Closing the generation gap in wealthy families
Studying how Asian families manage wealth from one generation to the next has led advisors to enhance how they work with high-net-worth families
- Tensions between first and second generations
- COVID-19 altered the dynamics
- Wealth advisors who leverage mindset changes gain competitive advantage
Older generations of wealthy families in Asia are usually self-made businessmen who prefer to hold on to wealth and keep a tight rein on their businesses, while younger generations place less value on wealth and often elect to address pressing global issues.
Robin Heng from Bank of Singapore told Wealth & Society that younger generations have their own ideas and mindset, and that they are more open to new solutions. Those differences spill over into how the two generations manage their wealth. Heng is the bank’s global market head of Philippines, Australia, Indonesia, Thailand and Indochina.
Vivian Kiang of RBC Wealth Management said the first generation tends to be quite concentrated on family businesses and its assets. The mindset is to accumulate assets for their children. Kiang is RBC’s managing director and head of wealth planning and fiduciary services.
The second generation, on the other hand, likes diversification and wants to institutionalise the management of their wealth. They hire the right advisors and less frequently tend to make investment decisions themselves.
Kiang said: “A majority of the second generation needs to have a purpose in life and want to contribute to society or make a change in the world.” They also want autonomy in managing their wealth.
COVID-19 has altered the dynamics in how wealthy families plan
Along with the older and younger generations having very different perspectives on managing their wealth, affluent parents have had a cultural reluctance to speak about succession arrangements. However, the COVID-19 pandemic and its global death count have put a spin on that resistance and forced family conversations around wealth and succession.
Heng said: “They are more willing to open the door to dialogue and the pandemic accelerated this process further.” He highlighted the importance of succession and estate planning to ensure continuity. As a result, wealth planning begins earlier, and the current generation is actively engaging the next generation to prepare them.
Cem Azak, chief executive officer of Crossinvest said that a lot of people are more open to talking about succession planning. He said: “Clients are more receptive to the solutions we’re offering on wealth structuring and estate planning.”
How wealthy families manage their wealth is also changing significantly. Azak said: “When I came into this business, 60 percent of mandates were discretionary management. The first generation doesn’t trust asset managers. Now, 97 percent is discretionary.”
A combination of COVID-19 and the war in Ukraine have accelerated the change. Some clients who did not have discretionary mandates lost a lot during the Russian invasion. Azak explained: “Some clients were travelling, and we couldn’t reach them. We showed our clients we can make decisions faster if we have an advisory mandate.”
Heng said clients also increasingly see the value of diversification and taking a long-term approach. Moreover, he said: “We have seen a growing interest in philanthropy and ESG (environmental, social and governance) investment from our clients. This is driven by a heightened awareness of sustainable investing and a sense of responsibility toward the world we live in.
“We also see a trend in diversifying portfolios beyond conventional asset classes with alternative investments such as private equity, private credit, hedge funds and real estate. They place more value on digital capabilities and are more engaged with digital tools and services.”
Similar to Crossinvest, Heng has also observed a strong uptake in discretionary portfolio management. Affluent families today understand that the challenges to wealth transition are numerous, so more of them are professionalising their wealth management.
The second generation follows the market closely and they are more involved than their parents, Azak added. Their parents were good in one sector. The second generation wants to be involved in the decisions on their wealth portfolio, to see everything immediately and to be more interactive.
The minefield of the family business
A key consideration as families plan for succession, Kiang said, is that the second generation may not want to take up the family business. Often, the second generation doesn’t find the family business interesting. For the first generation, however, the family business is their baby. They want their kids to continue to work in the business.
Clients who are more open-minded have other ways of exiting the business, Kiang said, and leaving the second generation to do other things that are more interesting to them.
Azak explained that the business has to continue, though, as thousands of employees often depend on it. A fight within the family is a real danger for the business. If the patriarch dies and didn’t make a clear decision about who inherits the business, the business is at risk.
He said: “You have to have a contingency. That’s something that clients are more open to discussing. We’re not experts in the business. We are experts in how inheritance can be structured so the business can continue.”
A framework for transferring wealth
The openness to planning for succession and differences in how the generations manage wealth has led advisors to enhance how they work with wealthy families.
The reality is that the first generation decides to how to pass on the wealth, Kiang said. Control remains with the first generation. What the advisor can do is to suggest the framework for the succession.
