Business Families in Transition – How the Wealth Management Community can Embrace the Opportunity?

According to Russell Reynolds Associates, some 85% of the companies in the Asia Pacific region are controlled by families, with the vast majority of them still private. In the Middle East, that number is even higher at around 90%, according to media sources in that region. In Europe, the equivalent figure is an estimated 60%, and with most of the very largest businesses listed and with ownership and management control spread much more widely. And McKinsey data indicates that 43% of the world’s largest corporations are in Asia. And hands-on, or line-of-sight evidence allied to many surveys combine to demonstrate that numerous of these family businesses across Asia are facing the need to transition control and then ownership to the next and future generations. What does all this mean for the wealth management experts plying their trade across the region? A panel of specialists gathered on June 15 for a Hubbis Digital Dialogue discussion to look deep under the hood of business families in transition and to mine out the immense opportunities arising.

The Sponsors:

• Lombard Odier
• Trident Trust

The Panel:

• Lee Woon Shiu, Managing Director & Group Head of Wealth Planning, Family Office & Insurance Solutions, DBS Private Bank
• Sunita Singh-Dalal, Partner, Private Wealth & Family Offices, Hourani & Partners
• Yanyi Choy, Director of Wealth Management, Hywin International
• Lee Wong, Head of Family Services, Asia, Lombard Odier
• On Wai Lau, Head of Wealth Planning North Asia, Pictet
• Sneha Makhija, Head of Wealth Planning, Sanctum Wealth
• Marilyn See, Director – Business Development, Trident Trust
• Wen Ni Aw, Partner, Wong Partnership
• Hengka (Henry) Ji, Partner, Zhong Lun Law Firm

Setting the Scene for the Discussion

At the same time as the already vast Asian private and family wealth is growing so rapidly, there is also a veritable tsunami of family businesses and wealth changing hands, as the older and founder patriarchs and matriarchs in the region either pass away or prepare to hand the reins and ownership of many thousands of family enterprises to the next or younger generations. Some of this has already taken place, but many trillions of wealth will transition amongst family generations in the years and decades ahead.

On June 15, our Digital Dialogue panel of experts focused on the needs and expectations of the current and the next generations of Asia’s private clients, delving into how the private banks and independent wealth management providers can offer advice and support in these areas, how they can tailor their offerings and their approach to retain and/or attract those next-gen and younger clients, and how they can maximise the opportunities ahead, for those clients and for their own businesses.

Estate and succession planning solutions are therefore key areas of rising emphasis in Asia’s wealth advisory industry. As so many of the founder generations age, as more of the second generation take control of the family business and financial wealth, and as more of the third generation return from overseas armed with their Western educations, there is a concomitant increase in both the focus and the professionalisation of solutions the wealth industry can offer in order to keep their private clients engaged.

Approaching older private clients on matters of wealth structuring and estate planning is always difficult anywhere in the world but this giant elephant in the room needs to be acknowledged openly. Accordingly, the wealth management industry has for some years been more and openly directly addressing this truly massive transition of wealth taking place from the founder/older generations in Asia to the younger generations.

Expert Opinion - Sneha Makhija, Head of Wealth Planning, Sanctum Wealth: “It is going to become increasingly critical for business families transitioning to ensure they do not just pass on wealth (in financial terms) to the next generation but also the right value system so that the next generation acknowledges the value of the inheritance as well as their responsibility as an inheritor. Additionally, communication is going to be the key to the longevity of family businesses. Hence, it is important that families establish mechanisms for joint decision-making where they come together at regular intervals to discuss matters important to them both professionally and personally.”

Our select panel of estate and legacy planning experts sought to analyse how wealth management and other professionals can turn these developments to the advantage of their clients and help devise the right solutions for their clients. They debated what talent, experience and expertise are required, and how the client-facing advisors and professionals should most effectively approach and communicate with all the different generations of clients.

Expert Opinion - Hengka (Henry) Ji, Partner, Zhong Lun Law Firm: “Applying proper wealth transfer tools with a people-first mindset is crucial in succession planning. Clients need to arrange different paths and asset holding structures according to their children's different abilities and characteristics.”

