RICH BUT NOT CRAZY
Don’t let your family fortune go to the dogs. Preserving wealth for future generations doesn’t have to be fraught with drama. Ashok Soman gets the experts to weigh in on better ways to keep family and money together
The wealthy in the 21st century are not like the kings, nobles and warlords of old. They aren’t sequestered from the general population, and don’t maintain elaborate protocols that one must master if one hopes to be a part of that world. One thing they certainly do is try to quietly preserve the legacy of their great wealth – the Shangs, Youngs and Leongs of the Crazy Rich Asians film and novel certainly do this. It is perhaps ironic that this practical touch is what distinguishes the story. It is certainly not the conspicuous consumption parable that its somewhat misleading title makes it out to be.
This is not to say that there isn’t pomp and circumstance, of course, but Singapore does not see such crazy affairs as the recent wedding of Isha Ambani and Anand Piramal in Mumbai, India, speculated to cost US$100 million and which saw a performance by Beyonce, or tycoon Lakshmi Mittal’s daughter’s nuptials in 2004. That extravaganza cost a reported US$55 million and involved the Palace of Versailles – yes the palace-turned-museum of the French royals.
The excesses of those European royals in particular offer a lesson in what not to do if you want to sustain the family legacy for future generations. But the past also reveals surprising continuity in some instances, most notably in the example of the Nishiyama Onsen Keiunkan in Japan. The world’s oldest hotel, it was established in 705CE and has been run by the same family since then. That’s 52 generations of founder Fujiwara Mahito’s family, which is a phenomenal achievement.
In short, making the money is one thing – keeping it and the family together through the generations is an entirely different matter. In colonial times, wealthy families relied on an instrument called settled
estates to preserve their legacies. This allowed large tracts of properties to be held together for more than three generations, but in today’s fast-paced environment, it is entirely out of fashion, according to lawyer Lim Fung Peen, Director of Yuen Law llc, who specialises in Private Client matters.
Reportedly, the Kohs of Bedok and the Lees of the Lee Foundation utilised settled estates to keep their holdings together, and did so until very recently. Nowadays, wealth preservation is a big part of the finance trade in Singapore and there is a bewildering array of instruments available. To varying degrees, all of these help prevent the issues driving the characters at the heart of Crazy Rich Asians, particularly matriarch Eleanor’s destructive need to protect the family fortune – for her son Nick.
FAMILY EQUITY
The latest fashion in wealth preservation is what’s known as the family office, of which there are two kinds: the single-family office and the multi-family office. For the purposes of this article, the focus is on the single-family office, of which there are so many types that it is fair to say no two are the same.
“There is no one recipe to running a family office,” says Jonas Lindstrom, ceo and Partner at Blibros Capital Partners. Blibros is the family office of the late Magnus Bocker, the former ceo of the Singapore Exchange ( sgx).
This is why Urs Brutsch, Managing Partner and Founder of hp Wealth Management, emphasises the set-up stage. “Getting the structure right is crucial ( from the start), as opposed to choosing the right investment. Typically, it is a trust structure,” says Brutsch. This is not primarily a vehicle to avoid taxes, but is instead used so that control of the wealth remains with the founder of the business and remains directed by the spirit of this person’s wishes.
“What you want to do is keep the ownership and control of the business together, in order not to lose voting power. So instead of distributing control to several family members, control remains with the family office,” says Lindstrom. He points to the example of the various foundations that control ikea as an example where the asset ( ikea) remains in the hands of the founding family. Despite the convoluted system of family offices there, the fact remains that Ingvar Kamprad’s family remains in control, and even receives antitakeover benefits as part of the package. “It takes vision for a family charter, where the founding family members set out certain guidelines for the future,” says Dickson Tan, Development Manager with St James’s Place Wealth Management. He suggests that this is part of the reason why the family office option is somewhat underutilised in Asia. Of course, the fact that the family office might cost more than US$1 million to operate annually might also play a part. Tan points out that the founding family would need to be able to control the costs, so that there is a meaningful legacy to pass on in the first place.
On the other hand, Brutsch thinks the time for the family office in Asia is now. “People say Asians do not give mandates for outsiders to manage their money, but that’s changing. Today’s families are willing to accept outside advice and to delegate management of their funds to outside parties.” Of course, this relates only to the family’s wealth because family offices are rarely involved in the day-to-day running of the family business itself, the ikea example notwithstanding.
On the legal side of things, a family charter with a high degree of clarity is useful, according to Lim. If everyone is clear on the rules of engagement from the start, there will no need for fights down the road. To make his point, Lim likens the family that owns the asset or the business to shareholders, raising the issue: “What happens if there is no shareholder’s agreement when one shareholder wants to sell?” Crazy Rich Asians may be a fictional story, but it does present a reality where many of the current generation of the wealthy are not directly involved in the core business of their families. “It is common that the sons don’t want to be part of the business of the father, simply because they have seen how hard the father worked,” says Lindstrom. Interestingly, family offices that are professionally managed can be growth-oriented investment vehicles that do not require the efforts of the family itself. Family members who are shareholders can simply earn dividends from the family offices, to do with as they please. Brutsch offers a counterpoint to this way of thinking though: “People come to wealth
“People come to wealth management firms because they are already rich, not because they want to become rich” — URS BRUTSCH OF HP WEALTH MANAGEMENT
management firms because they are already rich, not because they want to become rich. We don’t do leverage, for example, because these families have already made their money and they don’t have that much appetite for unnecessary risk.”
LAND MATTERS
The focus on preserving wealth does explain why so many wealthy families look to property as the vehicle of choice, even some kinds of family offices. “Family offices love real estate, mainly because it represents a guarantee of capital preservation,” says Desmond Sim, Head of Research for Singapore and South-east Asia at cbre. He goes on to note that in Singapore, even the losses one hears of in very expensive property transactions – in Sentosa, for example – are mostly due to currency fluctuations.
It is for this reason that Singapore recently recorded a couple of massive gcb (Good Class Bungalow) transactions. It was reported that Tony Tung, Chairman of the Winson Group, purchased a two-storey bungalow in the Nassim Road area for $105.3 million, a new record high. This was the second gcb deal that the Tung family has done; another family member bought a gcb for $44 million in early 2018. Brutsch notes that many, if not most, of Singapore’s wealthy families secured their fortunes via property. He cites the example of a client who bought some real estate in the early 1960s along River Valley Road for $85,000. That property was sold in 1997 for $110 million.
“The value of land is tangible in the Asian mindset,” says Tan, which he feels is one reason family offices have not become more prevalent here.
LOOSE ENDS
“Family offices love real estate, mainly because it represents a guarantee of capital preservation” — DESMOND SIM OF CBRE
Of course, successful property investing involves being at the right place, at the right time, as the incredible River Valley Road story illustrates. We close here on another bit of fantastic luck – a story that goes to show that families should always pay attention to the collecting habits of its members.
Christie’s tells us that a vase that served as one family’s umbrella stand eventually sold at auction for more than US$20 million in 2016. The family thought the vase might be a quaint 18th- century item, but it was really a 15th- century Ming Dynasty vase from the Xuande period. If nothing else, this example shows why calling on the experts might be worth it.