Updated November 2017 — Trends in wealth management are being fueled by dynamics at the center of wealth transfer. Financial needs are changing dramatically as affluent individuals grow older and begin transferring their wealth to younger generations — and as successful Millennials and inheritors join their ranks, according to Katherine Dean, Head of Family Dynamics at Wells Fargo Private Bank. As wealth professionals focus on meeting those evolving needs, technological innovations may be changing the face of wealth management for younger generations in the process, adds Erik Davidson, CFA®, Executive Vice President – Chief Investment Officer, Wells Fargo Wealth Management.
Here are three of the top wealth management trends that U.S. customers could see in the coming months and years, with perspective from Davidson and Dean about potential impacts.
Online portfolio-management services have actually been around for several years. However, they are becoming increasingly attractive to younger, cost-conscious investors, says Davidson. Robo-advisors use customer information and certain algorithms — but no human financial advisors — to suggest investing options to users.
“Robo-advising sites can be a nice way for young, beginning investors to get into the market,” notes Davidson. “However, the advice tends to be fairly cookie-cutter and not tailored to an individual’s personal circumstances.”
As younger investors mature — and their lives typically become more complex with their wealth holdings increasing and becoming more varied — they may be better served from the guidance of experienced, human financial advisors. Unlike online services, Davidson says, investment professionals can help clients with accounts and property in multiple states, accounts with varying tax treatments, estate or inheritance issues, and much more. “Robo-advisors typically can’t handle that kind of complexity,” he says.
“Coaching families on how to transfer and extend their wealth is going to be very important in the coming decade.” — Katherine Dean, Head of Family Dynamics at Wells Fargo Private Bank
2. Family legacy planning
“The financial industry is in the midst of a major transfer of wealth from one generation to the next,” says Dean. However, some studies show that more than half of wealthy parents have not disclosed anything about their financial or estate plans to their family. In addition, according to this Special Report: Estate Planning & Taxation, up to 70 percent of wealthy families are unable to successfully transfer their wealth from one generation to the next generation.
“We want to work with our clients to change that,” says Dean. “In our experience, focal areas that aid in managing challenging family dynamics include preparing heirs, opening up communication, and developing a shared purpose across the family.”
Candid sharing of situations, values, and goals is a great way to begin uniting families under a common vision for the legacy they want to achieve. Inclusion is an important component of this work; family members need to know that they are well informed and that their opinions will be heard and respected as together they agree on a mission for their wealth.
“We find that the more common ground wealthy families can create, and the more they are able to communicate openly across the family, the more likely they are to retain their wealth from generation to generation and use it in meaningful, long-term ways,” says Dean.
3. Behavioral economics awareness
“There’s a wealth of investment science out there based on facts. For instance, it’s fact that appropriate asset allocation, diversification, and global investing tend to be beneficial to our portfolios,” says Davidson. However, the irony is that even smart investors resist or avoid useful financial facts from time to time.
Davidson likens this challenge to health care: You may know intellectually that you should eat less and exercise more, yet thanks to human nature, you might not always do those things.
“Behavioral economics research has helped explain that overcoming behavioral biases, like our desire for immediate gratification, often applies to investing,” explains Davidson. One way companies have tried to help workers save more, for example, is by introducing features such as auto-escalation in 401(k) accounts so that the account owner doesn’t have to remember to manually increase his or her savings over time.
Experienced wealth advisors will increasingly focus on educating and coaching clients through financial decisions that may have behavioral or psychological components.
Talk to your advisor
At your next meeting with your financial team, Davidson suggests mentioning the above trends and asking how they might apply to your portfolio and to your individual financial needs.
You may also want to talk about when and how to begin bringing other family members into your meetings with Wells Fargo Private Bank. “Coaching families on how to transfer and extend their wealth is going to be very important in the coming decade,” says Dean.