Many of the nation's billionaires are self-made, having bested their competitors and built massive fortunes.
With their average age at 67, they are now facing a new problem: What to do with the family business and how to pass on their wealth?
For financial advisors, this is one of the most important issues they will help their clients within the years to come. Handing over a family business to unprepared heirs can be a recipe for disaster. And a fortune can dissipate quickly if it's divided between children, grandchildren and great-children.
"Simple algebra will tell you it's hard to keep that wealth together," says John Matthews, head of private wealth management at UBS, which coauthored a study on billionaires with PricewaterhouseCoopers.
The total wealth held by billionaires has grown to $5.4 trillion, up from $700 billion in 1995, according to the authors. And the ranks of the self-made have swollen to 66% of total billionaires, up from 43% in 1995.
"Weve had an extraordinary period of wealth creation," says Michael Spellacy, a principal at PricewaterhouseCoopers.
The authors describe this as a second Gilded Age the first occurred in the period leading up to World War I, when industrial giants like John D. Rockefeller and Andrew Carnegie ran huge business empires.
While that era was built on manufacturing, about one third of today's self-made billionaires in the U.S. created their fortunes in the financial services sector, according to the report. By contrast, nearly half of
European billionaires and just under a quarter of Asian billionaires did so in the consumer industry.
UBS and PwC said they expect Asia to be the center of wealth creation for the foreseeable future, partly due to the increasing pace of urbanization in the region. Asian billionaires had an average age of 57. That's 10 years younger than their counterparts in the U.S. and Europe.
About 60% of self-made billionaires want to keep the businesses they built within the family. Only about one third choose to sell off some business units and about 10% sell off the entire enterprise.
But despite the desire to keep the business family-owned, only 36% of U.S. billionaires successfully do so. By contrast, more than half of European and Asian billionaires achieve this feat.
Michael Ryan, chief investment strategist at UBS, says it's critical for advisors to engage the ultrawealthy early on about if and how they may want to sell the business they built. Advisors need to ask, how do you want your legacy to be established? This is particularly important, he says, for clients who don't have a background in finance.
Matthews agrees, saying "It's the pre-sale planning that's important. Too often we find clients don't want to have these conversations until it's too late."
Still, selling can be hard for clients. One billionaire interviewed for the report said he sold his firm once he realized none of his children wanted to inherit it.
"What was the point of sticking with the firm? I decided selling was a much easier option for my family, although it has been super tough for me to see my legacy being sucked into a multinational and six years on no trace is left," this billionaire told the authors anonymously.
Many clients don't realize that there's a wide range of opportunities, such as bringing in a smaller investor to create some liquidity. And while it's necessary to think about standard issues like taxes, it's also important to think about the kind of industry the client operates in. Technology companies are more likely to experience upheaval and rapid change.
Conversations about selling the family business naturally extend to a client's legacy: What do they want to leave behind for their children and grandchildren?
It's leading to more conversations about establishing family offices, the report's authors say. Many ultrawealthy clients also are looking for ways to do good with their money, Matthews says.
"We think there's a massive wave of philanthropy coming," he says.
Matthews says that UBS hosts an annual global philanthropy forum for its wealthy clients, and which consistently oversubscribes.
"We couldn't do enough of them," he says.
Impact investing has quickly become a hot topic among the wealthy, he adds. "We weren't even talking about impact investing five or ten years ago.
Ryan adds that the rising interest in impact investing stems from billionaire clients and their desire for measurable accountability; they don't just want to throw money at a problem.
But there are additional threats to a billionaire client's legacy beyond wealth dissipating through the generations. The first Gilded Age ended with two world wars, the Great Depression sandwiched in between, and the adoption of a national income tax. The fortunes of many families were buffeted by these events.
Spellacy says that today there are three threats:
- Potential changes in the tax code loom in the minds of many billionaires who worry about the future stewardship of their wealth.
- Geopolitical tensions are high in some areas of the world and account for 65 ongoing conflicts globally.
- There are underlying business risks, particularly from technological changes.
"The speed of competitive pressures is incredible," Spellacy says. "Those risks loom large in the mind of a billionaire."
The authors expect a slowdown in wealth creation, due partly to slowing economic growth in developing economies like that of China's. Matthews adds that some asset prices may come down as central banks' policies change in the coming months and years.
And there is another key differentiating factor between today's Gilded Age and the first one: there was no income tax back then and many families weren't prepared for the economic and policy changes that followed suit, Ryan says.
"That's a big difference," he says.
- HNW Tax Planning: What to Do With Low-Basis Assets
- Smart Trust Strategy for Wealthy Clients in a Second Marriage
- Making a Prenup Hold Up for Wealthy Couples