Wealth transfer requires steep rise in investor knowledge

With the great wealth transfer underway, asset and wealth managers must raise awareness of the key principles of investing.

The much-trumpeted intergenerational transfer of wealth between the post-War ‘Baby Boomers’ and their heirs is now in progress, estimated at $100tn by Cerulli Associates.

The main beneficiaries will be Generation X (born 1965-80) and Generation Y (1981-94). Their rise coincides with a concerted push to convert savers into investors. Indeed, the European Commission aims to redirect €10tn from low-interest bank accounts to investment products with higher return potential.

These key trends are highlighted in the latest global survey of asset and wealth managers from Citi and Create-Research. It covered a broad cross-section of 269 asset managers in 26 countries, with a combined AuM of $37.13tn.

Many among the emerging generation of mass affluent investors will be tech savvy, resulting in increasing demand for digital-first experiences, but allied closely to human advisers whenever needed. They are more engaged than their predecessors, using digital investment platforms on a scale unimaginable before the Covid-19 pandemic.

New model army

A new ‘Buyer 2.0’ model is coming into view. It comprises high net worth investors, hungry for insights yet still able to cover many of their investment needs in their own time without external human help.

These investors are expected to be the main drivers of top-line growth during this decade. In parallel, regulators are looking to help ensure these opportunities come with guardrails, via enhanced fiduciary responsibility on the part of asset and wealth managers.

This is just as well, since a fog of uncertainty has descended on the global investment landscape as the macro and political environment continue to evolve, with implications on current global trading and financial architecture. In the light of this, the endgame remains unclear from an asset allocation perspective.

Taking a three-year forward view, the key theme emerging from our survey appears to be one of higher volatility and wider return dispersion across asset classes, styles, sectors and geographies (see chart).

The most prominent is alternative investments in private market assets. Some see them as the main beneficiary of the democratisation process — via tokenisation — as the Baby Boomer wealth transfer progresses apace. Some also see these assets as credible sources of diversification based on their past track record: private equity and venture capital for high returns; private debt for good returns and inflation protection from its floating rate structure; infrastructure and real estate for capital growth, regular cash flow and inflation protection.

On the flipside, however, there  are concerns that stellar returns from the alternative investments of the recent past may well be in the rear-view mirror. The level of ‘dry powder’ — capital allocated but not invested until the right time — lately reached an all-time high. The new wall of money may well see a dilution of returns with the declining opportunity set. Just as notable, in the past three years, many asset managers in private equity have been left with a towering cumulative $3.2tn in unsold assets — covering 28,000 unsold companies — according to Bain & Co. An Illiquidity premium is far from guaranteed.

Traditional major asset classes like equities and bonds will continue to attract muted interest because of uncertainty around how the current tit-for-tat tariff dispute will eventually play out. For some survey respondents, there were already question marks about US equities, given that they were flirting with historic highs even before the dispute. Yet, other respondents continue to see equities in general and US equities in particular as a key pillar of diversification.

Similarly, respondents have an open mind about bonds. Some believe the US and its trading partners might well seek to reflate their economies with budget deficits and let real interest rates rise, causing falls in the value of fixed coupon bonds. Yet, other respondents see sovereign bonds as potential safe havens in current turbulent times. That has also reduced current interest in commodities and digital assets, considered too volatile and requiring good market timing skills.

Chasing the winners

Digitally savvy does not always mean investment savvy. Experience shows mass affluent investors often do not act on clear information and analysis. These investors often engage in market timing, that frequently hurts returns and jacks up costs. There can be a pronounced tendency to chase yesterday’s winners. Such procyclical investing is evident globally, especially in Asia, where the average holding period for mutual funds is 6-9 months, due to overtrading.

Our survey concludes that asset and wealth managers have to raise awareness of the key principles of investing, key risks that can hurt the portfolio and key techniques that help minimise downsides and maximise the upsides. There appears to be a dire need for objective, jargon-free education on investment basics.

As part of their thought leadership, some asset and wealth managers already offer simulations that engage clients to make decisions in real-life scenarios and use results as learning points. This helps empower them to ask the right questions and make more informed calls. The majority of investment players has to follow suit, in order to benefit from the historic wealth transfer.

Matthew Bax, gobal head of sales & client management, investor services at Citi; and Amin Rajan, CEO at Create-Research and a member of The 300 Club