Overseas investments have long been the way for wealthy families to diversify their risks. In recent times, the challenging local environment has seen affluent Malaysian families reviewing their portfolios and allocating more to investments outside the country in an effort to preserve their wealth.
Yap Ming Hui, managing director of Whitman Independent Advisors Sdn Bhd, has observed this trend. “A few years ago, these families may have placed about 10% of their wealth outside of Malaysia. Now, it is between 40% and 50%, which I believe is a healthy rate for ultra-high-net-worth families,” he says.
“This is due to their concerns that the ringgit may continue to weaken, causing their wealth to depreciate. They are diversifying into different currencies, such as the US, Singaporean and Australian dollars, for wealth preservation.”
These families have placed most of their money in residential real estate, especially in cities where their children are studying, such as London, Perth and Sydney. “As they travel there frequently [to visit their children], they have time to view properties and deal with lawyers and bankers. They may also choose to stay at their properties if they want to.”
In fact, according to Yap, there is a growing number of families who have begun using properties as a way of hedging against their children’s education costs. “This is becoming a trend as Malaysians get more sophisticated about overseas investing. In the event that the UK properties appreciate, they will have the option of selling them. This should be enough to cover the inflation cost of their children’s education,” he says.
This is a good move, he adds, provided that they sell the properties after their children graduate. “It is only for the short term, which is [typically] less than 10 years, depending on how many children they have. However, upon their children’s return to Malaysia, they will have to sell the properties to realise their capital gains.
“If they choose to keep the properties, they may face the risk of not being able to sell them later, especially if there is a market downturn. So, if they are able to sell the properties straight away, they can remove that risk completely.”
Yap says affluent Malaysian families are investing in overseas properties because locally, real estate is no longer an attractive asset class. “For these families, investing in properties is second nature to them. It is a tangible and familiar asset class compared with other more liquid investments.
“But last year, the families began having problems with their local property investments. When they bought these properties a few years ago, the market was doing well, there were a lot of buyers and they were able to get loans easily. The owners could also get good returns by flipping the properties.
“Today, however, they are beginning to realise that some of their properties are not making money at all. That is why they are turning to residential property investments overseas instead.”
But these investments are not without risks. Many of these families have exposed themselves to the risk of losing their money through unregulated investments. Yap points out that even though affluent families are generally a knowledgeable lot, they are not immune to scams.
“They are trying to diversify away from traditional investments and asset classes. They avoid equities because they feel that they are volatile. They avoid bonds because they think these are boring. So, they sometimes resort to unregulated alternative investments, such as commodity funds that invest in agar wood or arowana fish. Somehow, their experience and competence do not help them to assess whether they are getting themselves into scams or unsustainable investments,” he says.
“Truth be told, it is very challenging because the people behind such schemes are really good at marketing their products. Maybe clients know that they shouldn’t have anything to do with Genneva Gold, but when there is a new version of the scam — perhaps under a different name and packaging — they may fall for it.
“While they may not allocate a lot of their wealth to these types of investments, they have the tendency to put their funds in different kinds of schemes. This puts them at a higher risk of losing more in the event that all of the investments turn out to be scams or unsustainable in the long run.”
According to the World Ultra Wealth Report 2015/16 released by Wealth-X on Sept 28, there were 212,615 ultra-high-net-worth individuals (UHNWIs) in the world last year. Of these, 51,515 or 24% were in the Asia-Pacific, up 1.4% from the previous year.
As the wealth of these individuals and families grow, the demand for third-party services to help them manage their wealth has also risen. In Malaysia, family offices are helping the affluent manage their wealth effectively and efficiently, including monitoring their investments, coming up with strategies to help them enhance their wealth and assisting in the transfer of family values.
Services offered by family offices
Generally, there are two types of family offices. Single-family offices are set up to exclusively manage the wealth and needs of a particular family while multi-family offices offer their services to several families.
Yap says the awareness of what family offices are and what they can provide is still low in Malaysia. So far, the local landscape has seen more multi-family offices as they are more cost-effective to run than single-family offices.
“The cost to set up a single-family office can easily reach RM1 million per year. So, what they do instead is engage our services, which may cost them only RM20,000 to RM30,000, depending on their wealth. This is a much lower threshold for them to experience family office services before deciding if they would like to set up a full-fledged one,” he says.
Blueprint Planning Sdn Bhd charges clients between RM1,000 and RM10,000 a year, depending on the scope of services provided and the complexity of data gathering.
Family offices offer an array of services. They include managing investments, administrative activities, succession planning, philanthropic activities and tax and legal services.
