Over the next several years, a massive amount of money is
set to change hands, peaking in 2030, according to some estimates. Millennials
and GenXers are in line to receive the lion’s share.
Engaging these next-gen inheritors in conversations about
how family fortunes were made, plans for how the money will be handed down and
how funds should be managed in the future is critical to the preservation of
that wealth. Yet, in many families, those conversations simply aren’t
Money is admittedly difficult for many people to talk about.
In some generations and some societies, talking about money is still considered
taboo, prompting many a matriarch and patriarch to forgo even a high-level
discussion with their children.
Complicating these wealth transfer discussions is a
widespread apathy among next-gen wealth holders, Millennials in particular,
around the construct of wealth. In fact, many studies show that a large
percentage of people under the age of 40 don’t value wealth the way their
parents and grandparents did. Instead, they are more apt to prioritize
experiences and other intangibles.
So how can advisors get families talking about
inter-generational wealth transfer? Two words: Responsible Investing.
Out Of The Fringes
With an estimated $17 trillion invested in assets in North
America alone, according to the Forum for Sustainable and Responsible
Investment, responsible investing has moved out of the shadows into the
mainstream. In fact, at the start of 2020, 1 in every 3 dollars were managed in
responsibly invested assets.
We’ve seen this uptick in interest among our own clients. In
a recent RBC Wealth Management client survey, 61% of our clients said they are
interested in increasing the share of ESG investments in their current
portfolio. And the vast majority—86%—want more information about it.
Responsible Investing is of particular interest with younger
investors and to women. An article in ETF.com pointed out that 90% of affluent
millennials said they are interested in gaining returns on their investments
while also promoting positive social and environmental outcomes. And a 2021
report from Cerulli Associates found that 84% of U.S. asset managers anticipate
high demand for ESG strategies from Millennials, a cohort that currently only
represents 5% of financial assets, but that is set to inherit USD 22 trillion
in the next 25 years.
Whether parents, grandparents and advisors are ready and
willing to talk about ESG or not—the next generation of inheritors are poised to
force the issue.
From Apathy To Affinity
The idea of using ESG as a bridge in generational wealth
transfer conversations isn’t just theory. Several advisor teams at RBC Wealth
Management have experienced firsthand how the introduction of responsible investing
concepts can often flip the script.
One advisor team in Missoula, Montana struggled for months
to engage the daughter of a wealthy client in his 80s in a discussion about the
millions of dollars she was set to inherit.
“She wasn’t at all interested in building a portfolio that
is going to triple in a year or two or three,” said advisor Kimberley Shappee.
“But she is super passionate about water, so we worked to try to identify those
projects she could invest her newfound wealth in so she could take part in
creating sustainable clean water for all.”
For this Next-gen inheritor, talking about how that wealth
can make a positive impact was the only way to get her engaged. Per her
interest and her request, that team of advisors recently closed on an investment
for this family in an opportunity fund focused on sustainable infrastructure.
Let The Student Become The Teacher
For some families, helping next-gen inheritors explore the
bounds of responsible investing alongside matriarchs and patriarchs can do more
than get them engaged—it can give them a chance to shine.
Generally in wealth transfer conversations, the patriarch or
matriarch holds the greatest knowledge. But this hierarchical knowledge
structure is part of what leads to that apathy. Kids—of any age—don’t like
being talked to. We’ve seen how ESG can help Next-Gen inheritors have somewhat
of a level playing field.
A conversation around responsible investing and ESG
principles gives younger generations an opportunity to show their parents, or sometimes
their grandparents, how much they know about a really relevant investment
That’s essentially what happened with advisors Andrew and
Timothy Heald out of Boston. One of their long-time clients wanted to prepare
his adult children to not only inherit but manage the family wealth, which he
had accumulated by working in senior business roles over the course of a
successful 42-year career.
“Before entrusting his children with his entire estate, he
founded a small donor-advised fund and basically said, ‘Here, cut your teeth on
this,’” Andrew says. “It was a training-wheels approach to make sure everyone
could handle it and understood how it all worked.”
Eventually, once the client was confident in how his kids
were managing the donor-advised fund, he brought them on as co-trustees of the
foundation he had created. It was in that capacity that they not only started
to make grant decisions based on ESG principles, but advocated that the
foundation align its investments with its mission and purpose.
The patriarch was initially hesitant about the shift. “He
felt if the investing principles were too restricted to ESG and SRI, we would
risk performance,” Timothy Heald recalls.
But between the case his children made for responsible
investing and the data the Heald team was able to provide, the client
eventually embraced the change. In fact, today, that patriarch has some of his
own personal wealth invested in what would be considered responsible funds.
Why ESG Is So Key
Despite the growth in responsibly invested assets and rising
interest among these Next-gen clients, a large percentage of advisors in the
industry haven’t yet taken the time to get up to speed on ESG.
A December 2018 report from Cerulli Associates noted that
“financial advisers have not wholeheartedly adopted ESG mutual funds and ETFs.”
In fact, a slim majority (53%) of advisors do not bring up ESG investment
options unless prompted by their clients.
While that might have been OK five to ten years ago, today
advisors ignore ESG at their own peril.
Responsible Investing is important not only from a wealth
transfer standpoint, but from a business growth and preservation standpoint.
Advisors who can’t speak to younger clients about ESG run the risk of losing
that business to advisors who do speak the language.
Advisors Kim Shappee and Josh Gimpelson equate the ESG
phenomenon to holistic wealth planning.
“Back in the 2000s, if you were just a stock-picker and you
weren’t doing planning for clients, you lost a lot of them,” Shappee says. “The
same will happen in next 15-20-25 years. If you aren’t up to date on ESG you
are probably going to lose some big clients.”
Due diligence processes do not assure a profit or protect
against loss. Like any type of investing, impact and ESG investing involve
risks, including possible loss of principal.
RBC Wealth Management, a division of RBC Capital Markets,
LLC, Member NYSE/FINRA/SIPC.
Kent McClanahan, Head of Responsible Investing for RBC
Wealth Management-U.S. and Angie O’Leary, Head of Wealth Planning for RBC
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