The “Great Wealth Transfer” is in full swing as older generations are expected to inherit more than $100 trillion by 2048, according to Cerulli Associates.
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As the baton of wealth is passed on 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 traditionally monolithic family office more innovative value-based investments.
The great transfer of wealth is in full swing as, according to a December study, it is predicted that by 2048 in the United States, more than $100 trillion will be transferred from older generations to their heirs report by the research and consulting company Cerulli Associates.
“There is a large intergenerational transfer of wealth, but the preferences of the baby boomer generation are drastically different from those of… millennials,” said Nirbhay Handa, CEO of global migration platform Multipolitan CNBC Do it.
“Now we have a younger generation that really believes that profit and progress should go hand in hand,” Handa said.
Sea change
The report shows that the biggest beneficiaries of wealth transfer are Millennials (ages 27 to 42) and Generation X (ages 43 to 58), and are estimated to inherit about $85 trillion between 2024 and 2048.
Gen Z and younger generations (ages 27 and younger) are expected to inherit more than $15 trillion.
It is worth noting that 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 cover more than 50% of the transfers, or about $62 trillion.
Compared to baby boomers and older generations, “(younger generations) are less motivated by money, if I'm generalizing, and much more (motivated by) contributing to society,” said Martin Roll, INSEAD Distinguished Fellow and Office of Family and Family Business Expert McKinsey and Company. “They look out the window (and ask): 'What awaits us?' What are the most important questions of our time?”
Gen X and Millennials are interested in social impact, with topics such as climate change, diversity, health and well-being, and safeguarding against geopolitical conflict being the most important, Handa said.
“I think sustainability and the whole ESG narrative is extremely solid (among younger generations),” added the Multipolitan CEO. “So they may not be interested in investing in fossil fuels or oil and gas, but they are very interested in investing in companies like Oatly… or Beyond Meat,” Handa said.
Family offices have become centers of innovation.
Nirbhay Handa
President of the Management Board of Multipolitan
This change in the approach to investing among younger generations was a necessity, Handa said.
“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 is focusing more decisively on things that align with their personal values.”
“The challenges are real… yes, we talked about climate in the 1960s and 1970s, you could find it in American newspapers back then, but it was a little more abstract. Now it's real. Storms are coming, flooding is happening, hurricanes are more frequent… that's proof (and) they see it,” Roll said.
“Innovation Centers”
Another significant change can be observed in the way some… family offices are launched.
“The whole idea of family offices is less rigid than it used to be…Family offices have become centers of innovation,” Handa said. Growing up in the age of digitalization, younger generations of affluent families are investing more and more in technology and start-ups.
They are trying to discover and invest in technologies that can be a “leverage of impact,” Roll said. “For example, investing in climate technologies, edtech, food treatment, water treatment, natural resources, renewable energy.”
Additionally, younger generations are more active in investing through their family offices.
“30 years ago, family offices consisted primarily of equity interests in a company that the family owns through the family office and were tied to real estate, some broader public equities and (generally speaking, it would be) a passive portfolio,” Roll said.
Today, however, we see family offices more and more often direct investing in private companies, which is not traditional, Roll added.
“The parents used to be what I call a monolith – they ran one company, but the young people who come in may not be interested in chemicals, which is the main business, so they start to diversify (through) the family office,” Roll said.
Why is this great wealth transfer taking place now?
While 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, especially in the Western world, that took place in the 1950s and 1960s, ultimately with the rise of America after World War II and Europe, that created enormous wealth,” Roll said.
This post-war “boom” was followed by about 40 years of “outstanding economic activity” that led to the creation of new industries, large enterprises, and ultimately the rise of a middle class in the U.S. and Europe, Roll stated.
“That's why jobs were created… Everyone got a car, people got houses… so there were a lot of major changes that made this kind of wealth creation possible,” Roll told CNBC Make It.
It was the older generation that really built “the world and the wealth after World War II” and “that wealth, including business shares, is now being passed on to Generation X, but also of course to younger people,” she said. Roll.
Combining the old with the new
Overall, what does this mean for the world as trillions of dollars change hands?
“This huge change in money means that the way things have been done in the past will not necessarily be the way things have been done in the future,” Handa said.
“In this era, what matters is vitality, liveliness and commitment. It's about democratization, aspiration and accessibility,” Handa said. “Investment preferences are changing, and legacy institutions must adapt to the new world.”
Ultimately, as younger generations inherit wealth, Roll said, “I think money (does) a good job. They will be reinvested in the economy… in technology and, I think, in some of the greatest challenges facing our time: climate, gender issues, minorities, villages, poor people and basics (education).”
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