NBK Wealth Thought Leadership: Wealth Transfer and Optimal Capital Allocation
Wealth Transfer and Optimal Capital Allocation
How will your success impact your loved ones and how will you transfer your wealth to the next generation?
Wealth transfer and optimal capital allocation are key concepts to managing and maximizing intergenerational wealth and establishing a legacy.
Wealth to be inherited through 2045 by generation ($trillion)1
1. Source: Cerulli Associates, Merril Lynch
Older investors are often advised to take less risk, this is sensible when the investor has saved just enough for a comfortable retirement and there is a risk that he/she runs out of money in case of a drawdown. For a high-net-worth individual who has created significant wealth there is less need for a defensive asset allocation, such an investor should maintain a long-term horizon and take relatively higher risk to maximize the family’s long-term wealth. An overly defensive asset allocation is likely to reduce the long-term return and limit the family’s long-term wealth.
Wealthy individuals must decide if they want to leave as much as possible to the next generation or if they just want to provide a certain level of support? Are there other larger philanthropic causes they would like to support and how can they ensure maximum impact on those causes? It is also important to discuss wealth transfers with family members however, research from Milken Institute indicates that 35% of all Americans don’t plan on having such a discussion with their families. Having discussions about wealth transfer can be difficult as it includes talking about when a loved one is no longer alive. However, discussions about wealth transfer are crucial for family members to align on a family vision for the future, to manage expectations and ensure that the next generation has the knowledge to effectively handle the wealth that they will eventually inherit
Many heirs inherit significant assets without the necessary knowledge to manage them wisely, this can lead to financial mismanagement. By receiving financial education, heirs can learn about investment strategies, risk management, and the importance of diversification as well as other important concepts such as budgeting, taxation and estate planning. Financial education for heirs can help prevent conflicts within families, which often arise from misunderstandings or differing perspectives on money. Ultimately, financial education empowers heirs to continue building upon the family’s wealth and creating a legacy of prosperity. A trusted advisor or wealth manager can play a key role in educating heirs and helping them make informed decisions about how to invest their wealth in ways that generate long-term returns at an acceptable level of risk.
Ideally, heirs that inherit significant wealth will invest in productive assets that generate long-term returns, such as businesses, stocks, bonds, or real estate. However, poor financial decisions—such as spending on luxury consumption or investing in low-return assets—could result in the rapid depletion of inherited wealth.
Heirs should ensure adequate diversification and have a long-term investment horizon to create intergenerational wealth and build lasting legacies. With a time horizon that stretches across generations it is also more likely to be appropriate with an asset allocation that targets a higher return and accepts a higher level of risk.
The younger generation (21-43 years old) has different viewpoints on asset classes and asset allocation and therefore the great wealth transfer is likely to also have an impact on financial markets. According to Bank of America’s 2024 Study of Wealthy Americans, the most significant differences of the younger generation include a greater focus on sustainability and on companies making a positive impact, as well as less focus on public stocks.
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