Wealth Transfer and Investment Behaviors

The richest generation in US history will pass away over the next 25 years, with their $68 trillion in wealth transferring to the next generation. The so-called baby boomers, those born between 1946 and 1964, value loyalty and relationships and follow traditional investment practices, often relying on a personal financial advisor. Their children, Generation X born between 1965 and 1977, have grown up in very different historical and financial conditions and are set to bring their distinctive investment behaviors to the market as they take over the management of their families’ considerable resources.

We do not foresee this unprecedented transfer of assets taking place in a vacuum. It coincides with significant structural changes in economic conditions and a rapidly evolving technological environment, which combined with the great shift in investor profile and preferences, will likely have a significant effect on investment behavior. Many Generation X-ers have been described as tech-savvy, self-guided and less trusting (partly due to the 2008 financial crisis). They ascribe great importance to the cost-benefit ratio of services, value transparency and easy comparison between products. They are accustomed to 24/7 smooth, fast and competitively-priced virtual access to their bank, grocery provider or travel agent and expect a similar experience in their wealth management.

Both baby boomers and X-ers prioritize long-term goals in their investment objectives, including paying their children’s college fees and saving for retirement. But it is X-ers who will soon control most of the wealth, disproportionate to their numbers, and saving for the future is a major priority for this generation, in addition to taking care of their families and avoiding risk.

X-ers are no mavericks. They do their homework, including risk-assessments and fee comparisons, though in a 2017 survey 64% indicated an inclination towards investments that rely on the expertise of professionals, including managed portfolios (33%) and mutual funds or Exchange Traded Funds (ETFs) (29%). While many wealth management firms are failing to adapt their work practices to suit the next generation of investors, X-ers’ preference for self-directed learning combined with professional involvement, could lead them to favor Index-linked ETFs, which meet a lot of their needs. ETFs are cost and tax efficient, transparent, flexible and accessible. Their portfolios counteract various selection biases and are understandable by non-professionals yet have the added security of expert involvement in the composition of the fund. When combined with a contemporary, user-friendly interface experience, and the expectation of long-term appreciation, ETFs could prove a preferred investment path for the next generation of wealth-holders in the US.

Disruptive technology ETFs show particular potential in this area because of their structure, conditions and instinctive appeal. X-ers have seen the exponential growth of the computer, internet and cell phone markets in their life-time. Over 80% of them like to try new inventions and devices, and they have personal experience of the far-reaching impact such general-purpose technologies can have. ETFs focused on this sector are targeted towards markets with long-term exponential growth and capital appreciation, therefore seeking to meet one of Gen X’s greatest investment priorities- providing for their children’s education and their own retirement.

The “great wealth transfer” is only just beginning, but it is already clear that traditional wealth management providers will need to adapt to their younger clients, who are well-informed, have direct access to online options and are looking for slick, digital guidance towards unambiguous, low cost investments options. ETFs may yet provide the answer.