Asia is about to undergo the biggest intergenerational wealth transfer in history. But how will this massive pool of wealth move to the next generation, and what happens when it does?

Asia is about to undergo the biggest intergenerational wealth transfer in history. Many Asian high net worth individuals are first or second generation entrepreneurs approaching retirement age, who will have to hand over their business sooner or later. It is not surprising that topics like inheritance, trusts, family offices, succession and philanthropy are increasingly cropping up in discussion. But the question is, how will this massive pool of wealth move to the next generation, and what happens when it does?

Such was the subject of hot debate at WealthBriefingAsia's inaugural event in Hong Kong last week, WealthMattersAsia. 

Around 110 senior wealth management professionals gathered for the morning forum, which was divided into two panels. Industry heavyweights debated two key issues in Asia – succession planning and how to gain and maintain dominance in the region. 

The first panel, looking at the technicalities of intergenerational wealth transfer, had four speakers: Terry Farris, head of family office and philanthropy at DBS Bank, Trevor Mak, head of Hong Kong for Standard Chartered Private Bank, Ian Ewart, head of products, services and marketing for Coutts and Michael Olesnicky, partner and head of Baker and McKenzie’s tax group in Hong Kong. The event was sponsored by Coutts, Fox Partnership, Wealth-X and STEP.

Discussion was diverse, thoughtful and lively, including an impromptu contribution from Joe Fields, a veteran Withers lawyer who was called upon to lend his expertise to an answer.  

Family values

The question a lot of families are grappling with right now, is how to begin to engage and employ the next generation within the family business, said DBS' Terry Farris, who was first to speak. Farris believes that philanthropy is a crucial part of wealth succession because it defines values succession.

"It is a very powerful tool. Philanthropy is the glue that binds the second and third generations," said Farris. "It is not always easy, especially in Asia where wealth is much newer and there is not a well-trodden legacy of succession."

"Many of the clients we are talking to are entrepreneurs and businessmen. Succession planning is not an area on which they are naturally focused," said Farris.

As a wealth manager, he said, understanding a family's values are key to helping clients with succession planning. "It is a good place to begin as you help the family map out the setting up of a family council and a family charter. The family charter outlines the rules of engagement for the family."

And some are doing it very well, he said. He pointed to an Indonesian family, whose first generation has passed its wealth to the second generation. All of its children have been given equal shares of ownership in the holding company which they now run and manage.

One of the key roles that the siblings have given to their oldest brother is to manage and monitor the succession planning process between the second and third generation. "Their business is doing incredibly well."

Destructive wealth

Meanwhile Trevor Mak at Standard Chartered pointed out that wealth can have catastrophic effects if handled in the wrong way. “Wealth can destroy families. Like it or not, wealth is a big responsibility. There are a lot of high-level cases in the public eye where money is tearing a family apart,” he said. 

The first challenge he said, as a banker, is to facilitate the discussions between families. He said that in Asia in particular, the concept of ceding control to the next generation never makes for an easy topic. He highlighted the ongoing case of casino tycoon Stanley Ho, whose family have long been embroiled in a feud over his empire.  “The first generation tend to hold onto their wealth for too long. He didn’t realise that things were happening until it was too late,” said Mak. But it does not always have to be this way. 

“If you look at the Rockefeller family, you never hear about them in the news because they have very strong family values to start with. And that is key.”

Mak believes transferring aspirations is crucial to a strong family business. 

“More often than not the second and third generation does not share the aspirations of their parents. As a private banker you need to bring up the discussion, and enable that conversation.”

Communication is key

Ian Ewart gave a practical overview of the different types of succession planning he has encountered.

“We see mainly five types of wealth transfer. Firstly, there is the traditional successor,” he said. “They do nothing until the kids are around age 35, when they are brought into the boardroom and their new responsibility can come as a shock.”

“Then you have the laissez faire successor, who buys his son a flash apartment, a sports car, gives him a credit card and is surprised when he lays in bed all day. You have the philanthropic successor, who tried to instil in his or her family a set of values, goals and aspirations.”

“Then there is the steward – encapsulated by the Patek Phillipe advertising that you never own wealth, you just look after it for the next generation. This works alright for watches, but not so well when money is concerned.”

“What we think works best is the modern hybrid. This takes an element of stewardship and philanthropy, as a sense of purpose is vital. But the important thing is making sure communication lines stay open, which is integral to how we engage with families,” said Ewart.

Communication and transparency is a key part in ensuring that families achieve clarity, he added. If decisions are made because of deference to a family member, they will probably be non-optimal. “Don’t leave it too late and don’t wait for issues to solve themselves. Children will not understand what you want through osmosis, so responsibilities must be communicated as early as possible.”

He summed up with US billionaire Warren Buffet’s adage, that a rich person should leave enough money to their kids so they feel they can do anything, but not so much that they can do nothing.

Patriarchal responsibility

Michael Olesnicky agreed that parents have a responsibility to address wealth transfer issues as soon as possible, to avoid saddling children with their problems.

“When you start talking about wealth transfer it is rarely simple, and never cut and dry," he said. "The issue of tax evasion and tax compliance crops up time and time again. Parents should not want to lumber kids with all the tax discrepancies of past generations. But you have to convince the patriach of this,” he said. 

Setting up a family office can help with this, says Olesnicky, and the older generation is in the best position to do this. 

“A family office has a good role to play in helping succession run smoothly. By creating a family office and holding annual meetings, it enables the generations to discuss the intentions, family values, and get everyone on board.”

There is a tendency towards secrecy in Asian families but transparency is crucial, said Olesnicky. He believes that dissentions in families are frequently caused because people do not know what is going on, and it makes them suspicious. “If you get everyone together to share ideas people will feel more in control.”

Finally, Olesnicky said families should not be afraid to make decisions like cutting off a family member, if they are threatening to wreck the family stability. “There is usually a black sheep in every family that everyone loves to hate. If you cannot get them involved and they are destroying the harmony, to ensure the long-term survival of the family it is sometimes better to pay them to leave the family structure.”