As a result, we know that Asia’s wealth management community, and indeed the global wealth management ecosystem, must adapt their products, solutions and services to cater to the needs and expectations of these younger generations. The family office can often help draw them into the centre of the family’s affairs; hence we are already seeing them take an increasing role in the growing numbers of family offices in the region.

This particular Hubbis Digital Dialogue event accordingly sought to offer delegates some invaluable insights and guidance to the state of the wealth management industry from the perspective of the evolution of carefully planned and well-executed wealth, estate and succession planning and structuring, including advice on how to nurture the right types of discussions around these important subjects.

The Key Insights & Observations

There are many challenges around bringing the generations together and effectively bridging their preferences and expectations around family business and family estate succession

It might sound like an obvious statement, but as one expert observed, businesses and families are not the same. The family is all about a longer-term vision, sensitivities, and careful nurturing, while business decisions must be made with blinkers on sometimes to help the operation adapt to the near-term exigencies of markets and demand while hoping to sustain well into the future.

“In Asia, there can be tensions between these two visions,” he said. “And when it comes to succession, the generations are different, they have different value systems, they and it is difficult to bridge these gaps, and to do so harmoniously, and to avoid potential conflicts in the near term, or time bombs that might go off in the future.”

Another expert opened her commentary by first highlighting the absolute need for open dialogue amongst family members. “No matter what kind of structuring solutions we envisage, and what type of transition we plan, or that a patriarch or matriarch has in place or in mind, you must have those discussions with the next generation and a true understanding of their various aspirations,” she stated.

If this type of approach is not followed, she said advisors and families will struggle to achieve the necessary alignment within their generations, and problem issues will quite probably arise in the future.

“For me,” she explained, “the key to all this is bridging the gap between the current generations and the next to help them move forward in the same direction, and together.”

A slightly different perspective came from an expert on the Middle East, who noted that the region is some years or decades behind Asia, but there are significant advances taking place behind the scenes in these organisations, with improving management and increasingly well-devised business strategies and family and business governance.

The value of a defined and robust structure cannot be underestimated, and communication and transparency as vital as the ‘softer’ elements of the process

A guest highlighted the importance of well-devised and properly articulated structures, advising the trust at the top of the structure for ease of succession planning, sooner or later.

She also advised open lines of communication and openness in order to spread the trust amongst family members that is so often lacking in these areas. But she also noted that oftentimes, families find this difficult. As advisors and fiduciaries, they work hard to connect to all the key individuals and generations for a better understanding of the family dynamics and sensitivities before proposing solutions.

A panellist elaborated on the types of conversations needed with clients and what they might actually entail, first noting that when they talk about an open and honest dialogue, that does not emerge simply by placing a bunch of family members together.

“We first need to explain to the family about the process, about the importance of understanding each individual family member’s fears and concerns, as well as their aspirations,” she said. “You cannot just throw them all together in a room and expect results; you need to take a patient approach, and you need to tackle issues one by one. Some of these situations take literally years to resolve, and the bankers should not be the only ones to drive the process, it must be collaborative, and involve other experts in the ecosystem.”

Family offices as the hub and spoke platforms for robust wealth management  and enablers of family business and estate transition, as well as gateways to family cohesiveness

An expert addressed the role that a family office can play in helping articulate robust business and estate transition. She noted that in Asia, the bulk of wealth emanates from family enterprises, and the financial or investible wealth is often best managed through a platform such as the family office, at least for very wealthy client families.

“The family office can help significantly in keeping non-business wealth separate from the business and help to create a more holistic approach to the overall family estate,” she said. She indicated however that the family office can help in keeping a watching brief on the family business, but not actually directly managing it.

Moreover, the family office can act as the hub for the next generations to help them start and grow new businesses that might perhaps be more in line with their own interests and motivations, creating further diversity but also helping satisfy the preferences of the next and younger generations.

This expert concluded that the family office can, therefore, play a significant role in helping pull together the different strands of business, financial and property family wealth and helping manage both liquidity and diversification.

Understanding the nuances among the generations is vital to determining the best course of action and structures

A panellist stressed how vital it is for all wealth practitioners, whether wealth planners, bankers, lawyers, or fiduciaries, to have the necessary conversations with the families, to understand the dynamics and motivations, aspirations and interests of the different family members. “The various generations will have grown up in different times, perhaps in very different circumstances,” he remarked.

