The fabled, massive wealth transfer — the Holy Grail of the financial services industry. Back when economists were simply talking about what the WWII generation would pass on to its baby boomer children, they estimated that $10 trillion would change hands before the passing on was done.

In time, the legend grew. Updated estimates focused on what the boomers would be getting, plus what they amassed on their own, spawning an estimate of $41 trillion to be passed down over the next 50 years.

It's become an article of faith in this industry, a ballooning figure to salivate over. Advisors bring it up unprompted, as they hint at the dawn of a golden age for the industry — one in which clients will appear, checks in hand, seeking professional financial guidance.

The trouble is, many in the financial services industry are starting to think the estimates are way overblown.

Chip Roame of Tiburon Advisors, counts himself among the skeptics. “Lately, I keep going out to the mailbox to see if there's an envelope from Grandma that says ‘wealth transfer.’” Suffice to say he is still waiting for that check.

Roame's point is that too many advisors seem to take it for granted that new money will be coming to them with very little effort.

“The industry has interpreted this to say that [estimated assets] are all going from Grandma to the boomers,” Roame says. “In the end, it may all come down to a few nickels.”

But this isn't reflected in reality. It's not that there won't be a big transfer of wealth between generations — just that most of it isn't going to happen anytime soon, and you shouldn't depend on any of that money to grow your business.

Several factors, most notably increasing life expectancy, rising health costs and the declining savings rate (which reflects the proclivity of baby boomers to spend more and use an increasing amount of leverage through debt, according to the Federal Reserve) mean the wealth transfer could ultimately come to a lot less.

Certainly, there are opportunities for advisors when it comes to the aging of the baby boomer generation (and the generation that preceded it, still very much in existence). But gearing your practice around the expectations of a windfall is a mistake.

What is practical, analysts say, is to concentrate on building relationships with the children and grandchildren of existing clients so that you don't lose those assets when inheritances finally do occur.

“You can position yourself to serve the clients who are in the situation of transferring wealth in a case-by-case scenario,” says Richard Joyner, president of Tolleson Wealth Management in Dallas. “But I don't think you could stand back and say all you have to do is be in the right place and on Monday morning, $7 billion comes in, and you start getting transfers.”

Wealth Transfer: Urban Legend?

The idea of the wealth transfer first cropped up in a report by two economists from Cornell University in 1990, when it was estimated that $10 trillion would be transferred over a 55-year period. Two more economists, John Havens and Paul Schervish of Boston College, restated that figure in 1999 to an even-greater $41 trillion, which they call the low end of estimates. This figure is the one that's most often cited by those in the industry — even though this report specifically said that $16 trillion of that will probably go to the government in the form of taxes.

Since then, significant challenges have been lodged against those estimates. For one thing, people are living longer and therefore consuming more of their assets. The savings rate in America is much lower than in the past, and lastly, most of the population isn't going to see much of an inheritance anyway. And those that will are concentrated among a very small group.

Call this era the Age of the Aged. U.S. Census data shows that the fastest growth in population among age groups are among those 85 to 94 years old, which grew at a 38 percent rate in the 1990s; those between 75 and 84 grew at a 23 percent rate; and those 65 to 74 at just 2 percent. Those 75 and older make up 35 percent of those 65 years or older — compared with 32 percent in 1990.

The elderly need the most health care. And health care costs have been rising for years: This year, health care costs have risen at an average 4.4 percent annual rate, compared with an overall 2.7 percent rise in consumer prices, according to the Labor Department.

Not only are people living longer, but more are living on their own, which eats into those vaunted trillions. A report from the Federal Reserve Bank of Cleveland in 2000 said that only about 43 percent of people aged 85 and up lived with their children in the 1980s, compared with 87 percent prior to World War II. “The decline in the willingness or desire to bequeath may be a consequence of the fact that independent living is costlier,” the report said.

One of the authors of that report, Laurence Kotlikoff, also argues that the estimates of the inheritance aren't factoring in the steady rise in labor compensation (wages and bonuses), which are rising nearly as fast as the level of potential inheritances. “The original number was adding up the flow of bequests from now to 2050 without dividing by anything, or scaling it to the size of the economy,” he says. “What we did is look at what people would inherit as a share of their labor earnings, and, is that higher now than in the past? The answer is, no, not really.”

