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Asia-PacificJuly 1 2013

Banks race to capture Asia's next-generation wealth

With Asia’s post-war business moguls now well into retirement, an unprecedented amount of wealth is set to pass to the next generation, representing an enormous business opportunity for banks. 
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Banks race to capture Asia's next-generation wealth

With a vast amount of wealth due to pass to the next generation of Asian families, banks in Singapore – Asia’s wealth management hub – are vying to capture this business.

The topic of wealth succession is moving to the top of the agenda for many rich families in Asia. Shayne Nelson, chief executive of Standard Chartered Private Bank, says that the amount of wealth that will pass down to the next generation is unprecedented in Asia. “More and more conversations are about what's next... High-profile wealthy people have died intestate,” he says, explaining that even getting wills in order, with a full list of assets and liabilities, can be a formidable task. 

Taboo topic

One reason for the reluctance to make plans for wealth succession, notes Edmund Koh, UBS’s CEO of wealth management for Singapore and the Asia-Pacific, is that discussing mortality or planning for death is often considered taboo by Asian clients. But banking the next generation is big business. On a global level, a report by Morgan Stanley and Campden Wealth estimates that $27,000bn is expected to pass from one ultra-high-net-worth generation to the next by 2050.

And in Asia, a large chunk of the wealth is in the hands of family businesses, which have typically prospered since the end of World War Two. A Credit Suisse study found that family businesses account for 50% of all listed companies and 32% of total market capitalisation in Asia. And in a survey of 3568 publicly listed Asian companies, 65% of respondents said that business continuity was the most important issue for a successful transition to the next generation. 

Many family businesses in Asia are facing this transition and some are preparing for outsiders to run the companies. On top of this, there is also the personal wealth that needs to be passed onto the next generation. “The Chinese often say that wealth doesn’t transfer beyond the second generation. We beg to differ,” says Mr Koh at UBS. 

Business wealth

In many cases, family wealth is tied up in the family business. Su Shan Tan, group head of consumer banking and wealth management at Singapore’s DBS Bank, says that often the assets are illiquid and the wealth tends to be concentrated in certain sectors or asset classes. For example, a shipping tycoon will have a lot of ships, a property magnate will have a lot of property. 

Bernard Fung, Credit Suisse’s head of family office services and philanthropy advisory for the Asia-Pacific region, says that the founding generation typically sees its wealth as business wealth. “The majority of their wealth is in the business,” says Mr Fung. “The next generation will not see the business in the same way.” 

Comparing this with the needs of the next generation in US and Europe, David Lim, CEO of Singapore at Bank Julius Baer, says: “From our experience, the issues are relatively similar, although US and European clients may be slightly more accustomed to the planning techniques available. Asia is catching up fast in this regard, especially in developed jurisdictions such as Hong Kong and Singapore.”

Mr Fung notes that the wealth management industry has become more vocal on succession management in recent years and the volume of presentations on the topic has increased. “The only real solution that banks were presenting to clients 10 to 15 years ago was just about trust structures – that was really the only response. Clients had to find the other components and figure out the pieces of the puzzle themselves.”

He gives the example of one family in south-east Asia who figured out the necessary components themselves and used consultants to set up governance frameworks, for example. “Because they were doing it for the first time, the pieces worked, but 10 years later they realised that it does not quite work because the governance is not integrated with the trust,” says Mr Fung. In setting up structures to manage the transition to the next generation, Mr Fung says of this family: “They did not know the questions to ask.”

Future needs

A knowledge of a family set-up and their succession needs is important for any bank hoping to capture this wealth management business, as is understanding the characteristics of the next generation themselves.

Money K, managing director of the global next generation at Citi Private Bank, says there are three defining characteristics of the next generation of wealth. “They are extremely global,” he says, explaining that they may have gone to boarding school in the UK, done an MBA in the US and now have permanent residence in another country. “They are very digital,” he adds, with the next generation notable for their use of online banking tools. “And they are very social,” concludes Mr K, explaining that through social networks they typically have a small circle of friends that can be extremely influential on their decision making.

Mr Lim at Julius Baer says of the defining characteristics of the next generation: “They are made up of highly educated and independent thinkers. Quite a large number are next in line to take over the helm of the family business although they, and the patriarch of the family, may not have made sufficient preparations for such a transition. Their outlook on life, interests and values may also be rather different from the previous generation. They will need to find a way to bridge this disconnect, and to prepare and plan for the transition in a timely manner.”

Bridge from old to new

One way in which banks aim to bridge this gap is by providing training programmes for the next generation. Through workshops and events lasting a number of days, the banks seek to make the next generation aware of their impending responsibilities. 

“The parents love this programme. Their children get an education in wealth management and become more astute about finance, wealth management, trust and estate planning – things they do not learn in school, not even in business school,” says Mr K. “For the parents it is of primary importance – it is the child that is the most important consideration in what they do. They want their children to act responsibly with finance and the family’s legacy.” 

