The Great Wealth Transfer

Introduction

Over the past several weeks, headlines have been understandably dominated by the immediate impacts of SVB and the health of the global banking system. I’d like to take a step back and explore a few longer-term trends likely to accelerate, given recent events.

The Great Wealth Transfer

Even before the events in the banking sector, a wake-up call to financial institutions was well underway. I’m talking about what is commonly known as the “Great Wealth Transfer.” The Great Wealth Transfer refers to the unprecedented wealth transference between Baby Boomers and Millennials.

With Baby Boomers controlling ~70% of disposable income in the last decade, no generation has accumulated comparable wealth (US Census Bureau). Experts cite that as much as $84 trillion will be transferred from Boomers to their Millennial heirs by 2045 (Cerulli Associates). With this shift comes a stark contrast of behaviors and preferences, creating unique challenges and opportunities for the financial services ecosystem.

Shifting Expectations

Broadly speaking, Millennials value digital, transparent, and personalized experiences. 84% of Millennials are more loyal to a brand if they feel it is transparent, and this loyalty increases by 28% with personalized communication (SmarterHQ and The Org). For Millennials, omnichannel access is a “must-have.” 87% of Millennials expect omnichannel communication access as a base level of service (CMO Council).

These expectations apply across the banking, financial advisory, and payments landscape. For example, 68% of 25–34-year-olds regularly use mobile apps for banking needs – a stark contrast to the 42% of Boomers who prefer to bank in person (Go Banking Rates). Additionally, 41% of Millennials want consistent, quarterly conversations around fees when working with financial advisors, versus 14% of Boomers (Global Banking Finance).

Financial services firms have been slowly transforming to better serve this new segment as wealth demographics shift. Events over the last twelve months accelerated the timeline.

Bear Market Impacts

Most Millennials began investing through neo-banks and application-based brokerage accounts, which made investing accessible, transparent, and, let’s face it, fun.

These strategies worked quite well during a decade-long bull market when someone could earn a 15% annual return by simply investing in the S&P 500 (S&P 500 Index). The digital-first, lucrative introduction to financial services raised the bar on Millennial and Gen Z service expectations.

In 2022, neo-banks and digital brokerages quickly went from fun to serious when the S&P dropped nearly 20%. At this point, 73% of Millennials and Gen Z consumers moved their money to traditional banks pointing due to a desire for more conservative, risk-averse fund management (Raddon Research).

Banking Crisis Effects

As wealth transfers to Millennials and the generation moves its money toward traditional institutions, regional banks, credit unions and megabanks are in the spotlight.

Ironically, the banks most prepared to meet Millennial expectations were regional banks, the most avid adopters of next-gen technology over the last several years. Rewind just one year and PYMNTS was launching an article touting SVB as being “on the edge of technology.”

Regional banks were able to make strong digital advances as they were big enough to invest in transformation while agile enough to test, implement, and execute on changes. However, after the events at SVB and other regional banks, consumers have become skeptical.

In comparison, national megabanks have not always been the leaders in the digital-first race for Millennial-approved, omnichannel, and personalized experiences. Specifically, the size and bureaucracy of megabanks make them slower when it comes to technology evolution.

Legacy banks will be on the clock to provide tech-savvy solutions to consumers, as 47% of Millennials said they would be prepared to move to a wealth management firm with an enhanced digital platform (Raddon Research).

Credit unions are in a more difficult place as only 1 in 10 offer omnichannel banking access. The lack of technological capabilities is not something that CUs shy away from, as 37% self-identify as technology laggards. CUs need to move quickly as 27% of CU members said they would switch financial institutions for better innovation (PYMNTS).

Conclusion

The recent events at SVB and other regional banks have put a spotlight on megabanks’, credit unions’, and financial advisors’ ability to meet Millennial expectations on an accelerated timeline. These institutions must adopt the right digital first solutions to become beneficiaries of “The Great Wealth Transfer” and meet their clients where they are. There lies the opportunity for the next generation of financial technology solutions.

I look forward to discussing these topics and more over the coming months.

-Melanie