Financial advisor Katrina Soelter recently worked with a client who had received a seven-figure inheritance that included unwanted shares of oil companies and of Palantir. The software company has been at the center of several controversies, most recently revolving around links to surveillance and deportation.
The client, a self-professed liberal in her 40s who works in the entertainment industry in the Los Angeles area, was relieved to see the new portfolio of investments wasn't invested in guns or prison-related companies. But she knew she had to make changes to the portfolio.
"She has some very strongly held values and a vision for her investments," Soelter said. Her newly inherited portfolio didn't align with that, and so she divested.
It's a tale as old as time: A child holds different values than the parents who have passed along wealth. And younger generations are grappling with inheriting record wealth right now.
A third of wealthy families in North America are in the process of transferring wealth, according to a report from UBS Global Wealth Management published earlier this year. UBS estimates that over the next two to three decades, roughly $83 trillion in private wealth will change hands, marking the largest wealth transfer in recent history, while Cerulli puts the figure at closer to $124 trillion by 2048.
At the same time, studies have shown that younger generations are more likely to invest in companies that align with their values, giving financial advisors the task of helping younger generations sell inherited assets and buy ones that more closely align with their goals, as Soelter recently did.
Younger generations have also come of age alongside technological advancements for the financial markets, including the invention of low-cost index exchange-traded funds (ETFs) that give investors exposure to a range of securities with just one purchase.
James Mayo, a Denver-based advisor, is currently helping a client in her late 30s who works in the legal industry transition over half a million dollars she had inherited in various high-fee active mutual funds.
There was a lot of overlap between the funds and no real strategy or plan linked to them, Mayo said. It's a common problem. Many of his clients with inherited assets come to him with high-cost actively managed funds that were purchased long before low-cost index funds became popular.
Technological innovation has also given investors the ability to be more choosy about what they put in their portfolio. With a few clicks on their phone, they can invest in cryptocurrency, and they are increasingly getting more access to private assets. At the same time, they are losing faith in the traditional stocks and bonds their parents and grandparents banked their retirement on.
Garrett Reeg, a St. Louis-based financial advisor with Moneta, recently worked with a middle-aged couple who had inherited an eight-figure portfolio of various investments, but who had a real interest in private investments. Reeg helped them get some exposure, including to private equity and venture capital, and build out a disciplined annual pacing approach aimed at improving their diversification and the overall return profile, while staying aligned with what they needed in terms of liquidity.
"Private investments have been very popular and access to them is increasing, so they viewed it as a way to enhance the return profile and risk associated with the portfolio," Reeg said. "Companies are staying private for longer...and there's a lot of value creation in the private markets that you don't have access to as a pure public investor. They wanted those opportunities as a piece of the portfolio, given they could stomach the illiquidity aspect."
There's a lot more than just preference that goes into making changes to an inherited portfolio. Timing, liquidity, and how investments fit into your overall portfolio are also important considerations. But the key consideration is usually taxes, and sometimes it can even overshadow a beneficiary's desire to invest in companies that better align with their values or to invest in more exciting assets.
"If it's a taxable account and selling would trigger a meaningful tax bill, people are much more willing to delay realigning the portfolio to their values and prioritize tax planning instead," Mayo said. "That might mean selling gradually, setting a tax budget, or simply waiting for a better opportunity to make changes."
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