Asia private banking debate: Private wealth is sticky in Asia

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By:
Helen Avery
Published on:

As Asia’s ultra-rich entrepreneurs prepare to pass on their businesses and wealth to the next generation, Euromoney asks leading industry experts to discuss the challenges and implications of wealth transfer in a region unprepared for it.


Asian private banking debate: Participants


EXECUTIVE SUMMARY

•Families in Asia are struggling to talk about succession planning, so now is the right time for advisers to help get the discussion started

• More education and communication are needed between the generations

• Families need to look at governance structures and policies; they need to integrate ownership and governance and separate ownership and management

• Bankers should not be the sole adviser to families, yet banks need to ensure some continuity if they want to work with UHNWs over time

• Taxation is still a big challenge for structuring wealth transfer and succession

Helen Avery, Euromoney
As the vast wealth that was created in the past 60 years or so in Asia is about to be passed on to the next generation, what are the challenges advisers identify around succession planning?

BR, HSBC The sorts of things that keep these wealth creators awake at night as they approach their twilight years are less around strategy for the business or even their investments. They know how to do all that. It’s more about personal issues: which of my children are going to take over the business? Are any of them going to take over the business? How can I provide for my second family? What you see in the papers is the tip of the iceberg in terms of simmering family disputes. Although some families deal with these challenges well, most do not at all.

GM, FBNA Families in Asia are really struggling to talk about succession planning as these topics are not discussed in the culture. But just because you don’t talk about them doesn’t mean you don’t have the issues. It is a very delicate and difficult topic here to start to talk about emotions.

RA, BDO In the past, families would simply hand off the money and other fixed assets to the next generation, but now there are multiple issues, including things like migration to other locations and complex family relationships. Family companies and assets are being sold, the money handed over for distribution and then the courts are involved in the probate and distribution process. Succession and deliberate estate planning are new concepts where we are in the Philippines. The challenge is in making informed decisions while the person is still alive. With the myriad of laws and regulations, expanded family relations and politics, making these decisions alone is not easy.

CT, WMI The issue of succession planning and wealth transfer is relatively new in Asia. Moreover, dwelling on or discussing death is generally avoided a little more within Asian culture. However, we believe the time is right for our advisers in Asia to learn how to initiate and develop meaningful discussions on such issues, as this brings a richer and deeper dimension to the value that our advisers can bring to clients. Much of the wealth in Asia is new wealth; people will eventually need to give these aspects serious considerations. Advisers can help the client by starting these conversations earlier.

NQ, NQI If it had not been for the crisis, the subject of separating family wealth and business risk would not have been so upfront. But the next generation has realized that if they don’t get involved, they might not get a cent. For old money the concept of a family office isn’t really there. And new money doesn’t understand the concept of a trust. The key is education and more education and communication and more communication.

LL, DBS All successful businessmen know that their time will come. And depending on their background and culture, the challenges around succession planning will be determined by the level at which they are comfortable talking about it. But the emotional and logical parts of the brain are different. Logically they know they need to do something. The emotional part is more challenging. On one hand we know it is critical, but on the other it is how and when do we bring it up? Asian families are not as comfortable as Europeans in talking about the handover. You can have the answers to logical problems, but not to all the emotional problems. And that is the challenge.

AK, PwC Another factor I would like to add is the level of wealth. Someone who has $20 million might need a lesser extent of planning and face different challenges than someone with over $1 billion in wealth. At the lower end, just a suitable will might be OK or perhaps some standard planning ideas offered by private banks. On the other hand, someone with $1 billion-plus is likely to require specialists and tailor-made solutions. Also some might think that the ultra-high-net-worth individuals have not started planning, but in my view actually they have. It may not be as structured as we might want, but I believe they have almost always started planning.

Euromoney For the purpose of this discussion we are looking at those mega-wealthy families: those with at least $500 million. Where do you start with these families to address the challenges?

BR, HSBC The D word is generally out of the question. I tend to frame the discussion in terms of strategic planning for the family over the longer term. You plan strategically for your business and for your investments, we now need to plan strategically for those assets over the medium to longer term – and by that I mean, 20 to 50 to 100 years. When you frame it in that way it takes the business owner/patriarch out of the equation and the discussion can begin to focus on the real issues and concerns and what the options are in terms of addressing mitigating those issues.

NQ, NQI It starts with trusting your adviser. I talk separately to the fathers and the children and the mothers, whom I get a lot from. In the Middle East and in Hong Kong I’ve seen children work in their fathers’ businesses, but as they start to speak the father will say: "I started this business before you were born", and that can be emotional. And perhaps that child isn’t right to take on ‘Mr Li’s’ business. Families want to hear about other families’ experiences and this is where you can be helpful as an adviser.

BR, HSBC The ones who get it right are the ones who managed to successfully integrate ownership and governance and separate ownership and management.


NQ, NQI There can be a lot of interaction once the family accepts you are there to help. So then you need to listen to their real feelings. But it can take a very long time.


GM, FBNA
In the past five years I have been working with family therapists and it brings a whole different perspective. In family business it is never about the money. It’s not even about the business per se, but more about what the money or the business represents: is it a way to stay together? Is the money a way to maintain control over the children? There are many issues around money and business that are not spoken of as they are heavy and painful. I recommend to families and advisers that before they look at governance structures and policies, they should work on the relationships or else you increase the chances of complicating instead of facilitating family relationships.

LL, DBS Even in harmonious families you sometimes see it is very difficult to get there. How do you deal with a family that is already fighting?


GM, FBNA First I reset the expectation about what harmony is and is not: being harmonious doesn’t mean that families don’t ever disagree. I tend to help them focus with something positive: what are their strengths? Every family can find something to acknowledge and be grateful for. If it’s very dysfunctional I would encourage them to look for help from therapists. It is important to set clear boundaries in the expertise that professionals have: knowing family businesses doesn’t necessarily make advisers able to deal with deep family issues, for that you need specific trained people. If you advise your client and his son loses money in an investment, it is bad, but it is money and can be recovered, but if you offer the wrong piece of advice regarding individuals and relationships, very serious damage can be done.

RA, BDO There are also those who won’t even start a conversation because of fear of losing control of their wealth or the family business. And in the Philippines, where multiple families are not uncommon, then it becomes a case of how do you get the families together and agree on an orderly distribution of wealth and succession mechanism for family businesses? In most cases, they won’t even sit in the same room.

AK, PwC The importance of open and transparent communication cannot be overemphasized. It is important to establish as much trust as possible and communication is the tool. Once communication is established and trust built up, there can be a realization of common values among the family members. The next step evolves into establishing where the authority lies – whether with one member or multiple members. It is important for the family to know ultimately who calls the shots. Those calling the shots will also then need to understand that their decisions have consequences. With trust and objective set up, we then see families head towards establishing a framework.

Euromoney Cynthia, how are you training up private bankers to have these sorts of conversations?

CT, WMI We recognized this need some time back, and since then we have incorporated a wealth planner’s toolbox in all our programmes for private bankers. We train the adviser on the various tools of trust and estate planning, tax, insurance and best-in-class solutions to advise on succession planning, inter-generational wealth transfer, family and business governance and philanthropy. And very important, beyond the financial tools, also how to also handle the emotional aspects and family dynamic of such conversations.

This often requires the private bankers to see themselves as farmers, rather than hunters who merely focus on increasing AUMs and looking for the next transaction. The lesson we want these participants to take away is that relationship managers have to look at families and their needs on a long-term basis. They need to develop the passion, sincerity and genuine concern to get to know each of them individually.

LL, DBS It is a good starting point to look at tackling the issue in this way, but I don’t think that hunters and farmers are so cut and dried a distinction. What is important is to build trust. You cannot have these conversations at all if you don’t have trust. A lot of bankers are not equipped to do it. Or they don’t have the organization behind them that is equipped. They lack the white hair, or the specialist knowledge, or they rely on a team to do it for them. In this sense, they can start a conversation, but cannot complete it. So that is where experts are coming in, and a lot of the banks are trying to bring on experts.

BR, HSBC Tackling succession planning has to be collaborative. The best planning is generally where we are not asked to control everything as a trustee, but get the family and, importantly, their trusted advisers involved. The key issue is decision-making. There are many peripheral reasons why wealth dissipates over three generations, but the underlying cause is that decisions cannot be made – such as around dividends policy. The son with the business wants to invest in it. A sister-in-law says no, let’s put it back into society. Another brother says no, I want some cash. So they get to a gridlock. There needs to be a framework for collective decision-making or else it starts to fall apart.

NQ, NQI Divorce is a complication, and people don’t even consider that the father might outlive the son.



LL, DBS
Here is a real example. One tycoon decided his sons were not great in business and he had concerns about the in-laws, so he made the decision to convert the business and created two separate trusts that cannot touch each other.


Euromoney
There seem to be no set formulas here, and many individual cases. How can you know what to advise?

NQ, NQI Yes, no two cases are the same, and there are several solutions to adopt as best practice. So our role as advisers is to use our experience and pick a bit here and there to share with them.


BR, HSBC
It is the best thing you can do, I agree. There was a family where the father was stepping back and the two sons very amicably were stepping forward. It was a family where you would say there were no obvious looming problems. But one son said to me: "We are a happy family but we’ve never gone through an inter-generational wealth transfer." You must see what works and what doesn’t work from your experience and have some tips. And I think that is how we can help. We can share what we have seen work and what has not.

GM, FBNA The main contribution as adviser is to get the families to a point of understanding what the root cause of their issue is. One of the most important things is to help them understand what the business represents. It could be the legacy of the father, or maybe it is a way for the children to return the generosity of their father. So unless they frame this, they have the illusion that they are creating solutions as they communicate, but the first time they experience stress, they break because there isn’t the strong foundation.

RA, BDO Let me throw a question to the room. There are three bankers around this table. Given the complexity of the issues we have been talking about, would bankers be the right advisers? Given the hunter/farmer mindset we are groomed for from day one, do we make good advisers?

NQ, NQI I don’t think you can prepare a banker with a list of questions they go to tick off. You have to have the empathy to sit down and understand. The grey hair helps. But bankers and advisers can point families in the right direction. Singapore is good in that there are many service providers to call upon to share experiences, but bankers should not be a sole adviser – no. They are important but they do move on. They don’t always engage fully with their organization. There is a lot of work to be done by leaders of banks to make sure there is continuity if they want to be with these families for a long time.

LL, DBS I struggle with the same question and it is a serious one. A lot of people go to banks as a starting point. But whether they are equipped or not is a different matter. More experienced bankers know when and how to raise the topic but it can be touchy. And families also look to tax advisers and lawyers, and family office specialists. The problem is quite a lot of families in Asia are not prepared to pay for the service. There are a lot of advisers, but when it comes to the fee and payment, it becomes a struggle. So from a business standpoint alone, does it make sense to pursue this part of the business?

AK, PwC I think bankers play a very important role. They have the scale and see a lot of families and a variety of scenarios. Of course, it is not possible for them to possess all the knowledge, but they can be a good point of contact and sometimes act as project managers. They will invariably loop in experts like us and others to provide effective solutions to families.

BR, HSBC Let’s be brutally honest. Many bankers traditionally in private banking, and I think this is changing in Asia, were there to sell the next product; that is not helpful in this context. I think bankers need to understand that these are serious issues and they need to be able to have a dialogue. They know where to point their client because this area is multidisciplinary and not something a banker can do alone, as Noor says. This is not intended as a pitch. But our trust business has been around almost 100 years and is separate and we don’t require our trust clients to exclusively bank with us, so AUM is the not the primary driver in that regard. We charge a fee and it is a transparent fee and some families are paying us in the millions of dollars a year and it is not hidden so we have to provide demonstrable service and value or they stop paying. Private banks that are presenting families with cookie-cutter solutions are failing these families.

