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Written by: Brian Beck and Daniel Friedman | WMGNA
You don’t have to search too hard to find references to the forthcoming $75 trillion wealth transfer and how, among other things, it’s going to reshape the wealth management business. As big as the numbers may be, we see a missed opportunity rather than a massive opportunity.
I would note that while this idea of a massive wealth transfer has been, frustratingly, percolating for some time, we appear to be on the threshold of it actually happening. Really. Specifically, Boomers were born from 1946 to 1964 and are now 58 to 78. The average lifespan in the United States is 77.5 years. Clearly, Boomers will be expiring with regularity for the next 18 years, leaving behind memories for their loved ones and a whole lot of assets that need to be managed.
But we think our industry will miss the boat for two reasons: First, the wealth management industry is not positioned to appeal to the heirs of this bounty and second, the wealth transfer process is not so much an asset management play as it is a tax planning play which many advisors are unable to help with.
In our view, the wealth management industry is a hammer in which every problem looks like a nail. Yes, there will be assets that need will management, but there is a complex tax component that needs to be resolved first. And those who can help solve those tax problems are in the best position to manage the assets that are encumbered by them.
Here are just a few examples of the knotty tax challenges that need to be addressed:
New guidance from the IRS on the Secure Act makes sweeping changes on required minimum distribution by beneficiaries. This may require adjustments to a beneficiary’s wage withholding and or the payment of estimated taxes. This additional income may also require re-organizing the beneficiaries’ contributions to taxable versus tax-deferred accounts.
Generation-skipping transfers provoke arcane tax regulations which may require specialized areas of expertise.
Assets that are being transferred may have been established so long ago that there is no easy or reliable way to determine the original basis. Financial services firms were not required to report cost basis until 2011. Before then, it was left up to the investor, which means that they may need your help trying to calculate it.
Perhaps the most difficult obstacle for advisors who want to build their practice on wealth transfer is that the assets being transferred are outside of their control, or administrative purview. These include ownership positions in privately held businesses and unrealized incentive compensation.
In our practice, we approach the challenges associated with taxes on the transfer of wealth through a subscription-based model. This allows heirs and beneficiaries to zero in on specific tax concerns regarding their inheritance and allows us to deploy specialized expertise the client needs while maintaining oversight of the process.
For wire house advisors, and for larger RIAs, and even smaller ones, a subscription approach may not be practical, though it is worth considering if only to capture more business from wealth transfer. Absent that however, we would counsel wealth managers who offer their services under an AUM model to proactively form partnerships with allied professionals in law, trust and estates, business valuation, and even real estate to be able to offer the kind of “360” tax planning that beneficiaries will need.
Partnerships for RIAs are difficult because their business is highly regulated, and there’s little motivation to tinker with it, absent urgent need. Capturing their share of the $75 trillion might qualify as urgent, particularly for RIAs that have been acquired or consolidated into other practices facing an ambitious growth mandate.
It’s important to note that earning shared revenue by helping the heirs overcome the tax challenges their inheritance brings is not the point. The point is that by coordinating the tax resolution process, advisors have a clear path to managing the assets that will ultimately materialize. And patience is required. Selling shares in a private or closely held business may take years to resolve, but once this occurs and millions in cash flow to the heir, the advisors who were there every step of the way are the advisors who will ultimately manage these funds.
The other challenge advisors face is that the younger generation that will inherit the assets are a different beast than the clients whose assets they have nurtured over the years. One only needs to look at the rise of robo-advisors, Betterment and Robinhood to see this generation is – advisedly or not – self-directed and averse to paying fees under an AUM model.
We don’t see a wholesale change in the business model of the wealth management industry to accommodate the idiosyncrasies of the coming generation. We do believe, however, that to appeal to these investors the wealth management industry will need to offer value-added services as part and parcel of their AUM fees. Programs that focus on the tax challenges of the wealth transfer process, even if they are educational only, would be a good place to start given the enormity of the opportunity it represents.
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