LEAVING A PERPETUAL LEGACY
Rising wealth in Asia Pacific has created an urgent need for better wealth management.
Never before have so many families in the Asia Pacific (APAC) region had so much wealth, and never have they had such a challenge in passing on what they have accumulated to their next generations. According to data by Capgemini and UBS, this wealth amounts to about US$22 trillion and climbing, with more than 45% expected to be transferred to the next generation over the next five years.
However, the actual amount that will be left to pass to the second and third generations is unclear. The Williams Group reports that even in the US, where there is a stronger track record for successful wealth transfer, 70% is gone by the second generation, and 90% by the third.
Why does wealth dissipate down the generations? The same research shared three key reasons: 60% is due to communication and trust issues; 25% is because heirs are not properly prepared to manage their wealth; and 10% because the family has not formulated a mission statement on its wealth. Failure is seldom due to poor legal, investment or tax advice, but rather the lack of planning and communication.
It is important to note that successful transfer of wealth is achievable, and that many families in Europe and the US have done this for generations. The need to replicate this in APAC is an urgent one, given the pace at which wealth is growing in the region. In the next five years, eight Asian nations will be among the top 10 globally when measured by growth in their ultra-high-net-worth (UNHW) population, defined as having net assets greater than US$30 million.
But despite this, too few are planning ahead. According to research by BNP Paribas, the global average of wealthy families with a succession plan stands at 57%. But this figure is more than three times lower for Asian UHNW families. Only 17% of APAC families have outlined a roadmap for succession planning.
In addition to this, planning ahead is only the first step; the second is to focus on the family’s next generation members (NextGens) who will inherit the wealth. The business and wealth management landscape has been and continues to be impacted by technology, which necessitates that these NextGens acquire new skill sets, networks, and traits to manage both the family business and fortune.
It is evident that wealthy families must start talking more about this, but this is difficult in many cultures, and particularly in Asia. Many in the older generation are uncomfortable discussing their wealth with their children, perhaps because it is a taboo subject or because they do not want their children to feel entitled.
Education about wealth transfer has been around for generations in Europe, helping wealth to endure for centuries. But this is not the case for Asia, partly because great wealth is not something that many UHNW families were born into. For example, UBS reports that more than 70% of APAC billionaires are first generation and self-made. And although they clearly have remarkable skills in building wealth, they might not be as adept at passing it down in a sustainable way. The consequence of this is that many UHNW families in Asia either plan poorly or avoid the issue entirely until it cannot be put off any longer.
There are many families, of course, who do seek to create a sustainable legacy, but often lack the know-how on how to begin. Typically, they do so in one of two ways: outsourcing their wealth management to private banks and advisors; or having one or more NextGens and relatives run the family wealth, giving rise to ‘informal family offices’.
In many cases, neither is optimal. Private banks might focus on their proprietary services, which may not meet the unique and comprehensive needs of families. Families will also find that employing a variety of advisors is often inefficient and hard to manage. They can end up with an unconsolidated overview of their assets, overlapping investment strategies, and sub-optimal exposure to different asset classes and sectors.
On the other hand, informal family offices are usually established in an unstructured way, often out of the desire to be inclusive of family members. The resulting lack of a clear vision, resources and talent often makes this set-up ineffective and unsustainable.
Choosing the best path requires careful planning that considers individual circumstances. Many UHNW families have assets in different jurisdictions, locations and asset classes. Deciding how to best manage them is often a daunting challenge. For example, Reuters reported that in 2017, alerts from financial regulators globally averaged 216 a day, or one every seven minutes. Trying to follow these independently is definitively impractical.
Personalised Family Office
For families with a net worth of US$100-600 million, the optimal solution is typically to form a personalised family office within a multi-family office (MFO) setup. The MFO is a structure that provides a suite of services for several families, staffed by a range of professionals with a single point of contact. The most comprehensive MFOs can deliver everything from wealth management to tax planning, trust services to family governance, philanthropy to succession planning, and NextGen grooming.
Having a personalised family office can help UHNW families meet their evolving needs, such as keeping track of changing market conditions and obligations, or achieving greater efficiency through distributed costs. The office also forms a forum to share insights and best-practice advice with their peers. UNHW families also increasingly need a comprehensive view of family wealth in real-time, a technology that is of particular importance for the digital-first generation.
That was one of the takeaways from Golden Equator’s Beyond Wealth event, which saw the launch of the NextGen Programme designed to equip future leaders with the knowledge needed to build a sustainable legacy. Another key insight was the importance of philanthropy. The perception of philanthropy is currently not well-understood by Asia’s UHNW. Philanthropy focuses the family on doing good and at the same time, also fosters greater bonds. More UHNWIs, especially NextGens, are starting to take an interest in philanthropy.
Beyond learning new skill sets to take over the management of the family enterprise and wealth, NextGens will also need the network – in the traditional sense such as industry partners and business contacts, but also creating a like-minded community to help them achieve meaningful work.
Finally, while first-generation entrepreneurs may have the ability to teach business skills, they may not be as adept at training NextGens in wealth management skills as compared to a MFO, which can do this while also helping families plan, set clear objectives and create a long-term vision.
Building A Legacy
In the US, the disintegration of wealth across the generations is known as ‘shirtsleeves to shirtsleeves’. In China, people remark that ‘wealth never survives three generations’. But this does not have to be the case. Sound planning can ensure sustainable wealth management if delivered via a structured approach.
Regardless of the steps families are already taking to create a sustainable wealth legacy, they must address key aspects like open communication with all relevant family members – done separately with each individual. They must also clearly define objectives and goals, as well as the steps needed to reach them. Agreement on the structure that will be used is necessary, as is the education of NextGens so they can sustainably manage the wealth bequeathed to them.
In addition to all of this, it is easy to focus only on financial aspects at the cost of other crucial areas such as family harmony and individual health. Financial assets are important, but they are not the whole picture.
Ultimately, what Asian UHNW families need is a blended, bespoke approach: one that incorporates Western best practices but is adapted to local cultural nuances and tailored to each family’s specific needs. In this way, the wealth that the first generation worked so hard to attain can continue to enrich the lives of many generations to come.
About The Writer
Shirley Crystal Chua is Founder and Group CEO of Golden Equator, a group of five synergistic businesses covering fund management (Golden Equator Capital), multi-family office (Golden Equator Wealth), personal finance management (Asia Finance), business consultancy (Golden Equator Consulting), and a community-driven shared workspace (SPECTRUM). Shirley is a highly regarded thought leader and investor and has been a trusted advisor for UHNW families and individuals for close to 20 years. She founded Golden Equator in 2012 after spending a decade in Citibank and American Express International. Today, Golden Equator serves clients in over 12 countries with a diversified investment mandate covering 10 markets.
This article was first printed in MillionaireAsia Issue 52 - July 2019