RA, BDO The difficulty is making the shareholders understand that this side of the business is not immediately building AUM. Clients would usually negotiate the full service fee, so it can be a struggle with shareholders to understand the estate planning and succession part of the business compared with the investment-driven AUM side of the business. Primarily if you have shareholders to answer to, they will talk about return on equity, but creating this business segment takes a lot of time. It could be two to three years down the road after talking with them before a full engagement is entered into with these clients.

CT, WMI I think bankers can make good advisers as long they possess the right mindset to put the client first rather than their quarterly revenue or next big trade. I personally believe that a good private banker should see this as a business for the long haul and to be very client-centric in providing holistic solutions. In interacting with some of the young bankers, I sense they sometimes struggle with this philosophy as they may have some seniors who may have more short-term goals, and these pressures unfortunately skew the behaviours of the business towards the bottom line. We need to strike a better balance between clients’ needs and organizations’ goals so our training aims to increase the value-added of such relationship managers away from just focusing on products and prices that can be easily replicated. A deeper understanding of their clients and their needs, beyond just the selling of products, will ultimately lead to better revenue for their business when clients see the value and sincerity of the adviser.

GM, FBNA I recommend the book "The speed of trust". Stephen Covey, the author, says there are two main reasons we trust a person: their character, the ethical aspect, that they have no hidden agenda; and then the second is skill and competence. When we talk about bankers and advisers we focus on the fact that they should have a strong technical component in their skillset, but often the other piece about understanding the family is missing. Bankers who interact with families in any sense should have the knowledge that comes with understanding family theories as they know about business theories. It goes beyond using common sense and your experience. Some advice could be harmful once you start to understand family dynamics. So I think if you want to build trust as advisers working with families in business, this component needs to be developed. But even if you understand the family, the key job of a banker is to advise on the investments, not to fix the family. Here is where the other component of trust, the "character" of the adviser, comes into play. They need to be clear with the client regarding up to what point they can assist, and when another expert should come into the picture – that is the ethical part. That makes the family trust you, and you keep the client for the rest of your life.

BR, HSBC Gaia, what do you feel bankers or advisers could say that may be harmful, can you elaborate?



GM, FBNA
The easiest example I can think of is the phenomenon of triangulation. If there is tension, or conflict, between two members of the same family, the adviser might intermediate, thinking this is helpful; in reality, though, this adds another layer to the communication of the two people and keeps the family members separate. You are not helping them. They need to have a direct relationship, so you need to bring them into the same room sooner rather than later and help them to talk to each other.

NQ, NQI The adviser cannot be selfish but employ the best in class advice.



RA, BDO
How do you manage your own emotions when dealing with these clients?



NQ, NQI
It’s like other professions. Of course you feel, you are human, but you have to be a professional. We asked entrepreneurs with more than $250 million: "Have you arrived?" And they said: "I will only know after I’ve gone what value I have left in this world". This is important to them. So we have to be professional.

GM, FBNA If you deal with clients’ family matters, it is important the adviser has worked on his own personal issues first. The last thing you want is that the adviser projects his/her issue on the family and uses them as his/her personal therapy.


Euromoney Moving on to structuring the transfer of wealth, what are the issues around it that are challenging?

AK, PwC Since 2008 governments have been looking for money and they are going after tax evaders. Families who might have previously put money in tax havens such as, say, the British Virgin Islands or the Cayman Islands, might need to consider other jurisdictions that carry more credibility. Singapore is a business-friendly and low-tax jurisdiction. But at the same time it has a branding of being a strong and strict regulator, so we are finding that a lot of families want to use Singapore-based structures and family offices to manage their succession and transfer of wealth issues.

