Asia’s ultra-wealthy business elites are facing their biggest challenge – successfully passing on their hard-earned fortunes to the next generation.
There’s an old Chinese proverb that states wealth does not pass three generations. Such a sentiment is set to be put to the test at a time when Asian businesses and entrepreneurs are cashed up like never before, especially in China.
With companies such as China’s Alibaba, Dalian Wanda and Tencent, and India’s Reliance Industries and Wipro becoming commercial powerhouses – and others following in their slipstream – it is no surprise that the number of Asian billionaires is rising.
Indeed, research from UBS and PwC, in a report called New Value Creators: Billionaires Insights 2017, reveals that for the first time there are more billionaires in Asia than in the US, with China dominating the list.
“We see that momentum keeping going,” says Harry Qin, PwC China’s consulting wealth and asset management lead partner. He adds that the report’s analysis shows that if current growth trends continue, the total wealth of Asia’s billionaires will overtake that of billionaires in the US in four years.
This comes off the back of an exceptional period of business for Chinese entrepreneurs, in particular. In 2016, the number of Asian billionaires rose by almost a quarter to 637, compared with 563 in the US and 342 in Europe.
The number of billionaires globally rose to 1542, with three in four of the newcomers coming from Asia’s two biggest economies, China and India. However, the net wealth of American billionaires – headlined by the likes of Amazon’s Jeff Bezos, Microsoft’s Bill Gates and Berkshire Hathaway’s Warren Buffett – is still the highest in the world.
Although Asia’s billionaires are typically younger than their Western counterparts, with 80 per cent of them aged under 70, many are now contemplating the end of their working careers. This ushers in a new era, according to Qin, who says many of China’s billionaires are first-generation success stories who have aggressively driven growth.
“However, they have not been spending a lot of time thinking about how to preserve their wealth, most particularly transferring their wealth to the second or third generations.”
While the importance of wealth-transfer strategies is becoming apparent, Qin says the financial services sector in Asia, including wealth management and family office providers, is not as mature as in the US, Europe and Australia.
“In mainland China, family office and private banking services for billionaires exist, but they are still focusing on selling financial services products and less on catered advisory solutions for those first-generation entrepreneurs.”
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Qin says the key challenges for Asian billionaires include wealth preservation, business succession and maximising contributions to society through philanthropy. With international asset management companies such as UBS and Fidelity ramping up their Asian presence, he expects wealth management service options to increase quickly. However, the chance to grab market share could be brief as domestic providers are improving their services.
The message for global financial services brands? “The opportunity is going to close very soon,” Qin says. “My advice for them is to act quickly.”
Lessons from abroad
Asia’s great wealth leap is impressive, but the UBS and PwC research notes that Asian billionaires are more likely to slip on and off the billionaires’ list than their Western peers, and that “rapid economic development, political uncertainty and erratic stock markets forge fortunes fast but can equally undo them”.
The upshot is that Asian billionaires would be well advised to learn from the experiences of older, ultra-wealthy families in the US, Australia and the region with the highest number of multigenerational billionaires, Europe.
Peter Lee FCPA, leader of Deloitte’s family office services in Hong Kong, says “old money” in the hands of families such as the Rockefellers in the US, the Rothschilds in Europe and the Smorgons in Australia demonstrates that wealth transfer, while always complicated, can be successfully managed. However, he contends that China’s new breed of billionaires will face an even greater wealth-transfer challenge than Westerners simply because they have acquired more money faster than anyone in the past.
“The speed and magnitude of wealth [among first-generation Chinese billionaires] is much larger,” Lee says, “so when it comes to succession planning they are not really prepared for it.”
The legacy of China’s one-child policy adds another layer to wealth transfer, Lee says. In a nation where, culturally, many families still prefer to pass on their family businesses to sons, sole daughters now stand to inherit massive enterprises and vast fortunes.
“It’s created a situation where there’s no clear successor,” explains Lee.
He also fears that some wealthy families will suffer because first-generation patriarchs and matriarchs “want to hang on to the business” and maintain control, leaving little time for succession planning.
“Families who do it well start the conversation early, talking about the values that bind the family together.” Maria Lui, Mutual Trust
Key strategies for managing multigenerational wealth
In Australia, Mutual Trust is an integrated financial services firm with a long history of advising successful individuals, families, businesses and philanthropists. Maria Lui, joint head of family office at Mutual Trust, says wealth transfer and succession planning is difficult for all families, whether they are in Australia, Asia or elsewhere, because patriarchs and matriarchs are “facing up to their mortality”.
