The rise of the Gen Z investor

CLARE FRANCIS: Hello and thank you for joining our regular Personal Finance Podcast. I I'm Clare Francis, Savings and Investments Director at Barclays. And the eagled eyed among you will have noticed we’ve given the podcast a new name, Money Plan. The aim of this series is to cover things relating to how you can better manage your money and plan your finances to help you achieve your future goals.

Over the next couple of decades, we're going to see around £5.5 trillion being passed on from the Baby Boomer generation through inheritance and gifts and this is set to be the biggest transfer of wealth ever seen.

And many of you listening to this podcast will be part of this either as a Baby Boomer yourself, considering the best ways to pass on your wealth, or as a potential beneficiary.

So today I'm joined by Sarah Kingston from our Investment Consulting team and Lee Platt, a Director in Wealth Planning to discuss the challenges and opportunities this presents.

But before we start I just need to remind you that when it comes to investing, stock markets can fall as well as rise, so there's always a chance you could lose some money. Also we aren't giving personal, financial or tax advice. So if you're unsure about next steps please seek independent financial advice.

Sarah and Lee, thanks so much for joining me today, Sarah could we start with you just by telling us a bit more about the Great Wealth Transfer as it's been termed.

SARAH KINGSTON: Yes, absolutely. So hi Clare, thanks for having me. The Great Wealth Transfer as you've just said is all about the prospect of a record £5.5 trillion that's set to be transferred from Baby Boomers to the next generation of Millennials and Gen Z over the next couple of decades, and there's been various pieces of research that have shown that this transfer of wealth is set to be the biggest transfer between generations that we've ever seen here in the UK.

And there are a few reasons for this, most wealth owned by the Baby Boomer generation is in property and pensions, and with property values increasing. and pension legislation changing, this has generated unprecedented wealth, much of which will be passed to the next generation.

However, there is a risk that those who inherit this money won't know what to do with it, particularly if it comes to them as a lump sum. So what we need to try and do as an industry as a whole is to help people plan for a more gradual and consistent transfer of wealth to more informed and well-prepared beneficiaries.

CF: Before we get into the detail, you mentioned a few different generations there, can you just explain what those generations are and what the age groups are so everybody's clear.

SK: Yes of course. So we've got Baby Boomers which are technically defined by being born between 1946 and 1964. that's anyone from late 50s to early 70s. And we're also talking broadly about Generation Z and Millennials today, who for the purposes of this I'll group together, and that's because they're likely to be the beneficiaries of Baby Boomers, whether it be children or grandchildren, and that can be anything from teenagers to early 40s with Generation Z being the younger half of that. 

CF: So why is this Great Wealth Transfer happening now, why haven't we seen it before?

SK: Yes, good question. So in the UK the Baby Boomer generation currently has more wealth than any previous generation before them did when they were their age, and the majority of this as I just mentioned is held up in property and pensions.

So average UK house prices reached a record high of £256,000 according to data from the Office of National Statistics, which is a growth of 48% over the last decade, which is huge, and this is due to a number of contributing factors such as Bank of England interest rates reaching an all-time low in 2020, and reduced rates of stamp duty in the past couple of years due to temporary measures introduced by the Chancellor to help keep the economy moving during the pandemic.

And in addition as I just mentioned, pension reforms have allowed greater access to enable clients to manage their savings for themselves for their retirement. So what we've seen is kind of a perfect storm of low interest rates, property prices rising, pension reforms and general increasing levels of household wealth and increasing income, and this has meant that the next generation of beneficiaries is set to inherit this unprecedented wealth, and more wealth than any generation before them.

CF: And as you touched upon earlier it's really important that people plan for this isn't it not only for tax reasons and obviously inheritance tax is a big consideration to think about but also to help the beneficiaries prepare and certainly if I think about my own family this is something very much on my dad's mind in particular.

He's a Baby Boomer, and although I'm a bit older, I'm Generation X rather than a Millennial, but he's putting plans into place to help reduce his inheritance tax bill when he dies and you know he helped me my brother and my sister when it came to our first our deposits for our first properties so lee if we bring you in here when you're speaking to people on this subject um you know what do you recommend that they think about 

LEE PLATT: Well Clare I think the first thing is to include family members in the conversation, and it sounds like that's something that you that your Dad is doing. I know that with our wealth clients we do suggest bringing family members to meeting with the wealth manager to discuss things like retirement and inheritance plans.

