Over the next three decades, an estimated five trillion pounds is set to pass hands between baby boomers and younger generations, according to the King’s Court Trust. Though this transferral of wealth is set to peak in 2035, it is fair to say we are well in the midst of the single greatest inter-generational shift in capital power on record.
After all, £5 trillion is no small sum – indeed, today it represents a significant slice of the world’s total wealth. The trickling down of such a fortune will enable and empower a new clique of investors with an entirely new set of priorities, interests, and emerging trends to follow and capitalise on.
This new direction of capital represents a challenge for financial services companies to demonstrate agility in continuing to manage the flow of assets, and manage the transition as seamlessly as possible.
For lenders, this will mean ensuring a strategic position across a number of areas.
Growth of digital
Nexgen investors will be, for the first time, an entirely digitally native cohort. With new fintech services popping up regularly to explore the younger generations’ appetite for experimentation with their finances, greater impetus is placed on the wider sector to meet the needs of their clients for the long haul.
This means centralising the use of existing and developing technologies. Of course, as a task this does not reflect thankless future-proofing on our part; embracing technological innovations is a proactive measure to improve efficiency and diversify our means of communication, engagement and supporter with our customers.
A drawback that the sector must be alert to – particularly as a historic industry which is transitioning from analogue modes of operating towards digital – is to not allow the rush towards technology to erode the importance of individual customer communication.
The pursuit of greater efficiencies will, naturally, result in some loss of each borrower’s individual circumstances and needs – which in turn, risks dissatisfaction on the customer side.
A fine balance must be struck between building a robust and future-facing structure that takes in preparation for the industry’s shape of tomorrow, alongside maintaining the human face. For younger investors who value authenticity more highly than their preceding generations, though with no reduced focus on efficiency, is will be a critical balance to strike.
ESG responsibilities
It is also commonly anticipated that we will see a more conscientious class of investors, as young high net worth individuals (HNWIs) appear increasingly drawn to using their capital scrupulously, favouring investments in social goods and showing less inclination towards products and organisations that contribute to, for instance, climate change.
For this reason, close attention should be paid to Environmental, Social and Governance (ESG) – which will certainly rise in significance as the years pass.
A recent study by PwC found that positions in sustainable investments in Europe are expected to reach €7.6 trillion in the next five years – an increase of more than threefold, and a figure which would represent a majority share of European investment funds.
Research from Deloitte indicates a similar shift in pitch. Younger HNWIs are expected to use their capital and business clout to influence policy and impact on matters that matter to them – including the relationships they build with companies.
Just as this will influence the shape of the business world, so too will it hold sway over the financial services industry, as lenders will need to ensure they can assure lenders that they are credible and suitable for them in the areas of environment and social issues.Â
Property to hold firm
The UK property market is, and has been for a number of decades, something of a juggernaut, showing impressive inelasticity to wider economic shocks, and providing a safe haven for investment from HNWIs. This has turned into something of a self-fulfilling prophecy; the market’s buoyancy is often underpinned by the continued interest of wealthy individuals.
Many will fear that the nexgen investors may turn away from property. Many indicators, for instance, point to their increased appetite for high risk investments with higher, and shorter term, potential yields – including digital assets such as NFTs.
However, Knight Frank’s Wealth Report offers a valuable contrasting view, highlighting that despite the more global and holistic outlook of the youngest cohort of HNWIs, they still consider property to be a crucial cornerstone of their investment portfolios. In this case, higher risk investment avenues will supplement, rather than supplant, the proven track record of UK property.Â
Lenders should note, however, that the younger generation are more measured in their plans for property – looking more closely at liquidity and returns potential, over emotional attachments and speculations based on personal knowledge.
The financial services industry, then, has plenty to keep it on its toes over the coming years. It is evident that, while the trend of wealth transferral will continue to grow, the next generation of investor is already here, and clearly influencing the direction of markets.
Close attention must be paid to developing the flexibility and agility within the sector to respond to changing needs, and re-enforce those growing aspects of our industry which look likely to become touchstones of authenticity and credibility to wealthy clients in the years ahead.
Alpa Bhakta is CEO of Butterfield Mortgages Limited
