SUCCESSION PLANNING

Passing wealth down through the generations involves challenges

Effective succession planning demands that both the family and private banker commit to spending substantial time and energy at in-depth discussions, says PETER GUY

Asia’s rapid economic expansion has not only created a level of wealth that is being enjoyed by third or fourth generations, but new sources and first generations of wealth. Planning and executing a stable succession plan for business, personal and family wealth is one of the greatest challenges to families, especially large and diverse ones with complicated and sprawling businesses and assets.

China’s rise has also produced a new class of entrepreneurs who need to deal with the issues of first-generation wealth. And technology wealth has created huge windfalls that require immediate planning for its special characteristics.

Unique cultural factors, particularly in Asia, such as the expectation that the first-born male will have a prominent role in family-business succession, must be reckoned with family members who will continue to participate in the business, earning their right to share in the family wealth. Over the last several years, a major shift in intergenerational control over Asian businesses has occurred.

This is a particularly sensitive period when individuals are looking to step back from running the business they have founded. Effective family governance and controls are needed to preserve wealth and ensure that the entire family enjoys unity and benefits. The role of an independent trustee and/or adviser to the family is critical to design and ensure appropriate checks and balances are installed to prevent dissipation of wealth, through family disputes or bad investment decisions.

Mainland Chinese clients are fast learners but have little experience dealing with succession issues, because most of them represent first-generation wealth. First-generation clients must set clear principles and guidelines for successive generations. Education about succession challenges has proven to be one of the most important subjects for high-net-worth individuals and family offices.

Transparency about financial requirements, goals and intentions, especially in uncertain times, by the beneficiaries will help avoid misunderstandings and conflicts with core objectives set by the founding patriarch or matriarch. The beneficiaries have to be upfront and transparent about their personal financial circumstances, financial goals and life aspirations, as well as their expectations of their role in the trust.

Non-business activities, such as philanthropy and charity, can unite the

extended family, bringing everyone together to share aspirations for a greater good. When these activities are aligned to the family’s collective values, they become an effective way of building family unity and harmony.

Succession demands that both the family and private banker commit to spending substantial time and energy at in-depth discussions. Much information and planning are required to develop the appropriate, customised trust set-up. The bank’s service and outcome are only as good as the quality of the joint effort. The client’s trust adviser often has extensive knowledge of the family’s assets and their needs and goals. These are critical elements for ensuring that the succession-planning structure fits its intended purpose.

Once the client develops succession plans, they just can’t set up a trust and expect it to become a low-maintenance vehicle. The private banker and trust adviser want to maintain a long-term dialogue with the family because they need effectively to act as a partner to adjust the plan as circumstances change.

All of these services are ongoing and evolving as multigenerational family members of a family office or an ultra-high-net-worth client may be scattered and living around the world. They are not only subject to different tax requirements, but also have different lifestyles, as well as philanthropic and business goals. All of these financial matters are likely to be regulated.

Passing on investment discipline is a key part of succession, and in these uncertain times it’s especially important. Fundamental concepts such as downside protection, capital preservation and global diversification are better understood today. Most of all, Chinese clients now realise the need to assume less risk in their personal investments versus their business activities. Financial versus operational risk involves entirely different challenges.

Each wealth-transfer and succession situation is unique. Requirements must be updated regularly and executed with transparency for all beneficiaries, especially as new family members join. The ability to provide coordinated, multi-jurisdictional advice and execution is a vital part of succession for a family office or high-net-worth individual.

China’s unprecedented growth in wealth across many industries has resulted in Chinese families being

Non-business activities, such as philanthropy or charity, can unite the extended family

more open than those in Hong Kong to different succession mechanisms, such as selling their businesses to professional managers or to privateequity funds. These diverse options require careful planning for the family owners.

The recent technology boom has also created unique succession issues for a new group of young, millennial clients who have generated wealth primarily from successful technology start-ups and listings. The sudden nature of their success represents a new challenge for private bankers and investment managers.

These entrepreneurs start wealth accumulation in a poorly diversified position, as their wealth is concentrated in one company and sector. Achieving diversified portfolio-asset allocation becomes a priority and part of succession planning. Luckily, new tech wealth is receptive to new ideas and understands the need to diversify over time.

The millennial generation has demonstrated commitment in making environmental, social and corporate governance (ESG) central to the determination of their sustainability and the ethical impact of their investment decisions. ESG generated little investor and institutional interest several years ago. But, a new generation of investors has widened this asset class by being more empathetic with the environment and social conditions.

Private banks have traditionally concentrated on selling financial products. But their future lies in providing advice and solutions and addressing the global needs of high-net-worth clients and family offices. Asian clients and families have learned from Asia’s past booms and busts and, most of all, that history repeats itself.