stephanie, we've been talking a lot about estate planning, et cetera, and it is so much more than just taxes. As you said, it's a bit of psychology as well. Tell us about how governance, communication, and even philanthropy, how are those aspects part of this conversation?

Stephanie: Back in the day, we thought of wealth management as really investing for clients who had investible assets or high net worth and ultra high net worth, whatever label you want to assign to it. Wealth management today is so much more comprehensive, and really in many respects, so much more complex. What we're striving to do is provide holistic advice. In order to do that, we really have to know our clients, know their intentions and their wishes.

For most people, it's not just about stocks in a portfolio or dollars and cents. We are increasingly spending more and more time really understanding our clients deeply and having that type of relationship with them. In many parts of our industry, these have become full-fledged disciplines. We have professionals on staff who are skilled in family governance and helping clients navigate the transfer of their wealth and helping our clients organize themselves around their values, their priorities, and their intentions. We have a discipline around philanthropic advisory. How can we best position our clients to fulfill their philanthropic desires? The rise of using DAFs, for example.

Anu: DAFs are Donor-Advised Funds, right?

Stephanie: Donor-Advised Funds, correct. Forming private family foundations, organizing the family around their philanthropy, things of that nature. There are a whole bunch of things that we and others in the industry are really doing to help our clients.

Anu: Absolutely. Another aspect of this discussion that I wanted to ask you about was, anecdotally, there's been some comments about how heirs often leave their family's advisor after the great wealth transfer. I'd love to just understand, is that true, or whether it's during the wealth transfer, whether it's a surviving spouse situation? What's the situation with folks leaving their advisor? Why do they do that? What are some of the unintended consequences of that situation?

Stephanie: I think we did a podcast on this.

Anu: We did actually.

Stephanie: It's true. Just to set the stage, and I'll talk in gross generalizations here-

Anu: Sure.

Stephanie: -but all of this is borne out in the data. Historically, in the older generations, the primary client has been the male in the household. The relationships have been built with that male and largely around investment portfolios. Statistically speaking, he will be the first person to pass on.

Our first NextGen, if you will, is the surviving spouse. Statistically speaking, she is a she. She has different perspectives and different preferences. Fortunately for us as an industry, she is more aligned with younger generations, where there is really strong interest in values-aligned investing, in philanthropy, in making sure her children are set up from a planning perspective.

What we need to do as advisors and in our industry is making sure we are getting to know her, making sure she is a part of the relationship, making sure we are there for her in her moment of need when these assets pass to her and making sure we can adapt and support her in that transition and meet her needs, which will be different than her husband's, again, generally speaking. Like I said, it's not rocket science, and she is also very similar to some of the younger generations. We as an industry just have to make this evolution and be positioned to be there for her in the ways that she wants.

Anu: I think what I'm hearing you say is like it's about so much more than the ultimate investment. It's about a relationship. The focus needs to be on a holistic relationship.

Stephanie: It is about a relationship, and it's about really understanding our clients' intentions, their wishes. What do they want and need from these assets, and how can we design and implement strategies that give them the highest chance of fulfilling those intentions?

Look, having high quality investment capabilities, at the end of the day, it's table stakes and that's what at Neuberger, what we do so well but we have to know a lot and a lot of advice and planning has to happen in advance of establishing an appropriate investment strategy and then executing on that investment strategy over time.

Anu: All right. I absolutely agree. Stephanie, as we wrap up here, I'd love to hear what your most important actions, the families and advisors can really take in preparation for this great wealth transfer to really build long-lasting legacies. What are your key takeaways from this conversation?

Stephanie: I would say one, there's lots of planning techniques out there, certainly. Get educated, seek advice, and make sure that you are aware of all of the opportunities that are available to you. That's the more academic technical side of things. I would also say do the work personally and as a family to explore your wishes, understand your intentions, understand your priorities, understand what values you want to reflect in your wealth strategies, and communicate as much as you can as a family.

Ideally, your advisors can work with you in all of those respects. Again, don't just focus on the actual transfer of the assets plan for an extended transition. This is again, what I think the industry is not focusing on enough, but is going to be so important to families on so many different levels as they navigate that transition.

Anu: Lovely. Thank you so much for all those thoughts today, Stephanie. I can't let you go without a quick bonus question.

Stephanie: Oh, boy. The bonus question.

Anu: Here it comes. As someone who runs a wealth planning business, I am very curious: what sorts of things do you enjoy planning the most outside of your professional life?

Stephanie: Outside of my professional life and outside of wealth planning, I would say my priorities are family, and meet them where they are. Right now, that means activities that appeal to a teenage boy.

[laughter]

Anu: What are the top activities?

Stephanie: Golf, outdoor activities, sports events. Lots of time at the ice hockey rink. Family for sure. Friends love when we have the opportunity to combine family and friends with whom we have a lot of shared priorities and values, which again means in my household, teenage boy things, family dinners.

Anu: Watching a lot of sports.

Stephanie: Family trips, family golf. For me personally, it's philanthropy, dedicating some time to giving back. In this season of my life, I'm focused on education and the opportunities that my education afforded me. In my very limited spare time, I prioritize giving some of that time to help the next generation have similar opportunities.

Anu: That's wonderful. Thank you so much for sharing those thoughts, Stephanie. We covered a lot of ground today. Some of the highlights that you mentioned, just some of the younger generations. You mentioned that crypto is some people's first investments just because they're seeing so much of that on social media and there's maybe a little bit of FOMO that people have that they want to make sure they're in it.

We also talked all about longevity, how you said that's one of the most under-discussed areas of this great wealth transfer, and that folks should really be preparing for extended transitions based on longer lifespans.

We also talked about some of the innovations in the market as well. You mentioned 351 exchanges, about writing different covered calls on some of your concentrated positions. You also talked about how today the opportunity set for investments, they're more comprehensive, but they're also more complex as well. It's more than just investing these assets which you get at Neuberger Berman. The great investment platform is table stakes. The focus really is on relationships. Relationships really, really matter. You said, meet them where they are, bridging the gap between generations. Make sure everyone comes to the table.

I love what you said at the end, which was really about focusing for families and wealth advisors. Focus on the education, seek the advice, but do the work as a family. Understand your values so that you can reflect them in your family's intentions when it comes to your wealth. Hopefully, I summarized some of your key thoughts appropriately there. Thank you so much for being on here for spending your time talking to me today.

Stephanie: That was a wonderful summary, and thank you very much.

Anu: To our listeners, if you've enjoyed what you've heard today on Disruptive Forces, you can subscribe to the show via Apple Podcasts, Google Podcasts, or Spotify, or you can visit our website, www.nb.com/disruptive-forces, for previous episodes, as well as more information about our firm and offerings.