Published on August 10, 2023

The Great Wealth Transfer

According to a report from Cerulli, there will be $84.4 trillion of wealth transferred through 2045. This has been dubbed the Great Wealth Transfer. This transfer, primarily coming from the Baby Boomer generation to younger generations, will shape the wealth management industry as well as have broad market implications. In this insight, we will provide an overview of the demographics of wealth, how the wealth has been generated, and how the Great Wealth Transfer might reshape wealth management and financial markets.

The Demographics

As a brief primer, the transfer of wealth we are referring to is the Baby Boomers, or people between the ages of 60 and 80 roughly, passing their wealth down to their heirs and to a lesser extent charities. The same Cerulli report estimates that about 85% of wealth will be transferred to heirs while the balance will be given to charities.

Income and wealth inequality have been covered in depth in recent years, and the transition of wealth will be no different in its lack of equity. $35.8 trillion or roughly 40% of the overall total volume of the Great Wealth Transfer is expected to come from high-net-worth and ultra-high-net-worth households, which together only make up 1.5% of all households.

Similarly, the wealth is largely held and being transferred by White families. In a 2020 report, a researcher from the Federal Reserve found that the typical White family has eight times the wealth of the typical Black family and five times the wealth of the typical Hispanic family. So, while there will be a tremendous amount of wealth being transferred, it will likely do little to address wealth inequality.

The Wealth

In 1989, total family wealth in the United States was about $38 trillion, adjusted for inflation. By 2022, that wealth had more than tripled, reaching $140 trillion, according to the New York Times. The wealth accumulated by Baby Boomers has been a by-product of the environment in which they were buying real estate and investing. In general, the generation has had the benefit of timing.

Baby Boomers Hold Half the Nation’s $140 Trillion in Wealth

The Great Wealth Transfer : Baby Boomers Hold Half the Nation’s Wealth

Notes: As of the fourth quarter of 2022. The total amount accounts for liabilities, but the individual asset categories do not account for liabilities and do not add up to the $140 trillion total. The total assets when not accounting for liabilities is $158 trillion. Pensions include the present value of future benefits as well as the value of annuities sold by life insurance companies.
Source: Federal Reserve.

Source: The Greatest Wealth Transfer in History Is Here, With Familiar (Rich) Winners - The New York Times (nytimes.com)

Since 1983, when an average Baby Boomer would be 30 years old, home values have grown nearly 500% based on data provided by the Federal Reserve. The wealth generated from primary household appreciation has been a major source of wealth for the Baby Boomer generation. When comparing older generations like Baby Boomers to Millennials, there is a stark difference in homeownership rates, with nearly 80% of all Baby Boomers owning their home while that rate drops below 40% for Millennials. To be clear, this is not an outcome of a Baby Boomer buying a house and just holding onto it for a lifetime. According to the National Association of Realtors, Baby Boomers were still the largest share of homebuyers in 2022 accounting for 39% of all homes purchased. Further, there were more homes purchased with all cash in 2022 than there were first-time homebuyers.

Millennials and the following generation, Gen Z, are well behind where Baby Boomers were in terms of home ownership rates according to research put together by Redfin. Overall, the housing data paints a picture of huge wealth generation for the Baby Boomers while millennials and Gen Z on the other hand are entering a highly competitive housing market that based on valuation alone does not suggest that buying a home will be the wealth generator that it has been for previous generations.

Housing and real estate data show that appreciation in home values and high homeownership rates have been primary contributors to the wealth that the Baby Boomer generation has amassed. And further, it shows that subsequent generations cannot count on home ownership being the same wealth generator that it was for Baby Boomers.

Home ownership and real estate was not the only wealth generator for the Baby Boomer generation. They have also enjoyed higher income levels despite having lower education levels according to research from non-partisan think tank New America and research from the Pew Research Center. There are additional contributors to the Baby Boomer generation wealth generation like strong stock market performance but rather than further dissecting the generation of the wealth we can turn to the Great Wealth Transfer of wealth and how it might impact wealth management and capital markets.

Friction on the Transfer

Functionally, much of the Great Wealth Transfer will not be taxed. Currently, the U.S. tax code allows individuals to transmit up to $12.9 million to heirs, during life or at death, without federal estate tax (and $26 million for married couples). Over those limits, there is a significant tax of 40%, although there are other tax sheltering strategies that many high net-worth individuals will likely leverage.

Effect on Markets?

By 2030, following the Great WealthTransfer, Millennials will hold five times as much wealth as they do today. It follows that the way Millennials allocate their capital that they receive through the Great Wealth Transfer will impact financial markets.

Before diving explicitly into how Millennials might invest their inherited wealth from the Great Wealth Transfer, it is worth considering how Millennials will or will not leverage existing wealth management services. A report from EY found that younger generations list fintech services as their most trusted financial brands, followed by national banks. While wealth managers and smaller banks were the most trusted financial brands for less than 10% of respondents. It follows that much of the Great Wealth Transfer to millennials will move away from traditional wealth managers and towards larger and technology-integrated service providers. The report also found that bank and wealth managers’ ability to easily integrate into other technologies is of paramount importance for younger generations. This data suggests that as the Great Wealth Transfer unfolds millennials will cause there to be a greater consolidation of assets to larger banks and fintech services, further accelerating a trend we have seen in recent years.

Most trusted financial brands by age group

The Great Wealth Transfer : Most Trusted Financial Brands By Age Group

Source: How financial institutions can win the battle for trust | EY - US

The investing trend most closely associated with millennials is ESG. In a recent survey from Schwab, 75% of millennials said their personal values guide their investment decisions and about 73% said they invest in companies that align with their personal values. Based on this data, Bloomberg has reported that they expect ESG assets to continue to grow and such growth to accelerate as more capital flows to younger generations.

Millennial investors also tend to use alternatives much more than Baby Boomers with on average a 16% allocation to alts vs just 5% for older investors according to a Bank of America private bank study. Like ESG this will likely accelerate the growth of the alts industry and result in wealth managers being more focused on having an appropriate alternatives lineup.

Conclusion

The Great Wealth Transfer will significantly grow the net worth of the millennial generation and in turn will drastically increase the influence that millennials have on the wealth management industry and market in general. Research suggests wealth managers will have to consider ESG, fintech and alternatives in order to stay competitive and capture a share of the great wealth transition. Crystal Capital Partners is excited to be a fintech service provider that can partner with wealth managers to help provide access to alternatives.

Sources: