Intergenerational wealth transfer gathers pace - Wealth industry needs to better prepare

27 JUNE 2023

The pace of intergenerational wealth transfer has quickened. Most Baby Boomers will retire by 2028 and the industry needs to better prepare for this hastened process; notes a report from the country’s leading wholesale trading platform, AUSIEX.

The AUSIEX report ‘On the Precipice of Change’ asserts that the intergenerational transfer of wealth in Australia is occurring faster than forecast, as Baby Boomers reassess their lives in the wake of COVID-19.

This will change demand for some investment products, services and also for financial advice.

“Within five years, all Baby Boomers will be eligible for retirement and the Baby Boomer bubble will have all but left the workforce by 2028,” cites the report.

“It doesn’t stop there. In 2027, the first of the Baby Boomers will reach their statistical age of death (81 years for men and 85 years for women).

“The impact on the wealth management industry is, first, that Baby Boomer superannuation balances will start to deflate out of the system through retirement consumption and then through disbursement via the inheritance process.

“Second, Gen X are now the group preparing for retirement and will hold the large balances in superannuation. Third, Gen Z will soon be fully deployed in the workforce and the predominant demographic groups requiring to be serviced by the wealth industry will be Millennials/Gen Z.”

The report found that the decline and exit of the Boomers from the workforce means that for the first time in its history, the superannuation system is going to see retirement phase withdrawals coming from its largest accounts. Those in the 60-64 age group have an average balance of $323,000 compared to the younger generations, where those in the 30-34 age group have an average balance of $45,000.

The AUSIEX report also cites: “While it is hard to predict how the money will flow from where and to whom, we can make inferences based on what we see in the data that we know today. If we start with superannuation balances, we find that the facts don’t really match the prevailing narrative that super is an inheritance tax planning device”.

Millennials think differently

As the Baby Boomers are leaving the workforce, the values and motivations of their generation are also leaving with them. Accordingly, the values of the Millennial and Gen Z generations are going to ascend.

The Millennial and Gen Z generations also have arguably more grim income and financial prospects than those who came before them. A recent Pew Research study found that when asked how children in their country will fare financially when they grow up, a median of 70% of adults across 19 countries (72% in Australia) say they will be worse off than their parents.

The recent burst of inflation plus the focus on stifling wages growth that reduces their purchasing and savings power could mean that their prospects are even more difficult.

In summary, the report goes on to say, a new generation is entering the system that may have appreciably lower expectations of being able to build wealth, and who are also disengaged with the system. This indicates there may well be a considerable cultural shift in how and why the younger generations engage with the wealth management industry, and how the industry attempts to engage with them.

Technological shift

As the wealth management industry is technology intensive, these changes will result in significant changes to the type of technology the industry uses.

Service enhancement using artificial intelligence (AI), is likely to be disruptive as conversational and large language model (LLM) AI may find its way into the investment advice and servicing processes.

This means that while the current industry is defined by its service models for older generations, with larger balances in traditional products, there is a wave of transformative technological change starting to happen from back-office product change, through middle-office aggregation and product functions, and into the front-office customer service areas, where human interaction is increasingly replaced with machine interaction.

Changes we can see coming

Investments: Changing demographics and culture will see greater preference for ESG, greater access to investment structures such as private equity, through to the introduction of crypto assets, including central bank digital currencies.

Markets: The structure of primary and secondary markets may not change in any meaningful way, which means that as a mature segment of low change, the main drivers will be consolidation and technology efficiency from well capitalised and patient participants.

Platforms: Platforms may be a mix of stability and change. Their interfaces to markets and their aggregation functions will likely continue to require investments in scale and efficiency, while their interfaces to end user systems will need to adapt to the demands from those providing services and data to end users.

Financial advisers: Those providing services directly to users will see the greatest need for technology change, as the world of advisers and investors becomes completely mobile; information, compliance, and education needs for new investment and new demographic types require support, and digital transformation brings opportunities like AI and new media.

The wealth management industry has always adapted quickly to new technologies to improve products and services.

It started with information processing technology for cost and scale, then online technology in the 90s and mobile technology in the “noughts'' to improve service, and today there is social media platform integration so that people can also communicate, research, and get better service from the industry on the platforms that they use to live their digital lives.

Our industry has, and will continue to be able to, deal with change. This change is happening faster and with higher impact than many realise.

The older generations are about to leave the system, the younger generations face different challenges than those that came before them, and the transition to the digital world is continuing apace.

The industry and financial advisers need to prepare for change before the Boomer boom is over.

About AUSIEX

With over 25 years of experience in the local market and the backing of a multinational trading technology powerhouse, AUSIEX combines deep expertise with trusted and reliable technology to deliver trading solutions for financial institutions, intermediaries, advisers and industry participants. Owned by Nomura Research Institute, Ltd. (NRI), AUSIEX specialises in equities execution, clearing and settlement services and equities administration for the wholesale market.

As one of Australia's leading providers of trading solutions, AUSIEX has used its scale, expertise and heritage to deliver value for advisers, brokers, many large institutions and tens of thousands of their clients by seamlessly connecting them to markets.

About NRI

Founded in 1965, NRI is a leading global provider of consulting services and system solutions, including management consulting, system integration, and IT management and solutions for the financial, manufacturing, retail and service industries. Clients from all layers of these individual industries partner with NRI to tap NRI’s research expertise and innovative solutions across the organization to expand businesses, design corporate structures and create new business strategies. NRI has more than 17,000 employees in 16 countries and regions including New York, London, Tokyo, Hong Kong, Singapore, and Australia. NRI reports annual sales above $4.9 billion. NRI is rated “A” by S&P Global Ratings Japan.

For more information, visit https://www.nri.com/en

Disclaimer

This information has been prepared by Australian Investment Exchange Limited (AUSIEX) ABN 71 076 515 930 AFSL 241400, a Market Participant of ASX Limited and Cboe Australia Pty Ltd, a Clearing Participant of ASX Clear Pty Limited and a Settlement Participant of ASX Settlement Pty Limited. Share Trading is a service provided by AUSIEX.

This information contains general advice and has been prepared without taking into account your objectives, financial situation or needs. You should consider its appropriateness, having regard to your objectives, financial situation and needs. Investors should read the relevant disclosure document and seek professional advice before making any decision based on this information. This information has been prepared by Australian Investment Exchange Limited (AUSIEX) ABN 71 076 515 930 AFSL 241400, a wholly owned subsidiary of Nomura Research Institute, Ltd. (NRI). AUSIEX is a Market Participant of ASX Limited and Cboe Australia Pty Ltd, a Clearing Participant of ASX Clear Pty Limited and a Settlement Participant of ASX Settlement Pty Limited.