Now of course I recognize that these areas may not be applicable to a lot of people listening to this but the approach can still be the same. Now understandably discussing things like inheritance can be a difficult conversation to have but if the family is well prepared then it does make the process of inheritance much smoother whenever the day comes. And even if you don't have a wealth manager it is the sort of thing that you can talk to an independent financial advisor about or even do it yourself to some degree if you feel confident enough.

However, I would always suggest that you seek advice to best understand your options. A lot will obviously depend on the ages of the benefactor and the beneficiaries as well as their level of financial understanding and confidence, but the key thing is to talk as a family and make a plan.

CF: And there are obviously two parts to this story aren't there because as we've already discussed it's not only about the Baby Boomers looking to pass on their wealth, but also their children, grandchildren, nieces’, nephews who are set to receive it.

And then for them it's about what we can do to help them make best use of that money as and when they get it. So once we've included the beneficiaries in discussions with the wealth manager what comes next? You talked about financial understanding and that education is really important, can you expand on that a little bit?

SK: Yes, I can jump in there. The education point as you just mentioned is so important. A study by the CFA institute, that's the Chartered Financial Analyst Institute found that nearly four in ten Millennials cite lack of knowledge as a major hurdle to investing, and that's among other barriers such as not enough savings, not enough income and maybe a focus on paying off debt instead. But that point about lack of knowledge is really key and I think in the younger generation in particular there's such a huge disparity in knowledge.

For example, I'm Gen Z myself and I consider myself to be reasonably financially literate having studied the topic at university and now working in financial services. But while of course I still obviously have a lot to learn, some of my friends have never even considered investing or even saving for that matter, so I think there's still a lot a long way to go to bridge that gap.

LP: Yes, I agree with that and you know research has shown that there's a gap in the investment knowledge and experience of potential beneficiaries, and now with an ever-growing and complex universe of investments many younger beneficiaries may feel like they don't know how or where to start investing. So it's really important to educate beneficiaries first so they understand the importance of careful money management, saving and investing and the impact of not doing this could see that upon inheriting wealth they will be much more likely to recklessly spend it.

CF: Absolutely and trying to help people have a better understanding about their finances and how to plan and invest for the future is something we spend a lot of time on here at Barclays, it's the purpose of this podcast and a lot of the other content that we produce.

However, I think one of the worrying things is the misinformation that's out there as well, particularly on social media and I'm thinking with the younger generation in mind in particular, do you think this is a major issue because obviously social media is often the channel they're the channel that they go to for a lot of the content that they engage in?

SK: Yes, I can probably speak to that from some of my experience. I remember I saw a lot of my friends posting their Gamestop gains on social media back in January when there was a lot of hype around the stock on Reddit, only to see it all be lost again in a matter of days.

And a similar story could probably be told for bitcoin and other cryptocurrencies, and these sorts of investments can be really volatile and so easily affected by news flow or even celebrities making comments on social media. I think there is a lot of fake news about it sometimes.

LP: Yes, I think the issue here is that a lot of the younger generation can get caught up in the illusion of seemingly easy gains with investing that you can see in the news, without knowing a lot about the benefits of things like diversification or the perils of trying to time the market.

It's really important to remember that stock markets can fall as well as rise - so there are risks involved but there are also ways to help manage and reduce the risk so you can give yourself the best chance of seeing your money grow over the longer term.

Some young and older people do see investing as a way to get rich quick, but our view is of course to get rich slowly in an informed way, and this is another reason why it's so important is to discuss these topics and help to educate and ultimately prepare people.

CF: Absolutely, because it can be quite worrying, and a lot of it comes with experience and living through things and what we want to try and do is stop people getting their fingers burnt before it happens, rather than them learning the hard way.

On the flip side though of course, the other challenge is the fact that a lot of people, and you referenced it earlier Sarah with some of your friends, are just totally disengaged with their finances and have no interest in investing. So what can we do here to spark interest and help inform and educate them if it's something that they just don't really care about?

LP: I suppose one of the things that we do with our clients is to integrate issues that young people care about into the portfolio mix and consider the preferences when deciding what to invest in. Now this is important in the context of the transfer of wealth because ultimately one day that investment portfolio will be passed on and if it doesn't appeal or cater to the needs of the beneficiary, and they don't understand or appreciate what it is that they've received, they could be more likely to sell assets and spend the money.

