The coming decade will see the largest global transfer of wealth in the planet’s history, as the Baby Boomers’ accumulated treasure of more than $US68 trillion goes to their heirs.
As the Boomers move into the sunset phase, the transfer of generational wealth has become a pressing issue for many families.
While some inheritors may feel overwhelmed by the sudden influx of wealth, experts suggest that with the right strategy and guidance from financial advisors, they can leverage their windfall to build on this wealth and secure their financial future.
A research paper released by the Productivity Commission in late 2021 said that about $3.5 trillion in assets will likely change hands in Australia alone by 2050.
However, it’s estimated that around 70 per cent of inheritances are wantonly squandered due to poor financial management and lack of planning.
To avoid this, financial advisors recommend that inheritors work with professionals to develop a financial plan.
This not only ensures the preservation of wealth but also helps in creating a legacy that can last for generations.
Leigh Fernando, managing director, private wealth at BlueRock, an Australian professional services firm urges people to work with a financial advisor when receiving a large inheritance.
“It’s crucial for several reasons. Firstly, inheriting a substantial amount of wealth can be overwhelming. A financial advisor can provide valuable guidance and support during this transition, ensuring the heirs are making smart decisions in a difficult and emotionally charged situation” says Fernando.
“They can help heirs understand their financial situation, prioritise their goals, and develop a comprehensive plan to manage, grow and protect the inherited wealth effectively for generations to come.”
“Without external help and accountability from a financial adviser it is very easy for an heir to waste the money they have just inherited.”
He says when helping clients who have received a large inheritance BlueRock acts alongside the clients’ accountants and other professional advisers to manage areas including tax planning, investment strategies, debt, risk management, and estate planning.
“We tailor advice to the specific needs and aspirations of the heirs, ensuring that their wealth is preserved, protected, and utilised wisely.”
Fernando warns that inheriting significant wealth can tempt some heirs into making impulsive decisions or indulging in extravagant spending.
“Especially with the younger generations who have not had to work hard for the money,” he says.
“Baby Boomers saved and went without to build savings and pay down mortgages whereas younger generations have grown up in a world where many things they want are easily accessible with easily available credit or Afterpay. If they want something, they get it now and worry about paying it off later, generally kicking the can down the road.”
He says the age-old path trodden is that the first generation starts with humble beginnings, works hard, and creates wealth through their efforts and entrepreneurial spirit.
“The second generation, having grown up with the benefits of their parents’ success, continues to build on that strong foundation of wealth and expands the family’s legacy,” Fernando says.
“They learn from their parents’ experiences and make further strides in growing the family’s fortune.”
However, as the third generation comes into play, they may not have directly experienced the hardships and struggles that led to the initial wealth creation, he says.
“This can sometimes lead to complacency, overspending, or poor financial management, resulting in the gradual erosion of the wealth accumulated by the first two generations.
“While this pattern is not universal, it serves as a cautionary reminder of the importance of financial education, responsible stewardship, and effective estate planning to preserve and pass on generational wealth successfully.”