However, she pointed out: “We don’t structure it at the very beginning. The first stage is the strategy. We spend time with clients just to understand the client’s profile and not talking about framework—understanding the possibilities, the conflicts within the families, and their objectives.”
The framework comes in at a later stage. Kiang added: “When it comes to successor solutions, we will be in a better position to offer that.”
Even so, the planning now is different. Kiang observed: “Thirty years ago, we talked about one jurisdiction. Now that clients are very global, the planning is super-difficult. It is multi-jurisdiction.”
Whereas a trust structure 20 years ago seemed like it would last, now it is less possible. The important thing is to make sure it is flexible. And rather than doing everything internally, Kiang said: “We work with external advisors. It is not simple any more. You have to have different advisors.”
Heng commented that relationship managers (RMs) need to understand an individual family’s needs and tailor a unique framework and plan. With this foundation, the RM can help facilitate the creation of transparent governance mechanisms to ensure that the values and goals of various generations are incorporated.
It is also important to have family meetings, with the RM acting as the facilitator to assist in mitigating potential conflict, protecting the family’s wealth, and ensuring that it is grown throughout generations. Starting early is important, Heng said, as succession planning and wealth transition is a complex process that needs to be worked through carefully.
What is also important, Kiang said, is long-term training for the family and whether the second generation has the right skill set or mindset. Some parents prepare them with the right mindset at the beginning of their life. If the second generation starts their training when they are in their 30s, it may be too late.
Kiang warned: “Parenting right starts at the very beginning.”
Overcoming tensions and conflict
The differences in priorities and goals between generations can, of course, create difficulties. Succession planning and wealth transition can be challenging, Heng acknowledged, due to a generational gap in values, experience, beliefs, education and aspirations.
Next-generation family members are likely to have priorities, interests and motivations that differ from previous generations. Succession planning and wealth transition is not just about what the older generation values and wants, but also about what the next generation values and wants. At the same time, the next generation needs to take the older generation's opinions into account.
When tensions arise, Heng said, it is important for RMs to be the bridge between generations or family members, establishing a strong foundation of trust and communication.
To be able to defuse difficult situations, it is crucial that the RMs have strong relationships with each family member and knowledge of their interests, values and goals. The RM can organise preparatory meetings to allow family members to set out their grievances ahead of time so that the situation can be defused or potential solutions considered.
In one European family, Azak said by way of example, the parents died and there was a fight between two sons over who got which business and who got more shares. If a fight starts, the company may not survive. In this case, it diminished the total value and both lost out.
Azak said: “We had to step in. Finally, after three years, they listened. We are getting them back on track.” While the parents could have avoided that if we talked with them, he said, they were not open. Since the pandemic, however, families are more open to talking.
Alignment of generations on sustainable or alternative or impact investments
One significant shift is a focus towards different types of investments. Compared to other generations, Heng said, the younger generation’s decision to invest in a particular company or product is less about the financial impact and driven more by the company’s values and practices, and the effect the investment may have on the world and current issues.
They also believe that a focus on ESG investments is the best way to achieve sustainable financial outcomes.
Azak concurred, saying that the younger generation wants to see how much of the portfolio is invested in companies that are aligned with initiatives in ESG. They are also planning to implement ESG in their own companies.
He said: “The first generation wasn’t open to that. The second generation wants to have a more sustainable business for the environment and their employees. We have a client where the father was a collector of Ferraris. The son convinced his father to sell 10. They used gas-powered golf buggies (in their business)—now they only use electricity. It shows how companies are managed by the young generation.”
To meet clients’ needs, the firms are training RMs in new skills. Heng said it is important to ensure that RMs understand and anticipate the rapidly-evolving ESG landscape to identify risks and opportunities for their clients.
His firm uses a suite of 20 sustainability training modules that cover key concepts and practical aspects of sustainability. Kiang said that RBC has education for the RMs to experience how to talk to clients about succession planning, open up the conversation, and bring specialists in to meet them so they have a closer relationship with the clients.
Creating competitive advantage
Generational differences including how portfolios are managed, the multi-jurisdictional nature of families and how families prioritise sustainability and professionalisation are changing the wealth advisory business dramatically. Wealth advisors who embrace the change quickly and educate their staff and offer digital or other resources will thrive in this new ecosystem and create a tenable competitive advantage.
Keywords: Wealth Planning, Succession Planning, Diversification