Family Fortunes

George Osborne’s pension freedoms may have created a dash for cash by retirees, but advisers might want to focus attention on the tail-end of his changes – the ability to cascade cash down the generations.

The post-war demographic boom that created the Born In the ‘Fifties generation (BIFs) awarded that cohort with unprecedented privilege. Beyond free university education and low-deposit housing, most significant was a fundamental shift in financial opportunity. In 1956 Ross Goobey, the manager of Imperial Tobacco’s pension fund, revolutionised long-term investment strategy when he declared shares provided better long-term inflation-adjusted returns than bonds. This sparked the engine of a massive global transfer of pension assets from bonds into equity.

Twenty years later, BIFs were working and beginning to generate growth in earnest. Both UK inflation and interest rates reached 17% in late 1979. Western governments responded by adopting economic strategies championed by Milton Friedman. So-called ‘free-market’ economics disavowed state interference and created a freewheeling, debt-driven, deregulated and high-growth global economy. Since 1980, the FTSE All Share index has returned over 12% a year. UK Treasuries have produced over 7.5% pa. I repeat, that’s compound, per annum, over 35 years. The US story is almost identical – by 2011 bond markets had delivered more than over any 30 yr period since 1861.

We now have interest rates at rock bottom. Since 2000, we’ve begun to see the demographic impact turning negative; instead of accumulating and acquiring, BIFs are focused on decumulating and lifestyle maintenance. Consumer driven growth (in the West) will wane, while the next generation will be the first that is likely to be less wealthy than its parents. Those clients who see their families struggling to find tuition fees and house deposits, faced with rising interest rates and low growth – ie problems they never had – may want to do something about it.

US wealth managers are well used to planning the transfer of wealth through generations. Their experience mirrors the ‘Buddenbrooks effect’ named after the eponymous novel by Thomas Mann, which chronicles the rise and fall of a family’s fortune over the generations. In précis, the first generation makes it, the second spends it, and the third blows it. This knowledge should underline the importance of financial planning versus investment advice in the new pensions landscape. Comparing the efficacy of an inherited drawdown fund, versus a bypass trust where ‘control from beyond the grave’ can protect the family from a spendthrift beneficiary should be hugely valued versus mere ‘fund picking’. But that assumes advisers care about, and engage with, their clients’ kids.

Those US advisers are servicing the same generation as UK advisers. They have already recognised that if you don’t take on new clients, intending to sell-out and retire, a savvy buyer will want to know how close you are to the whole family and not just Mum and Dad.

If you think this is a minor issue, consider this: in a recent survey of US financial advisers*, 66% of children ‘fired’ their parents’ financial adviser after receiving an inheritance. Over 70% of advisers questioned said they rarely or never engaged with clients’ children – and bear in mind we’re talking about ‘kids’ who are probably beyond their teens at least.

Offering a ‘family office’ type service through the generations requires your business to remain in existence 30 years and more from now. If you’re dedicated to creating a sustainable business, you’ll need to consider what the income stream would look like if two-thirds of your best clients wave goodbye. If you are going to set up a family office business model, does your business have a succession plan? If so, how might your successors (maybe your own children) need to update your service proposition to serve a client base that expects a different, more digitally based service experience?

In conclusion, this isn’t just about your clients’ legacy. It’s about yours too.

*InvestmentNews Data, 2015

First published in Professional Adviser