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It’s already happening: the colossal wealth transfer between generations—reaching more than $70 trillion by some measures. With this migration comes arguably the most favorable opportunity for customer growth ever known to banks, credit unions and mortgage providers, who must compete with fintech rivals for the money-handling needs of digital-first inheritors.
Steven Ramirez, CEO of customer experience (CX) experts Beyond the Arc, joined the BAI Banking Strategies podcast in early 2023 to discuss this record-setting wealth transfer and the opportunity for financial services providers of all sizes. Ramirez said then that the money migration will not be a one-and-done transfer, rather a rolling wave of inherited investment accounts, real estate, cash and valuables.
This collective inheritance, at least for households positioned to save and invest, will move mostly from Baby Boomers to their children and younger relatives within Gen X and Millennials. And of course, some of the transfers will be in the hands of Gen Z, who alongside the youngest Millennials already have shown a preference for mobile banking over branches, easier bill paying and “I want it now” payments systems.
Plus, younger generations have made it clear that how their banks engage with communities, diversely populate their boards, and perform as corporate citizens all matters.
We caught up again with Ramirez for an update on this continued wealth transfer and what it means for banking strategists, especially in a climate of stock gains, higher interest rates and the wealth-eroding impact of inflation.
Questions and answers have been edited for clarity and length.
BAI: There’s little doubt that the great wealth migration is underway and is something that banking strategists should bear in mind as they innovate, yes?
Ramirez: The stat I’ve seen that really crystallized this all for me: 10,000 Baby Boomers turn 65 every day and right now, that audience controls 57% of the wealth and assets in the U.S. economy. And while they must first support their own retirement and there are some hard-to-measure factors, like long-term care and health issues, many will pass on at least a portion of their wealth.
How much has the bullish run for the stock market contributed to or sped up the wealth distribution? That said, how dependent is the wealth transfer on the robustness of stock returns alone? It’s a phenomenon that’s going to happen regardless of stock levels; it’s just how many trillions are we talking about? But we have seen increases in wealth transfer at a meta level based on stocks, not just the current valuation. Baby Boomers hold stock in a much greater proportion than previous generations. Stock ownership is ubiquitous with retirement via 401(k) plans, say versus defined-benefit plans, such as pensions.
And I would say outside of the stock market, another trend driving wealth is real estate, and particularly in coastal geographies, where real estate makes up a much more significant portion of inherited wealth. Plus, some of the early indicators show this set of inheritors have different preferences for the kinds of investments they’re exploring beyond stocks: venture capital, private equity, startups.
For financial services firms, understanding this demand is important and risk management should be part of the dialogue. Since we’re talking about all the ways portfolios can be divided, there is some research, from Pew, saying that current inheritors are expecting cash holdings to change hands. What does that mean for banks? Wealth management really anchors an entire deposit relationship and of course there are regulations dividing investment and banking, and each investor or wealth holder has a different risk tolerance, but if banks remain sort of the bottom line, where a wealth relationship ends, in a lower-risk pursuit, well banks are going to have to continue to meet those investing and saving needs.
Do you get the sense that banks, of all sizes, are focused on this wealth shift—from the board on down? What are some strategies if they’re not?
Millennials and especially Gen Z are already showing different patterns of spending and saving. They have social aims and other considerations, and they share this. Some of this viewpoint centers on material goods and how as a society we might assign value to material goods. But these considerations have a much stronger impact on their money decisions, and banks are smart to realize this.
Another issue is that Millennials in particular are noticeably going to see their parents age for longer, live for longer, and all the upside with that, but also a longer strain on savings and so on. This is true right now given the higher inflation environment. So Millennials are going to be acutely aware of those costs, which will continue to escalate. This could impact their banking habits. The inheritors are going to be, in one sense at least, living in a different financial world. Data is going to be so valuable, too. This is a generation-changing migration of funds and we’ll have to assess it in real time.
One of the most powerful fin tech innovations, I think, has been seamless account aggregation. Tech that enables your customers to share their banking data from other institutions with you. So why wouldn’t you, as part of that, have this more complete view so that you can really understand not just your little slice of it, but the much bigger picture. And a final point, because Millennials are a hybrid customer used to traditional banking and digital banking, and they’re well into mortgages and other sophisticated financing needs by now, many banks have seemed to say, I’ll focus on Millennials and their inheritance now and worry about Gen Z later. I think it’s a mistake to not be thinking about their needs now, roughly a decade out or so.
How would you size up the possible advantage that larger institutions have just by virtue of partnering with an internal wealth management division? But should that automatically count out banks of varying sizes?
What’s interesting is that Millennials and Gen Z are not fleeing from the large banks, or large regionals, where they can find advanced offerings and a greater openness to digital channels. Of course, wealth migration does also open the door to non-bank financial players as well. But there are roles.
If I’m a community bank, I’m making it clear I know my community better than anybody else. Ask yourself what you’re good at. Maybe in certain communities having the connections to handle the inheritance tied to an art collection doesn’t matter all that much. Let the big banks handle it. Maybe your bank can be good at living trusts and that’s particularly appropriate given the demographics and the folks that are in your area.
How should banks be marketing, messaging, using social media and generally paving the way for this transfer?
I’ve seen a survey that said between Gen Z and Millennials, nearly 60% said they intentionally seek out financial advice online or through social media. To me, that’s a huge opportunity particularly for community and regional banks to play a supportive role with time for customer needs.
Clearly, customers are out there seeking this information. And you have an opportunity to not only provide that information, but I think through social media, you can really make a connection in a human, authentic way.
Steven Ramirez is CEO of Beyond the Arc, Inc.
Rachel Koning Beals is Senior Editor at BAI.
