In the next few decades, we will all be witnessing the largest-ever intergenerational wealth transfer – the passing down of wealth from one generation to the next – a phenomenon happening across the globe valued in the trillions of dollars.
Specifically, in Asia, this is happening for the first time and on a massive scale, as according to UBS, around 85% of Asia’s billionaires are first-generation.
Wealth does not pass three generations…
Unless well-structured and well-planned for.
According to The Family Firm Institute, only about a third of family businesses (and wealth) survive into the second generation, while only 3% of all family businesses operate into the fourth generation and beyond.
Hence, there is a rising concern about wealth preservation and succession planning for family businesses, and wealthy families are turning to Multi-Family Offices (MFOs) to navigate this complex process to safeguard the family’s wealth and legacy.
That is why we have seen the rise of family offices around the region over the past few years especially MFOs, which are set up by professionals to look after the assets of numerous wealthy families and individuals.
In the succession planning process, it is important to achieve an effective intergenerational transfer of wealth while reducing family disputes. High-profile disputes such as the Ambani brothers’ feud have constituted important lessons for wealthy families. They demonstrate the repercussions of not having a concrete succession plan to help ensure a smooth transition of power from one generation to the next.
Some starting points for high-net-worth individuals and families (HNWIs) in their succession planning process could include:
1. Administering family governance
As the number of family members increases from one generation to the next, the transfer of wealth can become strained. It is thus important to determine the core values and objectives of the family as the foundation of how family assets and businesses will grow and keep pace. This process can be formalised through setting up family governance structures. In its simplest form, family governance lays out roles, rights, and responsibilities for family members as well as regulate how family members act towards one another and the family’s businesses.
2. Institutionalising and centralising investments and wealth management services
By consolidating investments under one roof (instead of having them spread across different advisors), higher returns with lower risk and true diversification may be achieved. Consolidated financial accounting and reporting services, which are essential for families to have a full overview of their wealth and investments, are also made possible.
HNWIs typically consolidate their different accounts with their trusted MFO. An MFO and its team of wealth managers are able to provide unbiased advice that is customised to each family’s unique investment strategy and objectives. The consolidation of investments also enables stronger alignment between the HNWIs and their wealth manager who serves as the single point of contact for all their needs as they would not be getting fragmented advice from different advisors across institutions.
Safeguarding a legacy requires expertise in fields as diverse as business consultancy, legal structures, lifestyle management, and generational transfer. MFOs help their clients integrate and coordinate all these services, to maximise opportunities for wealth creation and preservation.
Misconceptions HNWIs have about Family Offices
As one of the pioneering MFOs in Singapore, Golden Equator has done a lot of engaging and educating HNWIs to build trust in the industry since 2012. One of the biggest misconceptions we often encounter is the thinking that a multi-family office is only for complicated family and business structures, but, that should not be the case at all.
For instance, regardless of family and business structures, if the retiring HNWI hopes to pass on any wealth at all, buying a comprehensive and long-term care insurance might make sense because the rising costs of healthcare and long-term care can easily wipe out an estate in a relatively short time. This is in addition to the above initial steps that families need to partake in for their succession planning.
Without a systematic and institutionalised method of transferring wealth to the next generations, a family can be easily daunted by complexities in managing wide-ranging assets that can be further exacerbated by personal complications and disputes between family members.
With the right infrastructure to responsibly manage and preserve wealth, including grooming and assisting the next-generation HNWIs to pursue their passion, succession can last generations.
That is why as an industry, we need to encourage discussion and education on this intergenerational wealth transfer, which is a fast-approaching reality especially given Asia’s greying population. This is so that more wealthy families and individuals are better prepared as they start to contemplate issues like succession planning and legacy planning for their businesses, while maintaining harmony between family members.
Golden Equator Wealth can assist with wealth transfer and legacy planning. Feel free to contact us.