By William J. Kelly, CAIA, Founder & Managing Member, Educational Alpha LLC
Disruption is afoot at every turn. With due respect to a US Founding Farther, Ben Franklin, perhaps it is time to disrupt one of his most famous quips. “In this world, nothing is certain except death and taxes … and the move to the liquidity window when one expires.” But when it comes time to settle the estate, who is the counterparty and will there even be a bid?
My parents both died in the last couple of years. They led full lives into a tenth decade, had seven kids, twenty-four grandchildren, and even a couple of great grandchildren when they passed, so fullness of life and legacy is what the family now cherishes. Al and Sheila Kelly had solid middle-class values and a very modest balance sheet at the time of their passing. Notably, this Silent Generation knew a thing or two about the Great Depression, World Wars, and the need to be thrifty. Nest eggs were small in absolute dollars, but it was a generation who understood the power of compounding and long-termism.
There is so much talk about the coming transfer of wealth that Cerulli has (re)sized at $124 trillion, which got me thinking about its component parts, and of course what it meant to me in the inevitable settlement of an estate. The common and most divisible numerator in this process is cash, as obviously houses, cars, artwork, collectibles, etc. are hard to divide between two or more beneficiaries. With my parents it was a very modest home, small stock positions (mostly in companies where their kids were once employed!), and some silverware. We sold the homestead, divided the stocks (while perhaps putting a bit of sell-side pressure on former employers), and put the silverware up for auction. The vast majority of what they owned was reduced to cash as we sought counterparties to help liquidate most of the corpus.
What does this mean for the largest transferees under the Cerulli calculus? Likely the exact same approach we faced with my parents, albeit with (much) larger numbers and a much more sophisticated and complex set of assets in play. It will not be a single transfer but millions of individual transactions (there are over 70 million baby boomers in the US alone), across a cohort that happens to own over 50% of the wealth pie, and it is not all in cash and marketable securities.
The boomers own 56% of the US household assets invested in the public equity and mutual fund markets, 30-40% (the latter sweeps in some of the older years of Gen X) of the residential housing market, and they have been the primary drivers of the diamond market and bids in the high end art market. They also own just over half of the privately help small businesses in the US. For now, they seem to be keeping the houses, but diamond sales are shrinking, art sales are slumping, and private equity is already going through its own liquidity challenges. Death will always be the undefeated equalizer, and estate settlements are likely to bring a lot of diversified inventory to the liquidity window. The risk is that the counter party may not be a buyer at the current mark, or maybe not even a buyer at all.
Before you short the manse and go long the undertaker, it is worth at least understanding what this next generation is looking to buy and/or own. Future-proofing your estate needs to move beyond tax planning, and you should also be thinking about what those (fat) ‘tails’ from the crypt might look like. It is quite possible that the illiquidity discount could be more problematic than the confiscation fears brought to you by your friendly tax collector.
A recent study by Bank of America shows that the primary recipients of this great wealth transfer have a much higher bias toward digital assets, including crypto currencies. They also like real estate, but maybe not the big home in the leafy suburbs. The impact theme ranks high with them as well. That is not to suggest that the Baby Boomer should reposition their entire portfolio to meet the anticipated proclivities of a vastly different counterparty, but this type of post-mortem gamification analysis should not be dismissed either. It also provides a different angle to potentially sizing bitcoin or other digital assets in your portfolio, which is largely under-owned by the 60-plus crowd. Instead of the adage of buyer beware, it is a suitable time to be more aware of your buyer.
Remember that it was also a modern-day Ben Franklin who (kinda!) said that “assets stalled at the liquidity window are like fish and begin to smell after three days.”
Seek education, diversity of both your portfolio and people, and know your risk tolerance. Investing is for the long term.
About the Contributor
William (Bill) J. Kelly, CAIA is the Founder and Managing Member of Educational Alpha, LLC where he writes, podcasts, and speaks on a variety of investment related topics, focused on investor education, transparency, and democratized access to differentiated risk premia. Previously he was CEO of CAIA Association since taking this leadership role in 2014 until his retirement in 2024. Prior to that, Bill was the CEO of Boston Partners, and CFO and COO of The Boston Company Asset Management, a predecessor institutional asset manager. In addition to his current role, Bill is also the Chairman and lead independent director for the Boston Partners Trust Company and serves as an independent director for the Artisan Partners Funds, where he is also Chair of Audit Committee and a designated Audit Committee Financial Expert. He is also currently an Advisory Board Member of the Certified Investment Fund Director Institute within the IOB (Dublin) which strives to bring the highest levels of professionalism and governance to independent fund directors around the world. Bill began his career as an accountant with PwC where he earned his CPA (inactive).
Learn more about CAIA Association and how to become part of a professional network that is shaping the future of investing, by visiting https://caia.org/