You likely have heard the buzz about what has come to be known as the Great Wealth Transfer. Within the next two decades, an estimated $84 trillion will be passed down to charities and younger generations — e.g. Millennials and Gen Xers —from their parents and grandparents, and it’s expected to shake up the financial services industry as players jockey for position with beneficiaries.
While Gen X, Millennials, and Gen Z are destined to be the biggest beneficiaries of the Great Wealth Transfer, so too are their preferred financial providers. The ability for banks and other financial institutions to compete for these assets in movement will depend on how prepared they are to address inevitable changes in the economy, technology and culture that will impact the next two decades.
Here are three trends to keep in mind as The Great Wealth Transfer plays out:
- Fintech brands are rapidly gaining market share with younger generations.
- Technology will be integral to the process as digital capabilities like account aggregation and virtual meetings will help families manage estates effectively.
- Large banks have unrivaled budgets and are investing heavily in digital transformation.
As a fintech company focused on innovative digital wealth solutions, SigFig is uniquely positioned to help banks to modernize their wealth management services and compete for this transfer of wealth through streamlined advisor-led and self-directed investing solutions.
The Shift in Assets is Beginning
According to Federal Reserve Board data, Baby Boomers (born 1946–1964) and, to a lesser degree, the Silent Generation (1945 and earlier) control 65% of the nation’s wealth — or roughly $88 trillion.
Traditional banks have long enjoyed a firm foothold with these older investors. According to a recent EY survey of more than 5,000 consumers, wealth managers and banks (national, regional and digital) are considered the most trustworthy financial brands by the majority of individuals above the age of 65 (57%). That holds true for the 55-64 age group (51%) as well. However, there’s a definitive shift among younger cohorts, with 51% of Gen Z and 49% of millennials naming a fintech as their most-trusted financial brand. This trust has been gained by delivering on these younger generations’ demands for more personalized, streamlined and secure experiences. As such, leveraging a fintech partnership to deliver better experiences through technology, even if white-labeled, can help banks build trust and maintain market share.
While traditional banks have the advantage of incumbency and can offer several advantages to these soon-to-be wealthier households, heirs and beneficiaries of the Great Wealth Transfer won’t necessarily trust their new-found windfalls with their parent’s financial advisors. In fact, there are growing signs that many are likely to switch institutions. Banks will need to show that they are nimble and can keep pace with the expectations of younger generations to win this business.
FinTechs Continue to Gain Market Share Among Younger Investors
Digital-only banks are positioning themselves among long-standing market leaders. According to a report by Galileo Financial Technologies, while Baby Boomers and Gen X hold most of their funds in a traditional account, Millennials and Gen Z approach their finances differently, keeping 56% and 53% of their funds in some form of digital or prepaid account, respectively.
It’s a trend that is growing. A recent study by PYMNTS.com shows that 57% of millennials and bridge millennials are extremely or very interested in using a digital bank in the next 12 months. The primary reason provided for considering the move to a digital bank was access to improved transfers, with 43% of consumers saying that this is their greatest motivator. Lower costs and better notifications were other top motivators. The study revealed that Millennials are also interested in digital banks because they perceive digital banks to be more secure and provide earlier access to the newest technologies.
Technology Will Be a Catalyst for Change
Settling an estate is often a lengthy, complicated process — and the larger the estate, the more complex it will be. Ongoing management also requires substantial time and commitment.
Siblings may have dual responsibilities managing their parent’s estate — for example, one may have durable power of attorney managing day-to-day expenses whereas the other might serve as an investment trustee. While seeing to their respective duties, both could receive different answers to the same questions, opening the door to miscommunication, missteps and costly delays.
There will be strong demand for collaborative, easy-to-use technology such as virtual conferencing and chat functions so that all parties have regular, planned communications and are on the same page. Equally important will be technology’s ability to manage the estate over the longer-term, managing portfolios to stay on track to meet goals and automatically making changes as needed.
The firms that are able to guide younger generations through this financially challenging time and establish enduring relationships will be well positioned for the foreseeable future. Building education support for more complex planning topics, including how to manage the impact of taxes, setting appropriate investment goals and succession planning will become increasingly important and will help distinguish your brand.
Investing in Digital Transformation
Technology has cemented its place in the financial services industry, and it will remain a key differentiator during this upcoming period of change. To win the next generations, banks will need to show that they offer all of the conveniences of the latest financial innovations, while also being reliable and secure. Some of the bigger trends include more personalized offers to meet clients’ unique needs, expansion into non-traditional digital assets and providing more virtual collaboration and interactive learning tools.
Fortunately, great size begets great budgets for innovation, allowing upgrades to legacy infrastructure. Given the current economic climate, many financial institutions have grown increasingly skeptical of spending, however, optimizing front-end and back-end tech remains a priority to ensure the most seamless customer experience and overcome the perception that traditional banks are tech laggards.
According to a Bank Director survey of upper management at US banks, 81% of respondents stated their firms increased their technology budgets in 2022, with a median increase of 11%. Moreover, roughly a third of respondents believed their bank needed to allocate more money toward technology (otherwise, practically every other respondent said they spent enough). These figures shouldn’t be too much of a surprise considering 45% of participants selected “outdated tech” as a chief concern.
A Strategy for Winning the Great Wealth Transfer: Fintech Partnerships
Banks and fintechs complement each other well. Banks have robust resources, extensive customer bases, and decades of experience — but can sometimes be challenged with outdated IT infrastructure. Fintechs have agility, valuable technological capabilities, unique talent and are gaining in brand positioning in the eyes of younger generations.
By partnering with fintech providers, banks can sidestep legacy infrastructure hurdles and round out their services, which can help them secure the business of future generations. These alliances are not only common practice, they’re also viewed favorably by consumers. By McKinsey’s estimates, approximately 80% of the top 100 banks have partnered with at least one fintech. Previously, that figure was only 55%. Additionally, per EY’s survey, roughly three in four people between the ages of 18 and 44 highly value the benefit of bank-fintech partnerships.
The Advantages of Partnering with SigFig
The Great Wealth Transfer will shape the financial services industry for decades to come. Traditional financial institutions have a good opportunity to maintain or even gain market share if they invest in upgrading their technology to create better customer experiences. Banks, financial advisors, wealth managers and fintech companies can benefit from combining their core competencies to address the growing digital needs of newer generations.
SigFig products help financial institutions to streamline their wealth management experiences across investment types and deliver advice when and how they want it. SigFig’s Digital Advice and Digital Advice Pro products offer features like digital onboarding, daily portfolio health checks and automated rebalancing, while also offering advanced collaboration solutions. For example, SigFig Engage allows multiple people to meet with an advisor simultaneously or separately around the same accounts, planning, etc., which can help distinguish your brand during the Great Wealth Transfer.