The “Great Wealth Transfer” is well underway, with over $100 trillion expected to be transferred from older generations to their heirs by 2048, according to Cerulli Associates.
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As the baton of wealth is passed to younger generations, the heirs of wealthy families are taking a more active role in the impact they seek to make in the world through the use of the traditionally monolithic Family office for more innovative, value-oriented investments.
The large wealth transfer is in full swing, with over $100 trillion expected to be passed on from older generations to their heirs in the United States by 2048, according to a December study report from research and consulting firm Cerulli Associates.
“There is a large transfer of wealth between generations, but the preferences of baby boomers are significantly different from the preferences of … millennials,” said Nirbhay Handa, CEO of global migration platform Multipolitan CNBC Do it.
“Now there is this younger generation that really believes that winning and progress should go hand in hand,” Handa said.
A fundamental change
The Millennials (ages 27 to 42) and Generation
Generation Z and younger generations (ages 27 and under) are expected to inherit over $15 trillion.
Notably, the majority of wealth transfers will come from high-net-worth (HNW) and ultra-high-net-worth (UNHW) families, which together make up around 2% of all households, according to the report. These families are expected to contribute over 50% of the transfers, or about $62 trillion.
Compared to baby boomers and older generations, “the (younger generations) are less motivated by money, if I generalize, but much more (motivated) by their contribution to society,” said Martin Roll, an INSEAD Distinguished Fellow and family business and family Office expert for McKinsey and Company. “They look out the window (and say), ‘What’s coming? What are the big questions of our time?’”
The generation
“I think sustainability and the whole ESG narrative is extremely robust (among younger generations),” Multipolitan CEO added. “They may not be interested in investing in fossil fuels or oil and gas, but they are very interested in investing in a company like Oatly … or Beyond Meat,” Handa said.
Family offices have become centers of innovation.
Nirbhay Handa
CEO, Multipolitan
This change in investment attitudes among the younger generation is a necessity, said Handa.
“People see wars, they see the effects of climate change… there is a shortage of drinking water in many parts of the world,” he explained. “As a result, this generation has become more determined to focus on things that align with their personal values.”
“The challenges are real… Yes, we talked about climate in the ’60s and ’70s, you can find them in the American newspapers back then, but it was just a little more abstract. Now it’s real. Storms are coming, flooding is happening, hurricanes are becoming more common…that’s proof (and) they see it,” Roll said.
“Centers of Innovation”
Another major change can be observed in how some Family offices are executed.
“The whole idea of family offices is less rigid than it used to be…Family offices have become centers of innovation,” Handa said. The younger generations of wealthy families have grown up in the age of digitalization and are increasingly investing in technology and startups.
They’re trying to discover and invest in technologies that can be a “lever for impact,” Roll said. “For example, investments in climate technology, education technology, food processing, water treatment, natural resources, renewable energy.”
In addition, younger generations are investing more actively through their family offices.
“30 years ago, family offices were primarily equity shares in the company that the family owned through the family office and were tied up in real estate, some broader public stocks and (overall it would be a) passive portfolio,” Roll said.
However, family offices are becoming more and more common these days direct Roll added that investing in private companies is not traditional.
“The parents used to be what I call monolithic – they ran a single company, but the younger people who came in might not be interested in chemicals, which is the core business, so they’re starting to diversify (through) the family office said Roll.
Why is the great wealth transfer happening now?
Although it is true that wealth has always changed hands, the significance of our generation’s great wealth transfer can be explained by looking back to the third wave of the Industrial Revolution.
“It was really the industrialization, particularly of the Western world, that happened in the ’50s and ’60s, ultimately with the rise of America after World War II and Europe – a lot of wealth was created,” Roll said.
From this postwar “boom” came about 40 years of “outstanding economic activity,” which led to the emergence of new industries, large companies and, ultimately, the rise of the middle class in the United States and Europe, Roll said.
“That’s why jobs were created…Everyone got a car, people got a house…So there were a lot of big changes that enabled this kind of wealth creation,” Roll told CNBC Make It.
It was this older generation that really built “the world and wealth after World War II,” and “that wealth, including business interests, is now being passed on to Generation X, but of course also to younger people,” he told Rolle.
Combining the old with the new
What does it mean for the world as a whole when trillions of dollars change hands?
“This massive money shift means that the way things were done in the past is not necessarily the way things will be done in the future,” Handa said.
“This era is about vitality, liveliness and commitment. It’s about democratization, it’s about entitlement, it’s about accessibility,” Handa said. “Investment preferences are changing and old institutions must adapt to the new world.”
When younger generations eventually inherit the wealth, Roll said, “I think you’ll see the money do a good job.” It’s being reinvested in the economy… in technology, and I think in some of the great challenges of our time: climate, gender issues, minorities, villages, poor people and basic education (education).”
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