He added that the first generation might have built their business from scratch and with little formal education, and is likely to be immensely attached to it, and proud of those achievements. The second and third generations will then be the beneficiaries in terms of growing up in a lot more comfortable circumstances, with better formal education and different aspirations too.

“This can reflect through ultimately to their investment preferences, and their desire to make an impact, and also potentially in philanthropy,” he said. “Wealthy families have shifted from just charitable donations to making a real difference, especially the younger generations, including around climate and sustainability.”

All these factors open the doors, for example to the family business being led by professional management teams, and the family wealth being invested via a family office structure and controlled more by the younger generations, often with experience gained directly in financial institutions and investments, and the family wealth invested to reflect more accurately their own agendas.

Sophisticated solutions for a complex world

A guest expanded on these concepts, noting that in a world in which wealthy families are increasingly complex and global, and also one in which there are more acute differences between the generations, expectations need to be managed carefully throughout the process.

“People can become upset when in their heads as a family member, as an owner, as a manager, they believe they are entitled to certain things, and the assumptions around such entitlements are often different amongst different family members and generations,” she observed. “Accordingly, throughout the entire process, continuous communication is needed to identify these issues and to manage expectations, to help drive towards fairness and to avoid disputes.”

Empathy and openness

She also explained that some assets might mean more to certain family members. “It is vital for the patriarch or matriarch to be clear in their decisions and to explain them to family members,” she stated. “When people think about succession, they think about that one single point in time when that founder-owner passes away, and assets get distributed, but succession is really a much longer process that must be carefully articulated and properly explained and related back to the family value system. You cannot explain or resolve issues from beyond the grave.”

Expert Opinion - Sunita Singh-Dalal, Partner, Private Wealth & Family Offices, Hourani & Partners: “Succession plans that are frequently revisited, reviewed, and revised, ensure flexibility, facilitate the smooth transition of wealth, and minimize disruption for a family. Wealth preservation structures must be able to accommodate changing family dynamics, growth, and diversification. Family governance practices, such as implementing family constitutions and charters, have grown in sophistication and importance.”

There are interesting differences to consider when businesses and wealth are moving from the founder to the second generation and from the second to the third generations

A speaker highlighted how the instigator of the transitions affects the approach and the attitudes. “In some situations, we see that the dynamics of the family can be quite different if it is transitioning from the first to second generation, or from second generation to third generations,” she said.

Those who built the business have much more personal involvement, whereas the second generation might have taken over the business as their parents hoped, and done well, but not then see the need to pressure their children or nephews and nieces to themselves take control and responsibility.

“They will often be a lot more open to discussion, such as having professional managers, or perhaps selling up and so forth,” she commented.

Spreading the word from the experts to the client-facing bankers is a vital element of driving towards better outcomes and also better business

A lawyer remarked that the RMs and advisors are in an excellent position to help their clients and families, but need to be armed with the best insights and latest guidance from wealth planning specialists, lawyers and others involved in

Another guest added that families should be wary of trying to divvy up the assets, but should instead focus on consolidating family wealth, allocating returns equitably, and involving the next generations in control and management of those assets, including businesses, depending on their inclinations and aptitudes.

A panellist observed that RMs might need more patience and extend their time horizons to both manage their own business and revenues and to cater to, or sometimes pander to families who need their advice, but who very often drag their feet over many of these issues.

Balancing the books

“If you focus on these conversations while neglecting your normal business of building AUM and revenues, your bosses will come knocking on your doors,” he warned. “Find the bigger clients you know have the potential to give you large AUM and then have these conversations and find the pockets where you can generate revenues more immediately.”

In short, it is more of a juggling act to keep the revenues flowing and provide dispassionate advice to the clients and families as a trusted advisor. “Some bankers I have seen give up on these issues and focus solely on generating near-term revenues, but the risk there is in the long haul, if they do not have these conversations with these meaningful clients, they risk being left out when wealth and control transition from first gens to the next gens and beyond,” he cautioned. “Remember it is the bank that stands to lose if these relationships are not extended beyond the founder generations.”