Disturbingly, she says, about 70 per cent of wealth transfers fail; heirs waste wealth or lose control of family assets, often with those assets becoming a source of fighting and family discord.
Lui advises pursuing a strategy-led approach, rather than trying to address issues as they arise. Key factors that the most successful families get right when managing multigenerational wealth include:
- Having a shared vision: they articulate core family values that unite the family and its aspirations.
- Defining who are family members and their roles – deciding whether “family is blood” only, or whether spouses and partners are also part of the equation.
- Determining the purpose of their wealth – without a common goal around what the family is going to do with the wealth and why, families can drift aimlessly.
“It goes beyond just financial decisions. There are many aspects to what makes a family rich and any wealth management strategy has to cover all of those aspects,” Lui says. It is important to look at the richness of a family’s capital to encompass all four pillars of wealth – human, intellectual, social and financial.
She also recommends starting family wealth-transfer plans as soon as possible. “Families who do it well start the conversation early, talking about the values that bind the family together.”
Qin believes wealth-management services in Asia are likely to face challenges winning over “very self-confident” first-generation entrepreneurs who have enjoyed the remarkable growth of Asian economies in recent decades. “[Many of] these billionaires have not built a relationship of trust with financial services providers.”
Changing role for advisers: trust is the key
Institutions such as JPMorgan Chase and Merrill Lynch are famous for providing private banking advice for their clients, but the market for such services is less mature in Asia, and especially in China. That is likely to change as Asia’s wealth profile expands and business assets become more diverse and difficult to manage.
Lee says that, in the past, even in sophisticated financial markets such as Singapore and Hong Kong, wealth management strategies have typically been driven by their highly successful clients. Patriarchs, especially, have been largely dismissive of the need for wealth or business succession plans.
“They would only be interested to hear how much money they could make,” Lee says.
However, in the past five to seven years, with lower growth, shorter economic cycles and retirement looming for many billionaires, the mood has changed.
“We’ve seen a very drastic shift from wealth creation to wealth preservation,” Lee says.
“It’s becoming harder for the family patriarch to manage the diversified business interests of the family. It’s more important now to have a family office as a gatekeeper and to help manage the business.”
This is where private banking services and family offices are likely to play an ever more important role. Lui says it is important to be able to draw on holistic advice covering areas such as governance, investments, tax, legal, insurance and risk mitigation, as well as receiving guidance relating to dispute settlements.
A family office can also help establish an independent board to assist with management of a business. The imperative, she says, is having a trusted adviser “who really understands the overarching values of the family and how it wants to achieve them”.
As she explains, “If you get the wrong person, the family is not going to open up and listen to that advice.”
Asia's millennials are in the spotlight
With Asia’s billionaires getting older, the focus is shifting to millennial heirs, many of whom have been educated abroad and are tech-savvy.
To preserve multigenerational wealth and business success, Lee says it is crucial to close the gap between older and younger generations as they debate business philosophies and management styles. Whereas the instinct of many patriarchs and matriarchs is to “just buy another building” with their money, the next generation is likely to embrace social media and digital disruption opportunities.
“They will face a very different economy, where it’s highly competitive and there cannot just be a domestic focus,” Lee explains.
“It’s a global market and they must understand the global market trends.” Without education about wealth-transfer strategies and the reasons for them, family conflict is almost certain.
Any such challenges notwithstanding, the UBS and PwC report predicts that wealth accumulation in hot spots such as China and India will continue to grow at speed in coming years.
“Expect to see more people joining the elite group of billionaires,” says Qin, and also expect to see a growth in services to keep that wealth in the family.
Counting the billions
Source: New Value Creators Gain Momentum: Billionaires Insights 2017, UBS and PwC
- The total wealth of billionaires around the world rose 17 per cent in 2016, from US$5.1 trillion to US$6 trillion.
- About US$2.4 trillion will be transferred in the next 20 years, as billionaires age and retire.
- On average, a new billionaire is created every other day in Asia.
- The collective wealth of Asian billionaires went up by 31 per cent in 2016, from US$1.5 trillion to US$2 trillion.
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