The great wealth transfer

At last count, baby boomers held more than half of Australia’s wealth.

But it won’t always be this way. The Productivity Commission estimates that by 2050 about $3.5 trillion in assets will change hands in Australia, with baby boomers and the World War II generation passing on unprecedented levels of wealth.

It raises the question: How will younger generations approach this new-found financial responsibility, particularly those members of our wealthiest families who are set to receive the largest inheritances?

Recent findings indicate they’ll take a different path than their parents and grandparents. Already apparent is a decided preference for embracing new approaches and opportunities. Not only are younger generations keen to adopt digital technology and the DIY approach this affords, but they’re also looking beyond domestic stocks and bonds to the vast array of alternative assets – including those that support a more sustainable future.

As NAB Private Wealth Executive Darian Kuzma says, “There’s a strong desire to create a better world.”

Eyes on a sustainable future

When it comes to responsible investing, the younger generations are already a significant force, and their numbers are growing rapidly.

According to the Responsible Investment Association of Australasia, Gen X (40 to 59-year-olds) represent one in five of those investing responsibly, as do Millennials (25 to 39-year-olds). And while Gen Z (those aged 18 to 24) makes up just 12 per cent, that’s set to change.

Almost half of this youngest cohort (45 per cent) said they intended to invest responsibly over the next 12 months, and there’s evidence they are. A 2023 ASX survey shows that, in the past 12 months, over half of Gen Z investors (52 per cent) bought or sold an investment based on ESG (environment, social and governance) factors – or were professionally advised to do so and acted on it. This compares to just 14 per cent of retirees and 18 per cent of pre-retirees.

Unsurprisingly, Kuzma has seen strong interest in responsible investing across the next generation of high net worth clients, as has NAB Private Wealth Executive Declan Kyne.

“It’s becoming more and more prevalent,” Kyne confirms. “[We’re seeing a lot of these clients] selecting alternative investments such as green bonds or sustainability linked infrastructure investments.”

Making a marked difference

The generational shift is even more stark when it comes to impact investing – a more tangible form of responsible investment where the environmental or social benefits can be specifically measured and reported.

Despite being in its infancy in this country, impact investing is attractive to nearly three in five Australian respondents (57 per cent), with the interest highest among Millennials (68 per cent), according to a 2021 survey by global asset manager American Century Investments (ACI). Moreover, Millennials were found to be the most likely to be currently investing for impact and also the most likely to have plans to invest this way within the next five years.

While younger generations want to see wealth creating positive benefits, they also do not want to lose their wealth.

Private Wealth - Head of Investments Specialist, Nandita D’Souza, says younger investors seeking a more sustainable path don’t have to sacrifice returns.

“There is considerable international data to indicate investors can achieve equal or better returns through socially responsible investing, says D’Souza. “Partly this is because companies that actively seek to be more sustainable tend to have stronger governance in place, which improves accountability and even stock performance. Of course, all the other elements of portfolio enhancement like diversification across asset classes and geographies remain pivotal to long term returns.”

Kuzma supports this trend suggesting that “the most notable causes include renewable energy, regenerative agriculture and social housing.”

This trend is further reinforced by younger generations adapting business goals and philanthropic focus to their purpose. “Philanthropy increasingly features in conversations with the next generation who have inherited or are soon to inherit significant wealth, Kuzma says, while many are bringing their own values to their parents’ businesses, including new approaches to health, wellbeing and spirituality.”

And while investment performance remains a key concern, client conversations reveal environmental and social concerns are also top of mind.

This shift in attitude is reflected in the ACI report too, which found that younger generations were more likely to prioritise doing business with a group whose mission is to give back to society (39 per cent for Millennials versus 16 per cent for baby boomers.)

Taking the road less travelled

In addition, there’s significant interest in a wide range of alternative asset classes. A 2022 study by Bank of America found that about 80 per cent of young investors with investable assets of US$3 million-plus (excluding their primary residence) were turning to less traditional asset classes, including private equity and commodities.

This trend is reflected in Australia where the ASX study found that far fewer members of Gen Z held Australian shares compared to retirees (43 per cent vs 71 per cent). In contrast, they were much more likely to invest in assets like infrastructure funds (12 per cent versus 1 per cent of retirees), international shares held directly (25 per cent versus 12 per cent) and futures (9 per cent versus 0 per cent).

Those in the 25 to 49 age group invested similarly to Gen Z. However, their cryptocurrency holdings were the standout. While Gen Z held over three times more cryptocurrency assets compared to retirees (13 per cent versus 4 per cent of all investments), both were dwarfed by those in this middle cohort, who made up a massive 69 per cent of all cryptocurrency holdings.

Of course, these trends need to be kept in perspective. “When we consider those investors aged 25 to 49, their predominant assets held outside super and the family home are still Australian shares and residential investment property,” Kyne says.

Nonetheless, he has seen a strong interest in alternatives from younger generations. “This group, and [Gen Z], have more appetite for real assets, sustainability linked infrastructure, private equity and green bonds,” he confirms.

Embracing all things digital

There are other ways that the younger generations are doing things differently. Digital advice, for instance, is far more popular among those aged under 25. In fact, the ASX report found that around one in four (26%) Gen Z investors used, or are planning to use, robo-advice or micro-investing – digital apps that allow you to automatically invest small sums of money into the market. This compares to just 2 per cent of retirees.

They also show more interest in more recent DIY investment products such as exchange traded funds (ETFs). Data from nabtrade shows that clients under the age of 40 have 29 per cent of their domestic holding value in exchange traded funds (ETFs), compared to just 10 per cent for those aged 40 or more.

This is significant considering the growth in the ETF market. There’s been a huge increase in ETF activity over the past few years in Australia, reaching a market cap of $147.4 billion in May 2023.

And it fits in with what NAB Private Wealth is seeing among its wealthy clients. As Kyne notes, “While younger clients are still keen to engage the services of a wealth adviser, they’re much more involved in the portfolio selection; they want to have more of a hands-on approach [right across the board].”

Ultimately, they want to actively shape their world – through their investments, philanthropy and the running of their businesses. 

“We’re seeing a generational shift,” Kunza says. “Whereas the first generation focused their energy on building their wealth and creating a legacy, the new generation is focused on honouring that legacy by using it to generate a positive social impact.”

Contact our team for personalised lending, investment and advice solutions to help enhance your wealth and secure your future.

When it comes to the great Australian dream, the younger generation are doing it differently. Find out how in Part 3 of our Future Focus series. Coming soon.

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Important information

The information contained in this article is gathered from multiple sources believed to be reliable as of the end of July 2023 and is intended to be of a general nature only. It has been prepared without taking into account any person’s objectives, financial situation or needs. Before acting on this information, we recommend that you consider whether it is appropriate for your circumstances and that you seek independent legal, financial and taxation advice before acting on any of this information. ©2023 NAB Private Wealth is a division of National Australia Bank Limited ABN 12 004 044 937 AFSL and Australian Credit Licence 230686.