The changing preferences of next-gen clients: Asset allocation

How the family chooses to invest their assets is becoming increasingly more top-of-mind as younger generations become more involved in the process. The next generation of investors is mission-driven and cares deeply about social and environmental matters. In fact, 57% of Gen Xers and 79% of millennials prefer to invest in companies with a positive or environmental impact. Women are also known to believe that a company’s track record on the environment as well as social and governance factors are important considerations for investing. The advances that have been made in sustainable and environmental, social and governance investing make this an opportune place to engage the next generation in the investment process. With the mounting evidence that sustainable and ESG investing, when executed well, can lead to improved risk adjusted returns, there are fewer arguments against it from an economic perspective. Meanwhile the future client base in wealth management is far more interested than prior generations in having their investments reflect their values, and the Covid-19 pandemic has accelerated the focus on these matters. Committing to sustainable investing as fundamental to a long-term investment approach could be essential to engaging the next generation.

There are other notable preferences that can be incorporated into the approach to investing and further engage clients. Future generations are known for having similar risk tolerances but with a greater interest in taking calculated risks. They are also actively looking for new investment ideas. These preferences can be satisfied by complimenting core investment strategies with investments that provide additional return potential or risk mitigation, depending on the opportunity. These investments can be the perfect area of focus when engaging the next generation. For example, thematic equity investment strategies focused on innovations in technology or health care or investments in specific economies such as China. These are all areas of interest to the next generation that can be appropriately incorporated into long term, diversified investment strategies. 

PEOPLE

Having the right team in place is the first step in educating the next generation on the responsibilities that come with stewarding family wealth. It’s important for the entire family to feel comfortable with the fiduciary, legal, tax, and investment professionals who help oversee that wealth every day. 

Understanding each role can go a long way in preparing the next generation when it’s time to take over the reins. In some cases, family members may feel that they are best equipped to serve as a trustee, executor, or power of attorney. Yet, they may be unaware of the skillset, requirements or time involved in serving in such a capacity. For example, a trustee or executor should be able to understand complex tax, administrative, and regulatory issues, and have the time, resources, and knowledge to carry out the family’s wishes. If poor or uneducated decisions are made by a family member serving as a trustee, he or she could be liable personally for breach of fiduciary duty if sued by the beneficiaries of the trust, who can include future generations. A corporate trustee or executor is regulated and monitored by government agencies and can have the technical expertise, financial strength and resources to help ensure that the interests of all beneficiaries are protected. Often, a corporate trustee or executor is a more objective and appropriate choice than a family member or trusted friend.

Adviser teams may also need to think through who will be interfacing with clients. As demographics of the client base changes across numerous dimensions including gender, race, ethnicity, skill sets, backgrounds and interests – the demographics of Adviser teams may need to evolve too. Skill sets will likely also need to expand to include expertise in areas such as planning, health care, sustainability and lifestyle. 

In the next article in this series, the authors examine the importance of planning.

Alvina Lo is chief wealth strategist and senior vice president at Wilmington Trust and Stephanie Luedke is head of private wealth management at Neuberger Berman.