Generations Differ in Wealth Management Strategies: U.S. Trust

Wealth advisors will find a valuable new twist in U.S. Trust's annual survey of high net-worth Americans, released Monday.

For the first time since the survey's inception in 1993, the 2012 Insights on Wealth and Worth explored differences and similarities across three generations of American wealth: baby boomers (ages 47 to 66), the generation before them (67 and older) and Generations X and Y (18 to 46).

"Understanding these generational differences is important for the wealth advisors and other professionals who guide these families, since it will enable them to better serve their clients and build stronger relationships with them," said Keith Banks, president of U.S. Trust, in a statement.

Consider: 76% of Gen Xers and Gen Yers and 73% of the generation older than the baby boomers said it was important to leave a financial inheritance to their children as a way to preserve the continuity of family wealth and to influence their children's lives after they are gone.

By comparison, 55% of baby boomers thought it was important to leave a financial inheritance to their children. Among those who did not think it was important, 31% said they would rather leave money to charity than to their children.

Moreover, 40% of Gen Xers and Gen Yers had set up a financial plan for their parents' elder care needs, versus 20% of baby boomers who had done so. And 54% of the younger generation group had paid medical costs for parents and other relatives, compared with 42% of baby boomers.

"Our survey points to a shift in generational behavior and outlook, most likely shaped by personal experience and societal responses to economic realities," Banks said. "The next generation has not experienced the consistently strong economic growth or investment returns that baby boomers experienced during the longest bull market in history."

The survey includes many other insights into generational similarities and differences. Gen Xers and Gen Yers were aligned with the generation before the baby boom in their focus on the needs of the family and the continuity of family wealth.

The survey found the youngest generation pragmatic, proactive and disciplined in their approach to investing and wealth management, surpassing baby boomers in planning for wealth for themselves and their families.

Elder care

Eighty-five percent of survey respondents had talked with their spouse about long-term care plans, but 56% had never communicated their plans with their children, and 43% had never talked with parents and older relatives about what that generation's plans and expectations were.

Thirty-three percent of Gen Xers and Gen Yers, compared with only 6% of baby boomers, had bought long-term care insurance for their parents.

Thirty-eight percent of those aged 18 to 46 and 30% of baby boomers were personally financing the cost of long-term care for aging or infirm parents or relatives.

Financially empowering children

Nearly two-thirds of wealthy parents were not fully confident their children would be well-prepared to handle any financial inheritance left to them, with baby boomers having the least confidence.

Only 37% of wealthy parents had fully disclosed their family's level of wealth to their children, and 51% had disclosed only a little. Respondents over the age of 67 who had not fully disclosed their wealth said the primary reason was that they had been taught never to discuss wealth with anyone.

Baby boomers and the younger generation were aligned in being more comfortable talking about wealth. However, most either had not gotten around to it or were concerned that it would negatively affect their children's work ethic.

Estate planning and intergenerational wealth transfer

Although most respondents said they had a basic estate plan, including a will, a healthcare proxy/living will and a power of attorney, only 51% had a revocable trust and only 22% had an irrevocable trust. The youngest generation, in particular, underutilized trusts.

See also: The End of Trusts?

When asked why they have not established a trust, respondents exhibited widespread misunderstanding and lack of professional advice:

43% believed that because their wishes had been outlined in a will there was no need for a trust
31% cited procrastination
17% said they did not have enough money to warrant having a trust
17% purported not to know what the benefits of having a trust were.

Despite their considerable resources, nearly 6 in 10 respondents overall did not have a comprehensive estate plan. And in the face of possible tax law changes in 2013 that could increase estate taxes and lower lifetime gifting limits, many respondents had not taken steps to reduce the size of their taxable estate.

Sixty-seven percent had not made, nor did they intend to make, a financial gift to a loved one before year-end. Only 17% had made a financial gift to a charity.

Approaches to growing wealth

Respondents continued to be cautiously optimistic about the management of their investment portfolio. Most described themselves as independent, opportunistic and smart when making investment decisions, although 23% of the youngest generation of investors described themselves as "exhilarated."

Gen Xers and Gen Yers favored growth over preservation and were more willing to assume increased risk to achieve growth returns. Older generations were more inclined to seek asset preservation and lower-risk strategies.

Overwhelmingly, all high net-worth households believed in diversification to reduce risk over a means to market outperformance.

Seventy-seven percent of youngest-generation respondents said customized benchmarks were a better way of measuring investment performance than broad market benchmarks. This compared with 52% of baby boomers and 55% of older respondents, who valued personalized benchmarks.

Protecting family privacy and security

The U.S. Trust survey found that privacy and security, an emerging area of wealth management, varied significantly by age and experience. Those in the younger, technologically savvy generation were more apt to have taken actions to protect themselves, their finances and personal and physical safety.

However, respondents exhibited a generally low level of proactive activity to protect family privacy and security compared with the level of concern.

1 in 3 high net-worth households thought social media and personal information online had increased the risk to their privacy and safety. Yet, only 13% had sought educational information about protecting privacy and security, and only 14% had ever conducted an analysis of online information about themselves or family.
Just 17% of respondents overall said they were concerned about privacy and safety specifically because of their wealth, with the youngest generation the most concerned (37%), compared with baby boomers (20%) and the oldest generation (10%).
Those concerned about privacy/security worried most about financial ID theft, online theft and intrusion of privacy.
The youngest and oldest generations were the most concerned about physical safety.

U.S. Trust 2012 Insights on Wealth and Worth was based on a nationwide survey of 642 high net-worth and ultra high net-worth adults with at least $3 million in investable assets, not including the value of their primary residence. The independent research firm Phoenix Marketing International conducted the survey online in March.

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