This year, in my annual closing article, I want to introduce you to a topic that caught my attention in 2023 and will continue to be relevant for years to come.
Some time ago, I started hearing the term “The Great Generational Wealth Transfer” and began to wonder about the potential impact it could have on the financial and investment sectors.
The Great Generational Wealth Transfer refers to the transfer of wealth from baby boomers(1) to their heirs, valued at $84 trillion(2), making them the richest generation in history.
In my view, this shift will lead to a significant change in investment methods, driven by several key factors:
- Introducing new assets into investment portfolios. Assets such as cryptocurrencies or fintech will gain more weight and interest among these new generations and represent an increasingly important part of their portfolios. This interest is translating into a growing appetite among traditional mutual funds, which are allocating more weight to the asset class. According to a PwC(3) report, 38% of these funds invest in digital assets, a significant increase of 21% from last year. Moreover, it is estimated that the number of funds dedicated to cryptocurrencies now exceeds 300 worldwide, a number that is constantly growing.
- Consolidation of certain trends. Not only what we invest in will change, but also how we invest. Trends such as ESG (Environmental, Social and Governance) will become more important in the industry due to the increased awareness of these generations. According to the latest Inverco Observatory, 70% of millennials take ESG factors into account when investing, and the share of assets managed according to ESG criteria is already 55% of all asset classes marketed in Spain(4). It should also be noted that these assets have proven to be more profitable than their non-ESG(5) counterparts.
- The evolution of the financial industry. Finally, the third major change will occur through two channels.
- Designing new financial solutions. Tools such as robo-advisors, artificial intelligence or fintech solutions will have to be integrated into the offer of financial institutions. These digital natives will not only demand high profitability like the boomers, but also better navigability and the integration of all the technological possibilities we are living.
- More active involvement in decision making(6). Gone are the days when we delegated all management to our fund manager. We will increasingly want to influence the decisions that are made with our investments, and even the way we invest or transact will change. We have already talked about incorporating digital assets such as cryptocurrencies, but with the wide range of increasingly specific financial services available, we will need to go one step further to tailor our offering to the needs of our clients.
In short, this great transition will accelerate many changes in the type of investments we have access to and the way we invest.
(1) Generation born between 1946 and 1964.
(2) Cerulli and Associates estimates that beneficiaries will inherit $84 trillion by 2043.
(3) 4th Annual Global Crypto Hedge Fund Report by PwC – AIMA – CoinShares.
(4) Sustainable and Responsible Investing in Spain 2023 study by Spainsif and DWS.
(5) Morningstar has shown how ESG indexes outperform their non-ESG counterparts.
(6) This is one of the key points made by veteran City financier Ken Costa in his book ‘The 100 Trillion Dollar Wealth Transfer’.
The key will be intergenerational co-investment. As Gordon Gekko said, “Money itself is neither lost nor gained, it is simply transferred from one perception to another.
Finally, I would like to take this opportunity to wish you all a Merry Christmas and a prosperous 2024, full of personal and professional achievements. May all our dreams and those of everyone around us come true.
