For many years we have heard of the coming of a tide, ‘the next generation’ (or NextGen) bringing the largest transfer of wealth in human history.
It is expected in this time of wealth transfer that there will be large scale changes in advisers, domiciles, and approaches. Alongside the new drivers of increased social awareness, digital usage and relationship expectations, there exists the classical family element: children wanting to do something different from their parents. Most studies in the US point to 80 per cent or more of heirs looking for a new financial adviser after inheriting their family’s wealth.[i]
Opportunities For IFCs
There will be many similarities as we see generational change; and effective IFCs will be able to maintain relationships and business. That said, the braver IFC can gain significant advantage. There is a chance to refresh and reframe their business profiles long term, gaining competitive advantage that may be unassailable. To do so they must understand this NextGen, and specifically its increased focus on both individual reputation and positive sustainable finance (to use the broadest term).
The growing desire for ‘positive finance’, widely seen as being at the core of NextGen change, is reflective of wider changes that have been brewing for some time. This author has a clear memory of speaking at a leading private bank’s NextGen training course in Singapore in 2010. The audience, 16–25-year-old children of important clients, provided an amazing selection of differing views and ambitions. However, all were united by a commonly voiced desire to do good for the world: to change the approaches of the family business, dedicate profits to philanthropy and embed socially-minded decision making into the command structures.
However, this is only part of the picture. When considering the next generation it is temptingly easy to picture fresh faced idealistic teenagers or young adults, with untested ideas to change both the wider world and the family business. The truth is that the transfer of wealth we are facing will often include much older and experienced individuals.
This is true due to demographics and magnified by a change in expectations as to retirement. As famous patriarchs such as Rupert Murdoch show, the desire of the major players – often the original wealth builders in families – to step aside is limited. Arguably the most famous transfer to NextGen in 2022 involved a 73-year-old man in the form of Prince, now King Charles, in the UK. It is important to recognise this wide range of constituents when faced with the ‘NextGen’ tag.
In the face of such variation and claims of wholesale change, it is also vital to acknowledge elements of continuity in behaviour with the previous generation(s). Above all, the fact that most family principles are still driven to preserve and protect their resources, while actively looking to grow wealth for generations to come.
Here, a contradiction appears. The narrative of large-scale philanthropy and pledges to give point to a move away from wealth preservation. Most high profile is the 234 billionaire signatories to the Giving Pledge[ii] that made a public pledge that the majority of their fortunes will go to philanthropy before or upon their death. However the truth is that this is not reflected in action as yet. The 2022 Forbes 400 ranking of the richest US citizens included a ranking on their actual giving.[iii] In fact, over a third (36 per cent) had given away less than 1 per cent. Only nine billionaires (2 per cent) have given away more than 20 per cent of their wealth.
Hence despite high profile comments from UHNWIs, most recently Jeff Bezos, highlighting plans to disperse family wealth, the majority of families will continue to look to safeguard future economic power. The inability to offer the security and/or required financial growth prospects will negate any offer from a wealth manager or IFC. This does not change.
That said, beyond this low level of entry, real competitive advantage will fall to those who are responsive to the newer ways of operating with the markets, which this new generation of leadership will surely look to grow. At its very core is the idea of all forms of sustainable investing through to impact investing; and a wish to ensure investments are at the very least avoiding harm, through to actively achieving positive social impact alongside financial return.
To be clear, this is not something that is waiting for the transition. The 2022 UBS Family Office Report[iv] shows 56 per cent of Family Offices already having sustainably invested. Whilst there is room for growth in this, the next generation is expected to bring not just more focus but also more rigour to this area. This is driven by an accepted belief that millennials, Generation X and others are more socially aware and engaged with the impact that their investments have or could have.
Reputation Is Key
Here, the wish for quantifiable impact meets with the personal drivers and needs of a new generation: a generation living digitally, where personal reputation (or legacy) is far more prominent than ever before. Previous generations may have turned to good works for example to burnish reputations later in life, but reputation was not a concern through their school years. The tools of the digital era enable reputations to follow individuals for life, globally. For the newer generations, reputation matters in a visceral way amongst peer groups and wider society. Whilst it is for others to discuss the psychological burden placed by the measurement of self-worth in this new digital arena, it is important here to understand the effects of this driver on this new generation’s expectations.
When responding purely to the wish for new and long-term impact-focused products, IFCs have several cards to play. However, when faced with this reputational desire, at first, it seems that IFCs will struggle.
Some, not all, are still providing a negative impact on any individual reputation score that is available. The very mention of assets being held ‘offshore’ or in the same territory as those with perceived looser controls sparks negativity amongst many. To place assets in an environment at the centre of data leaks, court cases, criminal sanctions, transfer pricing and rumours of money laundering is a crucial reputation risk.
For this next generation importantly, this is a less appealing risk than for predecessors. The increased ability for reputational issues to follow individuals is married to a growing value placed in building online personas (or brands). Having come to adulthood in a globally connected digital age, this next generation values reputation far more and in turn views the perils or risks as far greater.
