Megatrends: The Great Wealth Transfer

Manju Boraiah: Sure, megatrends are structural shifts that are longer term in nature and they have irreversible consequences, both positive and negative for the world around us.

Sean Burke: That’s Manju Boraiah, head of Systematic Fixed Income and Custom SMA (separately managed accounts). I’m Sean Burke, head of the Remi Specialist Group, and you’re listening to On the Trading Desk®. Remi is Allspring’s intelligent solution for personalizing separately managed accounts, commonly known as SMA portfolios, powered by technology, research, and human insights. For our featured conversation, we’re focused on research and human insights, specifically looking at megatrends. Manju, thanks for joining us today.

Manju: Happy to be here, Sean.

Sean: Manju, let’s start with the basics. There’s been a lot of buzz around the term “megatrends.” Can you spend some time telling the audience what the term means to you?

Manju: Sure, megatrends are structural shifts that are longer term in nature and they have irreversible consequences, both positive and negative for the world around us. They can impact everything from consumer behavior and business models to government policies and international relations. Simply put, they are transformative powers that can change the economies, businesses, and societies around us.

Sean: Thanks, Manju. I’m sure you’ve piqued our listeners’ interest. We could probably talk for hours on this subject, so perhaps we’ll make this a multi-part series. But in the meantime, as an investor, what megatrend are you primarily focused on today?

Manju: I want to highlight one megatrend that’s relevant for our industry today, Sean. I believe wealth management is the next big frontier in our industry due to a multitude of factors, including rising wealth, changing demographics, technology advancements, regulatory changes, and then, frankly, globalization of wealth itself. One of the megatrends that is currently unfolding in this space is what is often termed as the Great Wealth Transfer. Due to ongoing demographic shifts in the U.S., an estimated $84 trillion coming from the top 1.5% will be transferred from older generations over to Gen X, Millennials, and Gen Zs of the world over the next two decades. Baby Boomers alone will be, I think, transferring close to $53 trillion, and then the Silent Generation will account for another $16 trillion in just the next 10 years. I think this multi-generational wealth transfer will be one of the most significant factors, in my view, impacting the high-net-worth and ultra-high-net-worth segments of our industry for years to come.

Sean: OK. Let me just make sure I heard that correct. Did you say $84 trillion over the next 20 years?

Manju: Yeah, it’s massive.

Sean: Yeah, that is a massive amount of money moving. Why should our audience today care?

Manju: Sure. If you look at the overall assets in motion, Sean, roughly half of these assets are actually held in real estate and pension entitlements. So, basically illiquid, right? And the other half is in liquid financial assets such as mutual funds, ETFs, SMAs, or even direct ownership of stocks and bonds. So, as this wealth changes hands, I think complex financial planning and wealth restructuring will really become front and center and will be more critical for investors. And what’s more pressing, in my view, for clients will be tax planning and ongoing tax management. Data also shows us that roughly 70%, that is really two out of every three investors who inherit the wealth, actually end up firing their financial advisor. To me, this actually presents a significant risk for advisory firms, but it’s also a great opportunity for firms like ours to develop innovative solutions for clients. So, clients are also looking for more holistic planning from their advisors that extends beyond just investment recommendations to advance tax planning and ongoing tax management. And given the complexity of the situation, advisors are looking more and more to outsource these services to external firms instead of kind of doing it themselves.

Sean: Wow. So, over $42 trillion in liquid assets moving. That’s unprecedented. Manju, as head of Systematic Fixed Income and Custom SMA at Allspring, what are you doing to capitalize on this trend for your clients?

Manju: Sure. So, given the size of the money in motion and the need to address changing client needs and expectations, retail SMAs, separately managed accounts, as we call them, as a vehicle can offer investors a better medium for transitioning and managing assets in a tax-aware fashion compared to traditional mutual funds. As you know, SMAs can offer a higher level of customization based on an investor’s goals, risk tolerance, investment time horizons, and tax objectives. I also think they are a better medium for providing client-driven customizations, transparency into client portfolios. It’s also a great medium for combining professional management with tax efficiency. It also provides flexibility in terms of investment choices and the ability to make changes to portfolios as the client needs and market conditions evolve. And all of this can be done at a relatively lower cost compared to traditional mutual funds. So, even though SMAs are not new to us at Allspring, Sean, capitalizing on this growth opportunity is not easy. We knew that and that we have to build a scalable technology SMA ecosystem to actually automate and scale the end-to-end investment process and the associated client experience. So, we ended up building and launching a proprietary SMA ecosystem called Remi in early 2021 that really combines our active and passive multi-asset investment expertise with a scalable technology platform that can actually help deliver customized, tax-efficient SMAs at scale to all our clients. I do think that to get to scale, we have to be hyper-focused on four things. First and foremost, I think that the ecosystem needs to be scalable and needs to be technology-led. Second, we need to transform our ecosystem to be a true multi-asset platform where we can offer both active and passive strategies across fixed income equities on one platform. Third, I think we need to continually enhance and evolve the client experience as the clients evolve and as markets evolve. And, lastly, we need to aggressively push for adoption and serve all segments of clients across the wealth spectrum.

Sean: Thanks, Manju. So, we’re getting close to the end of our time today. So, last question. I imagine that tax management will play a larger role in the lives of investors going forward. What implications does this trend have on the financial markets?

Manju: So, tax management can have significant implications for financial markets, and I think it impacts really from two angles. One is based on investor behavior and the other one is really investment decision-making. So, when it comes to investor behavior, we know taxes can influence investor behavior. For example, investors may be more likely to hold on to investments that have appreciated in value to avoid realizing capital gains and paying taxes on that. And with respect to investment decisions, taxes can also significantly impact the overall investment decision-making process. For example, investors may be more likely to invest in assets that have tax benefits, such as tax-exempt bonds, or in products that are managed and involved in a tax-aware fashion to maximize after-tax returns. So overall, I think tax management is a critical piece of the investment process and it’s actually driving wealth managers and asset managers to partner together to develop efficient tax management strategies for investors.

Sean: Manju, thanks for joining me on the podcast today.

Manju: Thank you, Sean. It was a pleasure.

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