Citi treats the next generation almost as a separate customer segment. “We created the next-generation programme as a dedicated means to look after this segment,” says Mr K. He explains that his role is more than a marketing function, and aside from looking after the training events he works with bankers trust specialists and so on, to help the next generation open accounts and consider investment opportunities. 

Spoilt for choice

With many banks in Singapore offering such programmes and the participants attending events of multiple banks, there is no guarantee that this strategy will translate into securing the next generation as clients. “There is no guarantee of loyalty from the children. The next generation have a lot more choices,” says Mr K. Mr Nelson at Standard Chartered agrees: “It is a bad strategy to hope and pray that the next generation will stay with you.” 

Sebastian Dovey, managing partner of wealth management specialist Scorpio Partnership, argues that some banks are naive in their approach to acquiring the next generation as customers. “Few banks recognise that the next generation could be a customer segment,” he says. The efforts to woo the next generation with training programmes require significant investment and the bank may not reap the rewards for another decade, says Mr Dovey.

“Research shows that in the succession process, the next generation like to reset the [banking] relationship terms,” he adds. “The industry treats the next generation in pretty loose terms. In terms of definitions, it is similar to how the industry used to treat philanthropy – it is a nice topic to talk about, but it is not thought about in commercial terms yet.” 

Another challenge facing the wealth management industry is building scale. “It is expensive to do private banking in Asia. It is never going to be cheap with the talent shortage,” says Mr Nelson. 

For European banks such as UBS and Credit Suisse, the scale comes from working off global platforms. For a local Singaporean bank such as DBS, the scale comes from capturing business coming into Singapore. DBS’s aim is “to serve as a gateway to global customers who want to come to Asia”, says Ms Tan. “If they come to us, they already know the West, but for solutions to investing in Asia and China, we create those solutions and tap into Asian linkages. We are not trying to compete with the Swiss and US [private banks]. We have no ambitions to build a US presence. Our ambition is to grow in our backyard,” she adds.

Management model

Aside from building scale, the private banking industry is still debating the best model to manage the wealth of Asian clients. One observer characterises a typical wealthy Asian client as having a number of private bankers on call and treating the banking relationship as transactional, with them telling the banker what they want to do with their money. This differs from the stereotype of a European client who allows the banker to manage their wealth at their discretion. 

“The Asians are more self-directed – they want to do their own trades. The percentage of discretionary management in Asia is pretty small,” says Mr Nelson.  

On the question of whether the discretionary approach to wealth management is a more European phenomenon, Mr Fung at Credit Suisse says: “Wealth owners [in Europe] in whichever generation want the most amount of control.” This view seems to go against the stereotype of European families being happy to hand over the management of their wealth to their private bankers. Mr Fung argues that ultimately, it is the family – not the bank – that needs to have control over the wealth. Of the approach in Europe, where there is a longer tradition of wealth over a number of generations, Mr Fung says: “In the long run, these families are the best long-term stewards of the family’s wealth. In Asia we are [also] seeing that view. We help [Asian clients] set themselves up so they can do it properly.” 

Mr Koh at UBS says that in pockets of Asia – namely Hong Kong, Singapore and Taiwan – clients are more open to, and are increasingly setting up, discretionary mandates. He gives the example of Taiwanese clients: “They are very good entrepreneurs, they like to be in control [of managing their money]. After two or three years, after the trust has been gained, then they might seek a discretionary management solution.” 

When questioned over claims that it is not possible to make money from discretionary business in Asia, Mr Koh says: “I beg to differ. We have had some success.” He explains that it is difficult to generalise because approaches differ. For example, an entrepreneur who has retired would rather be directive because he has the time to read and take a macro view of the global economy and financial markets. 

For Ms Tan at DBS, however, it all comes down to the fact that people will invest in what they know. A business owner from Hong Kong, for example, will be comfortable directing trades for Hong Kong, but would go to the bank for a discretionary solution when investing farther afield in Japan. “Wealth creators are just too busy to do it themselves,” she says.

Mr Dovey says that some private banks believe their clients only want to do self-directed transactions. He points out that believing in the stereotype of Asian clients as highly leveraged ‘stock jockeys’ looking for the best deal may mean that banks are overlooking potential clients who are interested in discretionary solutions. 

When asked if Asian clients are moving to discretionary solutions, Ms Tan at DBS says: “It is evolving.” Clients’ expectations are changing, as are the demands of the next generation, and at the same time there are other facets of the industry that are also evolving.

Mr Lim at Julius Baer lists other challenges, including the fact that clients are more globalised and regulatory requirements are more complex. “What works today may not work tomorrow,” he says. “Succession management has to continue to evolve over time, with the involvement of professionals. Long gone are the days when clients can just write up a will, set up a trust, lock these documents into their safe and end the succession management journey there and then.”

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