In a world where 70 per cent of heirs fire or change advisers after inheriting wealth, smaller firms with a focused approach can reap dividends from the next generation.
Smaller independent investment firms, whose interests are aligned with those of their clients, are better positioned to engage with the next generation, believes Kevin Philip, partner at Los-Angeles, US-based wealth manager Bel Air Investment Advisors.
A major contradiction in private banking is the discrepancy between advisers’ remuneration structures and their claimed ambitions of servicing clients across generations, he says.
Working under pressure to reach monthly or daily targets, private bankers are faced with the trade-off of servicing existing clients – typically the decision makers – and spending time with younger generations, not yet generating revenues or impacting performance metrics.
This paradox will become more evident over the coming decades, as wealth transferred up to 2045 will total $84.4tn, most of which will land in the hands of Generation X and millennials.
There is no guarantee these investors will continue working with their parents’ advisers, according to Cerulli Associates. Indeed, more than 70 per cent of heirs will change or fire their financial adviser once they inherit the wealth.
“We do not have any monthly targets or anything like that, our incentive is to never to lose a client, and we absolutely emphasise the importance of working across all generations,” says Mr Philip during a video call.
Flat fees forever
Bel Air was founded in 1997 by a team leaving Goldman Sachs. This was the largest private wealth management unit of its day. By leaving the major US bank, the founders hoped to move away from the stockbroking, commission-based and closed product platform model prevalent in private banking back then.
“We do not promise outsized returns. Our goal is to keep our clients wealthy with prudent investing,” says Mr Philip. “We want clients to pay us those annual, flat fees forever, and the only way you're going to do that is if they're happy with our service and the portfolio results,” he says, matter of factly. “Our interests are very aligned.”
From its offices in Los Angeles and New York, the firm serves “high profile” people, mainly in the entertainment industry, with a minimum size of $20m in assets, typically through their intermediaries, including talent and business managers or agents.
Most of their clients are business owners. “We keep our minimums high and our client list short, so that we can spend time with the whole family,” he says.
The firm serves multiple generations, and where it adds “most value” is on educating clients, be it on investment strategies, especially private assets, as well as estate planning and tax planning.
Gentle challenge
One of the ways they encourage both “education and empowerment of the next generation” is through philanthropy. A pool of financial philanthropic money, like a foundation, or a donor advised fund offers an opportunity to gather together the extended family. A “very healthy way” to begin the financial education process is to give next gens an annual budget to give away to their causes, asking them to make a case for why these deserve donations, adds Mr Philip.
“Because the money is not personal money, it's all geared towards good causes, it takes the stress out of making a wrong decision or ownership, it disconnects you from the emotionality of the money.” This approach gives next gens the opportunity to have conversations about investments in a safe environment, communicate with each other and “gently challenge or wonderfully support each family member in their interests to give away money”.
Advisers also must find the best way to engage with next gens and relate to them. In some cases, partners’ “younger lieutenants” at the firm are asked to meet clients’ offsprings, to establish first contact.
Senior advisers spend a “great deal of time” with younger cohorts too. The most important factor to engage next gens, and clients in general, is to listen, as “every client is unique”.
Respecting boundaries is also key, adds Mr Philip, explaining that “next gens need to know we don't go report on the conversation unless families want to, so a firewall goes up, and they feel they are being heard”.
Avoiding bad actors
Mr Philip has identified three different types of next gen clients, by attitude and personality, which helps him cater to them better.
The first includes “empire builders”, who feel they have something to prove because their parents were empire builders too. These often fail because they “take too much risk”. Such personalities, who represent 10-20 per cent of younger clients, “can be very challenging to work with because they're very aggressive,” he says. These clients “are often into leverage”, trying to make speculative investments or starting companies.
“After warning them several times, if we think it's a sinking ship, we will resign. But they usually fire us first, because we're not aggressive enough for them,” Mr Philip admits candidly.
While many of them succeed, the greatest risk for this segment is they get involved with “bad actors who target them, befriend them, and try to corral their money in all sorts of deals”, he explains.
The second type, accounting for 30 to 40 per cent of next gens, includes individuals not interested in wealth creation, having seen their parents so focused on it, and tend to choose a different, unrelated career, such as a social worker or a teacher. In this case, the best thing their parents can do is teach them how to interact with professionals, says Mr Philip.
“The biggest disservice I have seen in that category is when parents are too afraid to talk about money and include them in the process.”
The third type of next gens are the “healthy” ones and, encouragingly they represent the majority, he believes. “They live the life they want; they may become doctors or lawyers or choose other professional careers. They have learned from their parents how to engage with professional advisers, they have healthy relationships with them.”
The kids are united
While they differ widely in investment attitudes and personalities, there are also common trends uniting the way next gens want to manage portfolios. “Too young to remember the 2008 financial crisis, they may have made a lot of money in the tech sector, and now they're trying to figure out what to do with it,” he says.
According to a 2022 study from BNY Mellon Wealth Management and Campden Wealth, next gens plan to increase exposure to artificial intelligence (60 per cent), fintech (60 per cent), and robotics (53 per cent), while almost 80 per cent are driven by desire to diversify from traditional investments and invest in other areas, before they become mainstream (70 per cent). They also see value in digital assets and new tech.
“Next gens have an aversion to paying service provider fees, they hate paying their lawyers, and hourly fees, they're always trying to figure out how to use Legal Zoom to get a document done,” he adds.
“As they get older, though, and their balance sheet gets bigger, next gens realise they need advisers.” The recurring theme, he says, is that “the younger the clients, the more different they are to previous generations. But as they get older, they start to evolve into clients we've seen before.”