BR, HSBC I agree it is important today to think carefully about jurisdictions, but even more so is getting it right. Tax planning that relies on no one finding out for its effectiveness is evasion and not planning. That is clear to the whole world now. When it comes to structuring, families deserve to have their arrangements kept strictly confidential; we say we will try, but if it comes under the regulatory and fiscal spotlight it has to stand scrutiny. And if you are not OK with that you are not with the right bank.

NQ, NQI Not all clients are guilty of trying to evade taxes, let’s be clear. I have heard of people led into structures because they trusted their advisers. There is a big distinction between secrecy and privacy, and we need to get those right.


RA, BDO
The issue of taxes is a challenging one when structuring for wealth transfer and succession. The Philippines government has been looking at collecting more taxes to support the economy, and they have announced one specifically for the collection of estate taxes. We have to consider the law and the implementing rules and regulations that may be issued from time to time to interpret or apply these tax laws. It’s a challenge to manage estate planning and succession structures over several lifetimes. You always have to consider two factors: regular review of the family’s objectives and dynamics; and then keeping the structure current to make sure it remains faithful to that objective in the light of new laws and regulations including taxes. There is need for constant review.

AK, PwC I agree that whatever you choose needs a constant review. You need to choose a location that offers tax neutrality and at the same time is respected in the international community.


BR, HSBC
Years ago ‘Mr and Mrs Li’ in Singapore or Manila would have had all their assets there and it would have been very straightforward from a tax perspective, but wealthy families these days tend to be more multi-jurisdictional, both in their asset positions and in the spread of the family members themselves. Tax is something you have to get right. But I think starting with the tax planning first is putting the cart before the horse. First, what does the family want to achieve? What assets are core to them? What are they trying to keep together?

AK, PwC Yes, the structuring should not be tax driven. This is important. Any structuring you do has to be commercially driven and requires substance.


LL, DBS
Not too long ago there were some Singapore families who were setting up foundations around tax efficiency, and a lot of tycoons in Asia used to think about how to avoid paying death duty. But now some countries, including Singapore, are doing away with death duty, so that is no longer an issue. But the conversations today are very advanced because of the global nature of families and their businesses. If you are a Singaporean with US businesses or assets, then you are subject to US estate duties for your US exposure, so you need a proper structure.

NQ, NQI Many Asian families send their children to the US...



BR, HSBC
...and then pick up US passports.



NQ, NQI
Imagine if you are an Indonesian family and receive a legacy, but are living in the US...



BR, HSBC
What about Indonesians banking in Singapore? What are your views?



AK, PwC
The question is: how do we test the Indonesian wealth in Singapore banks for tax evasion? I would say that this issue is relevant not just for Indonesian wealth, but also wealth from other countries and for other financial centres. But whether there are any special arrangements between Indonesia and Singapore? No, there are no special agreements. We would expect banks to be certain that the deposits they hold have been properly taxed in the relevant country. Although the bankers are not expected to be tax specialists, they do need to have some comfort on this front. There are many banks that would rely on confirmations from their clients and then supplement that with other information they may have available.

LL, DBS Another thing to bear in mind is that we assume tax regulators and authorities are innocent. But the rules are enforced by the officers. One client in Indonesia is fully tax compliant. He is a regular taxpayer, but a change in the regime meant a new officer arrived and wanted another 2 million in taxes. We think of governments as honest, but in a lot of countries in Asia businessmen are facing challenges.

CT, WMI For the wealth management industry to remain successful, it needs to be trusted and not tainted. While the growing need for compliance and regulation, particularly in the area of tax evasion and anti-money-laundering, is challenging, it is something we encourage our advisers to accept and embrace as part and parcel of the costs of doing business today.

LL, DBS There is no reason to risk the integrity of your institution or yourself. In Asia, where there are politically driven regimes and we are dealing with this type of situation every day, one has to be mindful and careful not to fall into the trap. One has to be extremely vigilant.