For investment advisors, anticipating where money in motion will go rather than reactively chasing assets—including assets that may be left to clients’ beneficiaries—is crucial to building a successful practice. In other words, advisors need to proactively focus on strategies that will help clients’ beneficiaries prepare for eventually managing assets they will inherit.
Investment advisors have traditionally done a poor job of establishing and maintaining relationships with the beneficiaries of deceased clients, even though a massive transfer of wealth is taking place. According to Cerulli Associates and Accenture, the ongoing transfer of wealth from the Greatest Generation, which consists of those born from 1901 to 1924, represents $12 trillion in assets. In comparison, the transfer of wealth from Baby Boomers, or those born between 1946 and 1964, will involve $30 trillion.
Many advisors, understandably, focus on Baby Boomers and the Greatest Generation, as those two generations have accumulated substantial assets. By incorporating the beneficiaries of existing clients in the estate planning decision-making process, advisors can increase the likelihood of retaining assets across generations. In the process they may also gain a competitive edge by showing their clients and their clients’ beneficiaries that they are willing to go the extra distance to build long-term intergenerational investing plans.
For many advisors, routinely meeting with clients to review beneficiary elections on IRAs, retirement plans, annuities, life insurance accounts and other savings programs can be a powerful start toward retaining assets across generations. In the process, advisors and their clients may want to work with estate planning attorneys to assess options for selecting and designating beneficiaries.
Once beneficiaries are selected, advisors should propose holdings meetings with clients and their beneficiaries to discuss long-term goals. During the meetings, advisors should emphasize that designating beneficiaries is a powerful way to simplify estate administration because assets in certain accounts will pass directly to the beneficiaries rather than becoming part of the client’s estate and be subjected to probate expenses, including administrative fees.
Advisors should also use the meetings to illustrate how beneficiaries may benefit from creating a stretch IRA. With a stretch IRA, beneficiaries elect a required minimum distribution rate based on their own life expectancy. By doing so, they can stretch out the period of time during which they generate tax-free or tax-deferred investment gains. As part of this presentation, advisors may want to include projections illustrating the power of long-term, tax-favored investing as well as the consequences of cashing out assets. The presentation should also discuss requirements that beneficiaries must meet in order to use a stretch IRA.
The meeting can also be a time to discuss incorporating beneficiaries’ goals in the management of clients’ assets. For example, many investors create portfolios that reflect shorter investment time horizons of retirees. Yet, if a retiree doesn’t expect to tap the IRA for retirement income and is using a Roth IRA, the assets can be managed based on the investment time horizon of the elected beneficiary. So, if the elected beneficiary expects to manage the assets as a stretch IRA, the investment horizon may extend for multiple decades and call for a more aggressive investment strategy that will offer greater potential for long-term performance.
Advisors may also want to discuss other topics during meetings, such as creating special needs trusts for beneficiaries with special medical conditions or the transfer of ownership in a family business may also need to be addressed. Either way, the goal is for advisors to present themselves as trusted professionals who are anticipating beneficiaries’ needs. That way, beneficiaries will be more likely to turn to them for help once an intergenerational transfer of wealth occurs.
