"With Much Wealth Comes Many Worries." -- Proverb
By Steven C.Y. Seow
Head of Wealth Management, Asia
Mercer (Singapore) Pte Ltd
According to the Asia-Pacific Wealth Report 2014 from Cap Gemini and RBC Wealth Management, the region should surpass the rest of the world this year in the number of HNWIs in the region. Other surveys estimate that about 80 percent of the wealth in the region will be passed on to the next generation over the next 13 years.
Most of this wealth has been created by family-owned businesses with founders who are now anywhere between sixty and ninety, or older. If they haven’t already done so, they’re likely to be preparing to transfer their wealth to the next generation; and one of the burning questions is how to ensure that they can sustain and grow the accumulated wealth against a backdrop of low market returns and increasing regulation.
In fact, there are four important issues they should consider.
Last minute planning is no way to handle an intergenerational transfer strategy. Involvement in decisions about how wealth is allocated can start at a surprisingly young age. In fact, some families allow their children to attend the family foundation board meetings and assist with decisions. The story about the six year old who was given a seat on the board and voted for his family foundation to give all of its money to the local zoo may be apocryphal, but it’s sometimes the case that the family business gets passed on, but the values don’t.
Witness a recent story about Katsuhisa Otsuka, chairman of the Japanese Otsuka Kagu furniture chain, who wants shareholders to oust his daughter from her five-year tenure as CEO during which she returned the business to profitability. He wants her out because her vision for the company is different from his. It’s not enough to be a professional manager when you take over the family business; apparently, you also need to be able to manage the founder’s ego.
Families should make efforts to educate and develop the next generation, just as a Fortune 500 company grooms its high flyers in succession plans. Formal education in management disciplines including finance, rotational job roles, stretch assignments and cultural familiarisation with far-flung markets – all help the founders to assess the appropriateness and interest of the next generation in taking up active management.
These assessments can sometimes turn bitter with family members feeling hurt when not offered the top job, but third-party board members and executive team members or consultants can help mitigate the personal aspects of such decisions. While the next generation may have the requisite skills and training to take major roles in the family business, it’s often good practice to have professionals as well, to balance the family dynamics and provide alternative perspectives.
There is a wide range of professional investment advice available to HNW families, from investment, tax and estate planning and philanthropy, to insurance, and health and well-being. With family assets of US$50 million or above, it may make sense to use a multi-family office to manage investments. For families with US$300 million or more, a single family office may be appropriate. Often the investments are a complex mix of real estate, ownership in the business, investments in securities and or funds and other alternative investments (such as hedge funds, private equity and infrastructure) which require the full-time attention of a small group of professionals.
At this size, the family office may also want to use a third-party investment analysis service to screen investment managers, funds, and even alternative investments. Again, there is a range of available products – from simple historical performance data to detailed analytics and advisory recommendations, provided by the Mercer Manager Analysis Portal (MAP).
Philanthropy is slowly taking hold in Asia and more families will be thinking of disposing of their assets in the same way as famous philanthropists like Bill and Melinda Gates, Warren Buffet and Tim Cook. Whether the philanthropy is managed by the family office, a foundation, or a trust, the very process of focusing on the largesse can help bring families together around a common aim. It is a good way to give back, to build a legacy and to advance personal causes.
Philanthropy can be applied in any number of ways – from funding museums and research centres to health programmes for third-word countries – but all require planning, research and management.
In a recent Barron’s Asia article by Abby Schultz, Yvette Yeh Fung, who chairs her family’s foundation, The Yeh Family Philanthropy, described its specific mission, to “build capacity in promising young minds through education and social entrepreneurship.” However, the foundation found it was writing cheques for scholarships, but losing track of the impact of the funding.
A forum on philanthropy, presented by a private bank, helped the family determine that they wanted to continue funding a portfolio of programmes, but would select them based on both their mission and their ability to be scalable, sustainable and replicable.
An example of successful legacy transfer is the Lien Foundation in Singapore, which was established in 1980, and in keeping with its name and founder, Lien Ying Chow, focuses on Leading, Innovating, Empowering and Networking. The Foundation funds and partners in programs aimed at elderly care, preschoolers and the environment, and is currently chaired by Laurence Lien, Member of Parliament and grandson to the founder.
Families can preserve their wealth and offer an endowment for future generations. This requires long-term planning and communication, as well as outside expertise. Success depends on starting early, getting the right information, and careful management of the process.
This article first appeared on Wealth-X on Apr 10, 2015.
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