Now with this in mind it's important that there is a mutual understanding of each other's financial goals, investment preferences and risk tolerance as these are likely to differ between generations. So for example, older clients or the Baby Boomer generation are likely to have goals such as preserving the wealth, or passing wealth along to future generations, whereas the beneficiaries or Millennials are much more likely to have goals of growing the wealth, funding a start-up, or perhaps investing with sustainability or a wider social benefit in mind, such as ESG, or Environmental Social and Governance investing.

SK: I think that's so true, the Millennials in the UK are more interested in impact investing which you just mentioned there (defined as an investment strategy that aims to generate specific benefit to society or environment) than any other generation. So a study showed that 64% of Millennials expressed an interest in impact investing, whereas that figure is only 50% for Generation X and 34% for Baby Boomers.

And another trend that have seen among the younger generation is the desire for immediate accessible, digital investment platforms. So rather than speaking with an advisor face-to-face, you can complete an online questionnaire where you're asked about things like your financial goals, your time horizon, how comfortable you are with risk and rewards, and then you can be assigned an appropriate strategy accordingly.

CF: And we've obviously seen the industry adjust to accommodate that and the familiarization and comfort with digital platforms and here at Barclays we've got a service called Plan and Invest which does this as you said then Sarah and obviously there are other providers offering similar.

And it can be a great way to get started with investing and for anyone listening who's either thinking of investing for the first time or thinking about how they can help their children or grandchildren it could be worth looking into. Because as you said it's accessible, it's digital platforms but what else would you suggest people need to think about when considering their inheritance and passing on their investments to beneficiaries?

LP: Well Clare, clearly family relationships are not always straightforward, and discussions about inheritance can of course be difficult. Now whilst no two families or estates are the same, there are ways to take positive action to share wealth between generations and this is not an action that you take once, but more of a considered journey to smooth and ease the process of inheritance over time.

Now it's normally advisable to start planning for the future as soon as it is feasible, to ensure that beneficiaries are well prepared and supported through the various life stages. Including family in wealth advisor discussions can help demystify investing and also enable long-term consistent plans for inheritance to be put in place from an early stage. And certainly from my experience I find that most powerful client meetings are those where the beneficiaries are included at the outset.

SK: Yes, absolutely and I'd just like to add or reiterate that it's really important to introduce the idea of wealth and inheritance gradually, so giving younger people a large lump sum of cash as a gift or inheritance can be fraught with potential dangers if they're not adequately prepared. And of course it can be really difficult to get beneficiaries to appreciate the scale of family wealth if this is unfamiliar or unknown to them.

And as we've already mentioned one way to engage the next generation is to frame investment conversations around the causes that they care about, so as we've just mentioned, ESG or impact investing. Because ultimately if beneficiaries can see a wider societal or environmental benefit to their investment choices, as well as of course those attractive returns, they may be incentivized to remain engaged and seek to take an active role in understanding their inheritance.

So consideration of beneficiaries’ investment preferences and risk tolerances can also help to ease the transfer. If the younger generation feel that the portfolio of assets is well suited to their goals, needs and preferences they'll feel more at ease upon inheriting the portfolio and are more likely to remain invested.

CF: Yes, that makes total sense. I suppose the other critical point in all of this of course is understanding inheritance tax rules and the amount of tax that could be owed, and it's obviously a very complex and probably one we need to look at in more detail in a future episode. But Lee could you explain briefly what people need to bear in mind, and then we'll come back to it as we're running out of time for today?

LP: Yes, and I agree it's absolutely worth covering this off in more detail on a separate podcast, but a key point is that when considering the tax implications of an inheritance, the reality is that most people don't realize how much tax may be payable upon the death, and so often failed to plan adequately for it. However, with careful planning the tax liability payable on death can be reduced, meaning there's more money left to be passed on, and you can't underemphasize the value of planning your wealth and thinking ahead when it comes to financial planning matters.

CF: Absolutely and you know it can often be the driver for trying to get a plan in place as I think most people want to be able to pass on as much of the money they've worked so hard to accumulate as possible. Lee, Sarah thank you so much for your time today, it's a fascinating subject and hopefully we've given everyone some food for thought and definitely it's something we'll return to, particularly from looking at the angle of inheritance tax planning.

We've got lots more information available on our website though to help with your financial planning and investment goals. You can visit barclays.co.uk and click on the savings and invest and wealth management tabs to find it.

But thank you for listening, I hope you found it interesting and we'll be back again with another episode next month.