In our first FOXCast episode, we check in with David Toth, Managing Director at FOX about his recently-published study, Transformation of the Ultra Wealth Business.  

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Listen Now: Adapting to Change in the Great Transfer of Wealth

KC: How is the Ultra Wealth Industry Transforming?  

DAVID TOTH: It’s pretty remarkable. I guess there’s just a point in time where we found it was time to declare that it is transforming. And perhaps it has been all along.  

The point in time, for us, is tied to the great wealth transfer that we’ve talked about. And we’ve heard numbers all over the place—e.g. $40 trillion—whatever it may be. We just know that it’s massive and we know, demographically, it’s going to begin. We began to detect that it is happening, and we saw that detection show up in data that we got from a firm called Headwaters MB LLC. And when we researched and began to work with their data, what we began to realize is that the transference of this wealth is beginning to happen with private businesses—private businesses that are mid- to large-size. The wealth owners in those businesses are aging, quite frankly. Over two-thirds are over the age of 57, more than one-third are over the age of 67, and we know many are in their 70s, even their 80s.  

KC: And this wealth transfer is staying within their families?  

DT: Well it may, and it may not. So, what’s interesting about that is in the U.S., typically it does not. Typically, the business is monetized, if not sold—fully sold or at least the majority stake is sold. That’s different if we’re looking at different countries. Here at Family Office Exchange, we have a lot of members who are in Europe or Latin America and the businesses stay generation-to-generation. So, the U.S. and certainly North America is unique in that regard. So, for those listening to this podcast, you can offer that comparison and that contrast.  
 

KC: So, you’re talking about a global wealth transfer that is contributing to this transformation?  

DT: Yeah, so in a lot of the developed countries, there’s aging. Certainly, if you look at Japan, the demographics of Japan probably lead the way in terms of an aging population. And even China has an aging population. It’s hard to believe with so many people there, but in reality, that’s true. That’s in contrast to less-developed countries who have by far younger populations—that represents most of Africa and the like.  

This particular study and the work we did, and the transformation of the business is certainly U.S.-based but does apply very much to Canada as well.  

1. We found that private business was the first piece of this that we ought to be examining. Because of the age of the wealth owner, demographically, this is happening. But that alone is not enough. We looked at two other characteristics, which are really essential here.  
2. What kind of business is it? And we grouped together all of those that are in mature industries (manufacturing, media, etc.) all the industries that you can see right now are beginning to be disrupted a bit by technology.  

So, it’s not necessarily a bad thing but it causes that business owner, if they’re in their 40s or 50s to make a decision about making an investment. And for someone in their 60s, 70s, maybe even 80s – do you want to make that investment in technology? And follow that up with an investment in talent to continue to operate that business and continue to build value into that business? So, that’s a key part of it. We found nearly half of those businesses that we’re talking about are in mature industries.  

3. The third element, and it’s no surprise, is that we’re reaching, if not the end of the bull market, we’re certainly in the latter stages of it. So, you look at valuations and private equity valuations, and the market overall, all indicators are, if we’re not at the peak, we’re awfully close. So, another motivating factor for the aging business owner is to say, “Do I want to make investments in the business? What is the right time? Do I have a plan in place to do that? And if I’m going to make that kind of move, I should probably be doing it as close as I can to the top of the market and not in another place.” 

So, there would be at some point in time, a business owner, if you took it the other way, say the market begins to go down, the attractiveness of the business and people bidding on it, then you’re stuck in a situation where you do have to make an investment. And you’re stuck in a situation where you say, “if I don’t have a ready successor, what am I going to do?”  

So, the one element of it, in terms of the transformation—what does it mean to the ultra-high-net-worth business—is how prepared are you to help them? 

KC: How prepared is an advisor?  

DT: How prepared is an advisor, exactly. So, if you’re an advisor today and you see this coming, you think, “well that’s a terrific opportunity.” Of course. But it changes. It’s not the same opportunity you used to get. Occasionally, there were always people going through these kinds of transitions, but there are a lot of people who want to help these clients. So, how is it you’re going to go about that? How prepared are you for that? And, associated to that, how prepared are they? Because if they aren’t, they’re not going to be engaged in making decisions with you. They have to make certain decisions and they have to be prepared with what’s next. What happens after the business? Even if they still hold a small stake of that business, which many do, it is no longer taking up their time. Are they thinking more globally? Are they thinking beyond themselves? Are they looking to do something that includes their family? Those are important aspects of it. And who’s going to help them with that? It has to be somebody who is, in fact, their trusted advisor. Someone they believe in, someone who can, not just do things, but also help them make these kinds of decisions. And help them surround themselves with the kind of people they need to make that happen. So, as a business owner, you were surrounded by people who were helping you all the time. You had experts. There was a CFO, there was someone who headed operations for you, there was someone who headed marketing for you . . . all those aspects. Those people are no longer there. And it’s not necessarily the same team but what is that team? Who are they? And how are you helping your client think about that and take that next step?  

There’s a mindset change moving from a business-owner to something that’s more along the lines of an enterprise. You may continue to have business stakes, or they may want to make other investments in other businesses, directly or otherwise. They may want to set up a foundation or impact investing. Who knows what that is? But, talking about those possibilities, and also thinking about, how does a family get involved? Or are they involved? Should they be involved in decision making? Should they be involved in what that step is?  

So, if you sort of reverse the role of saying, “I’m not going to offer you a solution first to your circumstance, I’m going to come with a series of questions, I’m going to try to understand every aspect of what you’re doing on an integrated basis before we make any decisions.” In other words, you’re telling them, while the investment bankers and others are trying to speed them up to get to the transaction, you’re actually slowing them down. You’re telling them it’s OK not to make a decision. And that’s really important. Once you create that space for them, suddenly everybody’s relaxed and everybody can make better decisions. The sale of the business and all that can take the track in needs to take and making sure all the right things are in place is what you do as a responsible advisor. And helping them fend off the investment bankers, or work with them in the right way is important. But, all the decisions for the rest of their lives, do not need to be made right away. So, it’s important to point out to them, there are two separate tracks here. They’re related, but they’re not on the same timeframe. It’s more about the questions you’re asking and helping them find a way, as opposed to directing them towards a solution.       
 

KC: And it’s a great opportunity. How could somebody interested in hearing more, see you in action? What do you have coming up?  

DT: The big thing we have coming up is our Wealth Advisor Forum in Dallas on May 1 and 2. And at that forum, we’ll be talking about the transformation of the business. But we’re taking this a step further and we’ll spend more time thinking about, what are we building? What’s the business of the future that we need to build around this? Because it’s not going away. It’s not a one-time event. The stretch of time of this “great transference of wealth” is at least a decade, if not more. And the decisions around it that are being made, are not necessarily one-time decisions (other than the obvious transaction of the sale of a business).