All is not lost, as many IFCs have started to counter this historic perception by providing public commitment to regulation, or through effectively marketing the vital role they play in the global financial system. Some have gone further, vocally making the case to attract philanthropic capital in the forms of new structures, to highlight long-term security, practicality and anonymity that can benefit all. This is long-term work, requiring investment and the commitment of all players in each IFC.
In the meantime, complementing this approach is a counterpoint to this focus on reputation that plays to an IFC’s traditional strength. Those focused on the value of their digital reputation are also far more aware of the power, availability and potential risk of data. Secrets can no longer be kept. Privacy and control of information is crucial. Even for those high-profile individuals actively wanting to share and build a story of themselves, there is a clear understanding of the need to control and balance what is made available and when.
Despite data leaks and similar, IFCs retain their hard-earned reputation for privacy. For those seeing criticism levelled at IFCs for retaining anonymity, there is also an appealing reassurance to a tradition of controlling information; often being seen as the step up from retaining funds in social hubs such as London where the feeling (deserved or not) is of informal sharing by wealth managers and more visibility.
Once this initial condition is satisfied, the requirement will focus on ensuring any promised services and financial products can deliver on promised impacts. Driven by a wish to protect reputation, ensure positive (or at least non-negative) impact and build a family legacy. The growing challenge for wealth holders is to counter rising cynicism and confusion in the sustainable investing space.
It is important to admit that the rapid rise and adoption of ESG investing has led to confusion. Ensuring that at the very least Environmental, Social and Governance (ESG) aspects of investments are not negative as an investment approach, is proving easier to articulate than to deliver. Wariness has grown as to the decisions made to allow entry for opportunities into this ‘good’ investment pool, something understandable in a market where surveys suggest more than a third of all assets are now included in this ESG pool. Reports in July 2021 suggested this type of investing had US$35.3 trillion (yes trillion) in AUM across the world’s top five markets. This announcement by the Global Sustainable Investment Alliance[v], coming on top of rising cynicism, was met by more questions than celebrations. “There is $35 trillion invested in sustainability but $25 trillion isn’t doing much” was Bloomberg’s headline.[vi]
This is already driving not just stronger due diligence, but also questions around wider impacts and supply chains. Of those family offices mentioned earlier that are already investing sustainably, 53 per cent report increasing their due diligence. Yet still more than half (53 per cent) aren’t confident they can identify greenwashing and 60 per cent think that programme evaluation remains a problem in impact investing.[vii]
In the face of this more demanding audience, there is an opportunity for those IFCs who are prepared to grab it, highlighting and building on their existing track records and experience in extensive due diligence processes. Providing a closely integrated eco-system of integrated advisers and skill sets that can both undertake and understand shifting due diligence environments and requirements has long been an integral part of the existing service offer of IFCs. Supported by the efforts of some to carve expertise in certain areas of the ESG arena (such as Guernsey Green Finance), this can provide a unique selling point for IFCs: providing the targeted specialist expertise for which they have been famous for years, merely adapted for the new audience.
Again, this confusion surrounding the ESG market provides another reason for the IFC offer to appeal more strongly. It would require more confidence on behalf of the IFC community to reposition their strengths in a new message. In an environment fearful of falling foul of impact washing or being misled with large reputational issues, the ability to remain one step removed from investments becomes yet more appealing. The traditional IFC tools that provide security and support alongside anonymity can play a vital role in both protecting clients and crucially allowing a higher level of risk-taking. Safe from being associated with failures and short term regulation change, IFC-based wealth holders can take the sort of bets on the new forms of ESG or Impact Investing that are needed to provide solutions to world challenges.
In short, the NextGen are in many ways not unlike the last generation. They will need support, service and a number of the tools of their predecessors. Many IFCs will find their business levels continuing. However it is those IFCs that are both able and brave enough to react to the few ways that they are different that will win the day. Those that can reframe existing strengths, recalibrate services and adapt to new demands driven by an understanding of the importance of reputation and impact in this new digital world.
[i] ‘What the coming $68 trillion Great Wealth Transfer means for financial advisors’, Oct 21 2019, CNBC.com https://www.cnbc.com/2019/10/21/what-the-68-trillion-great-wealth-transfer-means-for-advisors.html
Peter Cafferkey is the CEO and Founder of Boncerto Ltd, based in London. Boncerto is a social good consultancy providing guidance and support to individuals, corporations and foundations looking to engage in the next generation of philanthropy, CSR, and impact investing. Peter is also a representative of the European Venture Philanthropy Association, Trustee of charities including Global Health 50/50, an international health charity focused on gender equity in healthcare. He has worked in the philanthropic and impact investing space for over 15 years and regularly speaks on impact investment and philanthropy at conferences around the world. Previously, he was a Director at Geneva Global and International Manager at the Charities Aid Foundation.