By Mark Gibson
The generational wealth transfer currently underway is the largest in history, as parents from the silent and baby boomer generations pass financial assets to their children and grandchildren. And while much has been written from an investment portfolio perspective, a significant portion of these assets is held by banks. Banks also have some advantages over investment companies in winning these assets.
A key insight is that for banks, the challenge is less about retaining assets and more about extending client relationships to include their children. If this is done successfully, the retention of loans, deposits and investment assets will, in most cases, take care of itself.
This article identifies successful retention strategies used by investment firms and banks, and offers a unique approach for community and regional banks to retain assets and relationships during the generational wealth transfer process.
The role of banks in the great wealth transfer
The current wealth transfer we are experiencing is expected to results in $124 trillion changing hands over the next two decades, reports Cerulli Associates. While investment houses have viewed this as one of their most important strategic opportunities for a decade or more, it has not been a priority for most community and regional banks. But it should be. After all, anywhere from 5% to 50% of these assets are held by banks, depending upon the specific client. And banks bring three potential advantages to the table.
First, the client’s bank typically has a local branch, and especially with affluent clients, the client has often worked with a particular banker as well. This potentially enables the bank to establish a stronger, more personal relationship with the client than an investment firm, which is often located remotely and visited less frequently, if at all.
Second, banks typically have a more extensive product relationship with the client than investment firms do. For instance, while an investment firm’s relationship with a client is often limited to wealth management and financial planning, a bank relationship can include the client’s personal deposits and lending, business deposits and lending, and children’s checking, savings and first mortgage. This multifaceted relationship across life stages also creates opportunities for stronger bonds and better retention across generations.
The final distinction may be the most important. While most investment firms and private banks focus on the ultra-high-net-worth segment, which accounts for about half of wealth transfer but only 2% of the population, regional and community banks serve the vast majority of affluent and mass-affluent consumers. This insight means that banks can play a leading role in assisting most families to prepare for this momentous life event, without competition from large investment firms.
The key challenge
The reality is that, if no proactive action is taken, the vast majority of inherited dollars are moved within months of a parent’s passing.
The reason, of course, is that while decades have been spent establishing a relationship with the parents, there is often no relationship with the children who are inheriting the parents’ assets. So, it’s critical for financial providers to realize that what they are facing is not really a wealth transfer or retention problem but a family relationship problem. Once a bank reframes the problem or question in this way, the solution becomes more apparent. It’s not about trying to retain dollars; it’s about establishing relationships with the client’s children well before the time of wealth transfer. The next section examines successful ways financial institutions have done just that.
Building strong family relationships
There are quite a few financial institutions that are very good at building multi-generational family relationships, and there is much to learn from them.
Be family-centric. Instead of asking, “How do we retain these assets?” leaders in this space ask, “How do we become trusted advisors to this family?” In other words, instead of organizing around accounts or individual customers, these banks organize around family relationships. While this may seem like a subtle change, it has significant implications for relationship management, KPIs, incentives and information systems.
Build relationships with future decision-makers. One of the strongest predictors of retention is whether the heir already knows and trusts the banker/advisor. To accomplish this, relationship management broadens beyond parents to include adult children, their spouses, trustees, and other key influencers such as attorneys or accountants. In addition to banking the children, common tactics to build relationships with this broader group include family review meetings, estate planning discussions, and educational content or events.
Help families with legacy planning. Parents often spend a lifetime working hard to accumulate financial assets, but little to no time speaking with their children about questions like what role wealth should play and what responsibilities come with it. While many financial institutions focus on financial planning or wealth planning, few have broadened this to financial stewardship or legacy planning. This leaves a valuable opportunity for bankers to facilitate a discussion among family members to help address important questions like:
- What do you want your wealth to accomplish?
- What opportunities do you hope to create for your children and grandchildren?
- What values do you hope your family carries forward?
- What financial lessons do you want future generations to learn?
- What does a successful legacy look like? (Family business continuity, philanthropy, etc.)
This type of discussion is equally valuable to both generations, and most families have never had it. It also provides an opportunity to build an emotional bond of trust, in addition to a purely financial relationship. Perhaps most importantly, it builds relationships with the children long before the assets are transferred.
Build the right products and channels. To successfully bank the children of wealth holders, institutions ensure they have products and delivery channels that meet the needs of families and younger generations. Features such as family banking packages, high-yield savings, easy-to-use mobile banking, online account opening, digital service options and Venmo or Zelle all appeal to multi-generational clients.
Provide financial education. Just because a person stands to inherit significant wealth doesn’t mean he or she is prepared to manage it. Successful institutions build trust by offering a variety of educational programs around investing, tax planning, estate planning, trusts, and family business continuity. Not only are these programs valuable to the next generation, but your current customers typically appreciate you enhancing the financial skills of their children.
A banker’s action plan
Once a financial institution recognizes the magnitude of the wealth-transfer opportunity and strategically prioritizes it, it should consider taking the following three actions to position itself for success.
1. Adopt a multi-generational family mindset. This opportunity is not about growing deposits or loans. It’s not about accounts or dollars. It’s about helping parents, children and grandchildren thrive financially through each stage of life. Once the institution and banker shift their mindsets to multi-generational family banking, relationships expand to include almost every product and service a bank offers. To be successful, the mindset is also incorporated into relationship management protocols, goals, incentives, and the CRM.
2. Become a bigger part of the family’s financial ecosystem. The typical family already has a financial ecosystem comprising multiple providers. Your challenge is to become the institution that provides the most value and builds the strongest emotional relationship with your current client’s children. To do this, you need to ensure you have the right tools. For instance, do you have relationship pricing that allows the children to benefit from the parents’ substantial banking relationship? Do you have savings and mortgage products, processes, and policies which make it easy for a parent to help get their children into their first home? Do you have robust financial education programs that inform parents and, more importantly, prepare children for the next stage of their financial journey? All these tools and techniques help position your institution at the top of the family’s financial support network.
3. Deliver real value to the family. Our industry has been moving from a transactional orientation to an advisory role for quite some time. The wealth transfer event is the perfect use case to apply these consultative skills. With the goal of building relationships with clients’ children, the types of conversations and questions need to shift from short-term money management to longer-term financial and life planning, addressing questions such as: “How do we help families think through the financial futures they want to create?” Bankers are trained to have these value-added conversations with parents and children, leveraging the full range of tools available to them. The relationship evolves beyond meeting banking needs, to assisting with the creation of family financial stewardship.
The time is now
The great generational wealth transfer has already begun, and it will only accelerate as baby boomers move into their final years. Banks are well positioned to take advantage of this event, given that a substantial share of financial assets currently resides with banks, and they have local personal client relationships with many more clients than investment firms do. While success requires a shift in strategic priorities and mindset, there are no formidable barriers to regional and community banks assuming a leading role in this decades-long endeavor.
Mark Gibson is co-leader of the sales and marketing practice at Capital Performance Group. He can be reached on LinkedIn or at [email protected].