Specifically, the report says that between 1962 and 1997, inheritances as a share of labor compensation rose to 3.7 percent from 3percent. Kotlikoff estimates that this will indeed rise, but only by 0.8 percent, to 4.5 percent, through 2015. He does say, however, that inheritances will rise to about 8 percent of compensation by the middle of the century — suggesting that the transfer will indeed matter, but not for another 30 years.

In a subsequent study, however, the Boston College professors defended their original study, saying that despite living longer, the very old simply don't spend much money. In addition, they say that living longer also translates to working longer — labor force participation among older workers having increased to 62 percent in 2002 from 59 percent in 2000. But the report doesn't challenge Kotlikoff's assertions about the share of labor earnings.

What should reps do with this conflicting data? Lincoln Anderson, chief investment officer of independent broker/dealer Linsco/Private Ledger, which has more than 3,300 offices, says they should assume that growth of wealth transfer could slow, but not reverse. “People work longer, so in that sense they may continue to run positive savings rates longer, before they switch over to dissavings,” Anderson says. “To the extent that people live longer, they could end up unwinding a greater share of their assets before they bequeath them to the next generation, but I don't see it as something that will reduce — just slow down — the growth of those assets.”

So, Now What?

Many agree, however, that the idea of an en masse transfer isn't really something that the country will see. So that becomes the next question — if the opportunity isn't there in that way, how do you take advantage, or can you at all? “We do see our brokers having a difficult time transferring that money from the senior generation to the junior generation,” says one wirehouse executive, who asked not to be identified.

Some of the problem with that may lie in the relative concentration of the wealth to be transferred — nearly 55 percent of the wealth transfer is in the hands of 2 percent of baby boomers; the next 15 percent or so accounts for about 35 percent of the estimated inheritances, according to Boston-based Cerulli Associates. That puts a premium on having the right customers in the first place, according to Steve Shoen, president of Allied Financial, an independent financial consulting firm based in Los Angeles. In other words, this is largely about high-net-worth clients transferring assets to the next generation, which means you have to have those clients.

“The only way we work with clients is if we're dealing with all of their wealth,” he says. “If an advisor is looking at the whole family and multiple generations, they're doing their job. It becomes more of a question of, will they lose this money because they're not doing a proper job than, ‘How can I pick up this money?’”

Others agree.

“I never think of it as one big figure,” says one Merrill Lynch advisor, who serves high-net-worth clients. “It's sort of a moving target. You can't be all about the one client, but be deep into the family. You have to be introduced to family members above and below your client. What are you doing to develop a relationship with the children?”

“I'm just trying to keep good relationships with the kids, so I would keep the account,” says Tom Samuels, managing partner of Palantir Capital Management in Houston. “In that circumstance, it's just me not losing something, rather than being a real boon for somebody or being a boon to my system.”

With Americans living longer, there's a greater possibility of generation-skipping. If those with the assets are in their 80s, it means the next generation is in their 50s, the peak of their earning power — and so college-related bequests might be the most advantageous way to distribute wealth. The increasing popularity of tax-free college savings plans like 529 plans has resulted in a cottage industry in this area. As long as the tax laws are favorable for this type of savings, more generation skipping is likely to be seen in financial plans in the coming years, Anderson says.

The wild card, of course, is the estate tax, which will be phased out in 2009, but due to a sunset provision, will come back in 2010 if current legislation is not changed. If the repeal is made permanent, there's a potential $12 trillion more in inheritances “between now and 2046,” according to Cerulli Associates.

Still, it's important to note that the Boston College report cautions that the original estimate wasn't calculated “primarily for the purpose of estimating the amount of wealth transfer.” In other words, it just means, like the clients you serve, prepare for this possibility — just don't expect it.

Shrinking the Inheritance

Rising percentage of elderly in the U.S., 1990-2000.
1990 2000
Age Number Percentage of 65+ Pop. Number Percentage of 65+ Pop. % Growth
65-69 10,111,735 32.4 9,533,545 27.2 -5.7
70-74 7,994,823 25.6 8,857,441 25.3 10.8
75-79 6,121,369 19.6 7,415,813 21.2 21.1
80-84 3,933,739 12.6 4,945,367 14.1 25.7
85-94 2,829,278 9.1 3,902,349 11.2 37.8
95+ 250,437 0.8 337,238 1.0 34.7
Source: U.S. Census Bureau