He added that internal communication with the private bank bosses is also vital, so they are aware of the value of the conversations taking place and rally the broader resources of the bank to help these RMs and advisors.

Balancing needs and expectations

Another panellist addressed the issue of this potential chasm between the need for private bank RMs to generate revenues and AUM in the near term and the need for the banks, and indeed many of the RMs not nearing retirement age to help generate future business from the next and younger generations.

She indicated that their own bank is far less conflicted in this regard than some of the other big-name private banks. “We remain privately owned, and accordingly, our DNA is slightly different,” she explained. “From day one, we stress the importance of our bankers embracing a genuinely long-term approach in relation to our clients and in relation to helping guide our clients towards their goals and understanding where they are and what they want to achieve.”

Long-term horizons

She said the bank strives to balance the challenges around RMs in this industry relating to these longer-term missions and objectives, and address those by ensuring that their DNA is centred on the long-term and multi-generations of clients. “We truly aspire to be our client’s trusted advisor, not just for today, but for generations to come,” she said. “That is our official mission statement from the top of the bank, and that is very much the culture here.”

This, she said, means that their bankers are empowered to relate these narratives to their clients early on and to highlight to them the vital importance of focusing on these issues.

Expert Opinion - Marilyn See, Director – Business Development, Trident Trust: “It's a basic expectation that we will do an excellent job of our core task of overseeing and administering a family's structures. But we also need to take a step back from the day-to-day administration to ensure we understand the family's evolving motivations and aspirations, so we can continually reassess their needs and where necessary, adapt their structures.”

Teamwork is essential

“But that does not mean the RMs are the best at articulating these messages and delivering the depth of advice required,” she explained. “And that is precisely why I am here and why my team is with me on this mission. The bankers can focus on these matters and open the doors to their clients, we can deliver our core expertise to their clients. This type of team approach is vital.”

Moreover, as to the collaborative effort she had highlighted earlier, she noted that the bank’s family services team is working on these matters constantly and has assembled its own set of trusted partners to help these clients achieve their goals, including, of course, specialist lawyers, accountants, consultants, trustees and other experts.

“We bring the ecosystem that we trust and rely on to support these clients,” she said. “Our bankers open these very important doors, essentially planting the seeds, and we then offer our expertise and our relationships to help them achieve their objectives. And we then remain aligned to our RMs to help ensure that we all keep up the momentum that we have gained.”

Seeing the value

Another specialist picked up on these points, noting that he tries to convey the message internally to their RMs that they should focus closely on these matters and that they are valuable to the bank and therefore positive for their own careers.

“We have to convince our relationship managers despite the pressures of their KPI that they need to understand the importance of these issues from the bank’s viewpoint over the medium to longer time horizons,” he said. “We must help the clients, or they will go elsewhere, and loyalties will be weakened. I often find it quite helpful sometimes to deliver some simple solution to help them address their immediate problems and thereby build rapport with the family.”

This can or should then lead to further conversations and deeper involvement, so the RMs and the bank have built the trust that will allow them to understand more about their client’s needs and family dynamics and then come up with more sophisticated solutions and ideas.

China tracks the major trends around business and succession planning but also has its own set of problems and issues to overcome

In China, these same issues are increasingly prevalent, but there are also specific challenges relating to the one-child policy and smaller family units. An expert reported that there is a lot of work taking place around the right types of tools and structures for wealth and business transfer, such as family trusts, statutory inheritance, gifts, wills and life insurance policies, and with more and more PRC clients choosing to set up a family office or family trust as the top-level structures.

“The advantage for the older generations is control and the ability to establish an investment and distribution plan that they believe safeguard the best interests of their descendants, but according to their own wishes,” he explained. “Remember that China introduced its one-child policy in 1982 and that lasted until 2015, so if the offspring are either not able to take control properly, or uninterested, then the owners need to sell or bring in professional management.”

He explained that if the latter is the case there are challenges around the relationship and boundaries between the daily management team and how the incumbents and successors retain the ultimate control of the equity interests, and the most critical decision element is the power over the governance of the company

Expert Opinion - Hengka (Henry) Ji, Partner, Zhong Lun Law Firm: “Remember the special case in China: the one-child policy and the large volume of single-child families. Most Chinese families only have one child to be considered as the successor. If the only successor is not capable or shows no interest in the older generation’s business, there are limited options and alternatives.” 

