More than 70% of heirs are likely to fire or change financial advisers after inheriting their parents' wealth which hugely highlights the need to establish an intergenerational continuity plan to retain assets, according to the latest Cerulli Edge—U.S. Advisor Edition.
This disconnect can become a significant wrench in any estate, said Cerulli, let alone for an adviser's business continuity. Advisory practices that have not already done so will need to shift their mindset and strategically engage their clients' spouses and children on a more regular basis.
Chayce Horton, analyst, said: "The looming wealth transfer presents a significant opportunity for advisory firms that can adapt to a shifting landscape and evolving wealth demographic.
It remains critical for wealth management firms to have thorough discussions with clients and ensure they have well-designed and adaptable intergenerational plans in place.”
"It remains critical for wealth management firms to have thorough discussions with clients and ensure they have well-designed and adaptable intergenerational plans in place."
As Baby Boomers enter retirement and look to structure transfers of accumulated wealth, advisors need to be prepared to ensure the transition is as smooth and as tax-efficient as possible, Cerulli said.
It further cited how US households are expected to transfer close to $70trn to their heirs and charities by 2042.
Baby Boomers are expected to pass on upward of 73% of this amount (a total of $51trn).
Tax efficiency will become increasingly important, given most of the wealth is held by older, high-net-worth (HNW) investors (those with greater than $5m in investable assets) and will likely be subject to more expansive taxes in the coming decade.
For advisers serving older HNW clients who prioritize tax minimisation, emphasizing the importance of pre-emptive and adaptive planning is critical, particularly in the current political climate.
In the US, federal tax changes recently proposed by the current administration would greatly hike the top-line capital gains tax rate, applying to earnings exceeding $1m.
Though this is only expected to apply to roughly 0.3% of the US population, that still means close to one million of the wealthiest households would be significantly affected by this change.
Horton said: "Advisers planning for clients who have significant capital gains exposure beyond the million-dollar threshold should consider stringently managing taxable income by realizing gains up to certain levels, if possible, and plan a strategic gifting and/or donation plan."
With the rates being posed by policymakers, advisers are quickly realizing that resorting to deferrals of gains and income, which has been a major facet of tax planning for years, may no longer be an effective base-case plan for clients.
Though nothing is promised yet, advisers serving HNW households will likely need to put a greater emphasis on sequencing taxable income events both as part of regular ongoing tax management, in addition to advanced pre-emptive estate planning.
These findings and more are from The Cerulli Edge—U.S. Advisor Edition, 3Q 2021 Issue.