APAC families not ready for succession amid largest wealth transfer in history

• 70% of families reportedly failed to prepare for intergenerational wealth transfers
• 75% of wealth owners desired to create positive impact through their investments
• Share of impact investment doubled from 20% in 2020 to 41% in 2021 

Succession planning is an important activity for family offices and family-run businesses. It facilitates wealth preservation and family governance, and ensures wealth utilisation towards a positive social cause. However, most families are unprepared and do not have a plan for a smooth transition. Hrishikesh Unni, managing director of Singapore-based multifamily office Taurus Wealth Advisors, shared that some clients may not know about or have drawn up a will, the simplest form of succession planning.

70% of families reportedly failed to prepare for intergenerational wealth transfers

Credit Suisse estimated that wealth valued at nearly $8.6 trillion will be transferred between generations from now until 2029. Nonetheless, DBS Private Bank reported that 70% of families failed to prepare for intergenerational wealth transfers, despite 67% citing succession planning and inheritance as their biggest concern and only 57% suggested that they have a formal succession plan in place.

Audit and tax advisor, Moore Stephens, reported that wealthy families have high awareness of the importance of putting in place a succession plan, but there is a general laid-back attitude and failure to act. Among them, 88% agreed that succession plans are critical for families, but 38% of families did not have a succession plan. Each family inevitably faces the difficult question of wealth transfer and succession.  

Intergenerational family disputes generally stem from communication issues among family members. Seventy-two percent of wealth transfer failed due to poor communication in the family. In terms of the barriers to succession planning, difficulties in consensus building and decision-making have been cited as other reasons. Only 8% believed that budget restriction is an obstacle for succession planning.

Global wave of intergenerational wealth transfer accelerated need for next generation education and family governance

The next generation of family members are the torchbearers of change. Although there has been a rise with respect to their involvement in wealth management, there’s ample evidence that suggests the next generation is not as prepared to manage the reins of their family wealth. The pandemic has also triggered a sense of vulnerability among families in terms of mortality and the transient nature of family assets. The global wave of intergenerational wealth transfer, the ultra-high-net-worth (UHNW) families will have increasingly stronger needs for professional and comprehensive services in the areas of family wealth management, succession planning, tax planning and family governance. Therefore, there has been an increased emphasis on lifelong learning. With higher involvement of the next generation in wealth management and family businesses, it is critical to offer educational services. Family office staff and family members exchange know-how to ensure consistency and quality of learning for the next generation of wealth owners. The next generation has also been increasingly factoring environmental, social and governance (ESG) into their investment decisions.

Jesse Mandell, family engagement strategist at Bank of America Private Bank (BOA), emphasised the need to start family discussions around wealth management early and to involve the next generation in the infrastructure of family wealth at a young age. Similarly, family governance adds value to a family-run business. While each family has different dynamics, structures, and interpersonal relationships, identifying best practice in family governance can help ensure the smooth transition of businesses through generations of a family.

Increased use of trusts for more efficient tax planning and asset protection

Families are increasingly establishing trust structures for considerations such as tax planning and ring fencing of assets in addition to that of wealth inheritance. There has been a rise in the use of trust structures among wealthy families especially in Asia. In addition, trust structures are used as an important strategy not only for tax planning but also for shielding assets from external risks that include future creditor liabilities and divorces.

Unni shared, “We’ve worked with certain families and helped them do charters. Although there’s no airtight solution, it does mitigate and address some of these anxieties in managing family businesses through structures and their ownership”.

With the introduction of the concept of “common prosperity” in China, the demand for charitable trust as an avenue for wealth management has risen drastically.

Family wealth growth, preservation and tax management are three key goals of family offices

Family governance structure in terms of a set of decision-making rules is the foremost of family wealth management. The first step of implementing family governance is to have well-defined mission and vision statement that articulates goals and creates a joint decision-making model among family members. According to Morgan Stanley, the three most important goals of family offices are family wealth growth, family wealth preservation and tax management, with 82%, 78% and 70% of participants marked extremely and very important.

The involvement of professional talents coupled with having a goal in mind help to ensure the success of a family office. The inclusion of non-family professionals in family governance adds critical thinking on management process, and including external consultants to review the governance may even identify potential conflicts of interest in the family office. Nonetheless, the balance of relationship between family members and non-family professionals needs to be carefully managed by defining clear roles that all participants agree on.

The adoption of technologies in the management process also boosts the efficiency of governance and meets the needs of new generations who are used to a digitalised era. Family offices have began to implement technologies for data aggregation and reporting, investment analysis, ledger processing and documentation, though not dramatically. According to Moore Stephens, virtual data room services are regarded as important technology advancement by family offices, yet only a small number of them embed such data rooms into their daily operations. Mandell also suggested that over 80% of private banking clients actively use BOA's online or mobile platforms, and the proportion is believed to reach 90% over the next few years. New norms with respect to remote working and social distance emerged from the pandemic also posed challenges and pushed family offices to smooth their governance and communication systems using automation and cloud system. Notwithstanding the above opportunities of digitalisation, family offices must be mindful about security issues related to data protection and take necessary actions to mitigate risks.