Another expert picked up on the earlier comment on communication, pointing to the deeply ingrained Chinese cultural inclination towards respecting and adhering to parental views. “Offspring are expected to respect their elders and are expected to care for them,” he said, “but as positive as this might be in many cases, it does often promote a lack of communication and transparency when it comes to a family business transition. It can cause a lot of misunderstanding. Even when there is a good succession plan in place, there is often a lack of communication about it.”

Expert Opinion - Marilyn See, Director – Business Development, Trident Trust: “Open and transparent communication with and between the family members are undoubtedly essential. But when supporting families in the intergenerational wealth transfer, it is equally important to hear everyone's views, so 1:1 discussions are critical to avoid certain stakeholders from feeling "silenced" by more dominant members.”

Another expert explained that the buoyant, rapid growth Chinese economy is a fertile ground for new economy businesses that the government wants to promote; hence the average age of the owners is considerably younger than in other countries, especially Hong Kong, which is more mature and saturated.

“These younger entrepreneurs are often well educated, they tend to be more receptive in terms of the concept of family governance, as well as being more open to succession planning,” he explained. “It is quite different from the earlier generation of business creators.”

And an expert also pointed out that many wealthy younger generations in China want to have a more international life ahead, so it is often difficult to attract them to stay, especially as historically the success of many Chinese family businesses is closely related to the communities and regions in which they live and operate.

A final word on China went to an expert who highlighted how the patriarch might in fact have more than one wife and might have children with mistresses and girlfriends, so the possibility of disputes in China is significant as the legal heirs want to defend their inheritance against what they see as outsiders.

“There are many disputes which occur in China or across multiple jurisdictions, as there are often onshore and offshore trusts, and to be frank, legal documents are not always well crafted, so we see more disputes ahead in the coming years,” he warned.

The various jurisdictions in Asia and the UAE are intensifying their efforts to draw HNW and UHNW wealth to their shores and to encourage more family offices to locate in their centres

The discussion drew to a close with several experts highlighting the intensifying efforts that the UAE (Dubai primarily, but also Abu Dhabi) is making to attract more major family wealth from around the globe. At the same time, in Asia, Singapore keeps racing ahead as a magnet for such wealth and family offices, while Hong Kong’s regulators are working assiduously to enhance their incentives and appeals, especially emphasising the connectivity to and cultural empathy with Mainland China as a source of those types of clients.

Bankers and advisors see some synergies in the relationships between these different centres and some collaboration potential as well, but the reality is that this is more of a competitive situation currently, with Asia’s leading private banks and EAMs hedging their bets by, for example, opening in the UAE and expanding their capabilities there, partly off the back of their offerings in Asia, for example as reputed booking and custody jurisdictions before the UAE develops its own capabilities in that regard.

Expert Opinion - Sunita Singh-Dalal, Partner, Private Wealth & Family Offices, Hourani & Partners: “The UAE does not compete with Singapore or Hong Kong, it is positioned distinctively in a class of its own, providing clients with a gateway to explore growing markets and trade opportunities. Families from the Far East are choosing to relocate their Family Offices to the UAE for a variety of reasons; access to Sharia investments, a growing talent pool of investment advisers, the ease of doing business, and attractive residency programmes are but a few of the attractions.

Additionally, plans are nothing; planning is everything. When transitioning into new territories, adequate exit planning, pre-arrival tax planning and cross-border advice are crucial prerequisites to ensuring successful and sustainable wealth migration. Choosing the right professional advisers in each jurisdiction at the outset, is critical.  A lack of advice, paralysis by analysis (essentially, being over-advised), or just getting plain bad advice, are so often among the reasons that many families set themselves up to fail.”

Into the future…

Throughout the discussion, panellists advised wealth managers and their clients and families to get focused on these issues as early as possible. One expert closed her comments by advising bankers and clients to avoid direct discussions about death but to focus instead on the future and the legacy the founders want to achieve for their businesses and their families. She said this is all about a smooth, equitable and transparent transition of business and family wealth, and the entire process should be tailored with the objective of retaining the family’s integrity and cohesiveness far into the future.