75% of wealth owners desire to create positive impact through their investments

Sustainable investments are also becoming mainstream and wealth managers are now required to provide their clients with insights into making impactful investments. Although Asian families are lagging behind in integrating ESG into their investment portfolio, the appetite for leveraging wealth for impact is rising exponentially. One of the driving forces for this trend has been the pandemic together with the COP26 in Glasgow last year that highlighted the importance of impact investing. With better access to data and stronger regulatory requirements, Asian investors can be better equipped to make decisions about sustainable investing 

Millennials make up 25% of the population in Asia Pacific and the next generation of wealth owners are expected to drive the growth in impact investment. Markus Mueller, global head of chief investment office at Deutsche Private Bank, shared, “With Asia Pacific’s large and young population, there is a unique opportunity for growth in ESG investing”. The bank’s client survey corroborated this insight, with 75% of wealth owners stating that “their investments should have a positive impact om the world”.

Family offices in Western Europe and Asia are spearheading sustainable investment which is increasingly becoming an integral part of their investment portfolios. Furthermore, the governments in Asian countries such as China and Singapore have launched ambitious de-carbonisation plans such as the “carbon peak by 2030, carbon neutrality by 2060 for China”, while Singapore has the Green Plan 2030. Family offices and private banks are responding by integrating ESG-themed funds, establishing green classification standards compliant with investment targets such as EU’s Sustainable Finance Disclosure Regulation (SFDR) and UN’s Sustainable Development Goals (SDGs), and/or covering areas of circular economy and renewable energy.

Joseph Poon, group head of DBS Private Bank, said, “Asian assets tend to have lower ESG ratings than their Western counterparts. There are regional differences in terms of sector preference, with family offices in Western Europe claiming that their impact investments are heavily inclined towards climate change initiatives".

Share of impact investment has doubled from 20% in 2020 to 41% in 2021

Investor awareness of social issues and desire to generate positive impacts are playing a vital role in driving financial management and investment decisions. According to Campden Wealth, the primary motivation behind impact investing is to make the world a better place, with 64% of positive responses. This is followed by a moral belief that impact investing is the right thing to do (45%). More than a third (36%) reported to engage in impact investing as they believed it has the potential to offer better financial returns.

Impact investments have also proven to be more resilient and rewarding during uncertain times such as the global financial crisis in 2008 and the current COVID-19 pandemic. The proportion of impact investing has doubled over the span of one year, accounting for 41% of the average portfolio in 2020, compared with 20% in 2019, and is projected to rise to 54% over the next five years. A UBS report on global family office in 2021 showed that education and climate change are popular sectors of impact investment, with 64% of responses each, followed by healthcare at 61%, and agriculture and economic development. Impact investments under topics of ocean conservation and biodiversity - the services that nature provides for free such as clean water, raw material and air – are of great potential.

As sustainable investment gains global consensus, most global family offices are increasing their interest in ESG. According to Global SustainableInvestment Alliance’s Sustainable Investment Review 2020, sustainable investing reached $35.3 trillion in asset under management in the five major markets of the United States, Canada, Japan, Australasia and Europe, at the start of 2020.

Given increased uncertainties over COVID-19 recovery and challenges in the global geopolitical environment, family offices remain cautious about future investment prospect. Although global markets have recovered from the sharp decline, the allocation to alternative assets is gaining momentum as returns from income largely remain low due to low interest rates. According to UBS, on average, asset allocations of family offices are stable with 32% invested in stocks, 18% in fixed income, 18% in private equity, 13% in real estate, 10% in cash and 6% in hedge funds. Smaller allocations were made in gold, precious metals, commodities, and art and antiques.

Family offices are more cautious about increasing risk asset allocation and the overall risk level of their investment portfolios, 49% of wealth owners surveyed believed that low interest rates pose a major challenge to performance in the next three to five years. In terms of risk, 26% stated high valuations across asset classes as their greatest concern.

The risk appetite is high as family offices are keen to invest in expansionary and growth stocks to support new innovative companies that are disrupting existing technologies. As reported by UBS, 77% of family offices are investing in growth stocks. This number is especially high in the US at 92% and Switzerland at 86%. There is also an increasing interest in venture capital funds, which ranks second place (61%) in the investment of all private equities.

One thing seems certain before the true impact of the pandemic can be fully understood, wealthy families and private investors are looking at impact investments as a long-term trend. Although the wealth management industry in the Asian economies is still in its infancy, the demand for ESG-themed funds and using wealth for the welfare of society is constantly on the rise. Impact investments as a theme has multi-generational implications that go well beyond asset markets.

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