Dr Mohar Yusof, head of family office and Islamic financial planning at Blueprint Planning Sdn Bhd, says while the family offices in Malaysia generally offer these services, their specialties may differ. “For example, what we bring to clients is family governance. This is a very broad area encompassing family business advisory and family counselling.
“Therefore, we try to understand the goals and values of the family as much as we can. We interview the family members, either together or separately, to identify their common values, which we will capture and codify in the form of a family constitution.”
Mohar says family offices are also able to help the families draw up policies or agreements, such as a family employment policy, shareholding policy or an agreement to dissolve the family business. He adds that it is usually quite difficult to discuss such topics between generations. That is why there is a need for competent advisers to step in to formulate a code of conduct, known as the family charter.
“A family charter is a written agreement on business-related issues such as ownership, control and employment. It is a living document and it needs to be reviewed regularly. For example, if there is a new family member, we may need to change some parts of the charter as the expectations may have changed,” he says.
In family governance, there is a need to set up a family council. Because not everyone in the family is involved in the business, the council serves as a platform for all members to voice their opinions. Mohar says this is very important to avoid conflicts, especially when the family business reaches the third generation.
Some firms, like Whitman Independent Advisors, put more emphasis on wealth planning, especially strategic asset allocation, which is something the family’s private bankers cannot offer.
The firm does not need to engage with the whole family to do this. It only needs to work closely with the family patriarch, says Yap. “We have a bird’s eye view of the client’s investments. This is very important to make sure that they are not overexposed to any asset classes.
“Private bankers, on the other hand, may not know how much exposure their clients actually have as they may only see what the clients have in their banks. So, this creates a silo limitation.”
Some family offices work with external parties to provide services that they may not be able to offer. James Ong, CEO of Fortis FP Consultancy, says while his company offers services such as managing investments; handling accounting, tax and administrative matters; and managing lifestyles, properties and philanthropic activities, he gets a third party to deal with legal services and succession planning.
“For example, my clients may need legal services for transaction paperwork. I will do my due diligence. It may involve three days of research and meeting with a few lawyers to get the one with the best perspective. Then, I will explain their perspectives and suggest the best to my client.”
One of Fortis’ key services is custodianship, or keeping its clients’ important documents safe in its custody. “We have all the information. When they are needed, we will make them available. Sometimes, people lose things such as a title deed to an asset they bought 10 years ago. That is why custodianship is important,” says Ong.
Family office services are available to clients with a net worth of RM10 million (Whitman Independent Advisors) to RM50 million (Fortis FP Consultancy). For Blueprint Planning, clients must have a family net worth or annual family business revenue of about RM50 million.
Family office investments
Globally, family offices’ holdings in private equity (PE) have risen to 22.1% this year from 19.8% last year, according to The Global Family Office Report 2016 (GFO16) by UBS and Campden Wealth Research. Yap expects to see this trend in Malaysia as well.
“There has been an increase in PE investments among affluent families in Malaysia. That is because the wealthy are usually entrepreneurs — it is in their blood. So, PE investments or investments in high potential businesses are very appealing to them,” he says.
Foreign fund houses and private bankers have been actively promoting PE investments. This could have contributed to the higher take-up, says Yap
For example, RHB Asset Management offers wholesale funds that are structured like PE funds, such as the RHB Pre-IPO and Special Situation Fund. It also launched a PE fund — the RHB Private Equity Fund 1 — recently.
Affluent Malaysian families tend to invest in traditional assets classes, such as properties, equities, bonds and unit trusts. Mohar says this could be due to the influence of the banking industry. “People feel very close to their bankers. Since the bankers have their information, they may influence their investing behaviours.”
Yap, meanwhile, expects affluent Malaysian families to gradually move from direct investments in bonds to bond funds. “Before this, private bankers tended to recommend direct bonds to these families. However, because of defaults or corporates failing to pay the coupons, the families may end up losing their money.
“This is frustrating for them as they thought bonds were supposed to be safe. So, they will move into bond funds instead. Also, they will prefer to get a manager to select their bond papers for them as there is an extra layer of credit analysis and due diligence,” he says.
This is a good move, he adds, as long as they leverage a good fund manager. “With the help of bond fund managers, your risk will be spread across several bond papers instead of just one. The manager, as a professional, will also help you select better quality bonds. Third, because it is a fund, you may get your money back very easily should you decide to sell.”
Meanwhile, there has been growing interest in impact investing in the past few years, according to GFO16.
More than half (61%) the family offices are active or likely to be active in impact investing in the foreseeable future and nearly half of the family offices (47%) believe that impact investing is a more efficient use of funds to achieve social impact, says the report.
However, Yap says this has yet to reach our shores. “Although there is growing interest in this outside of Malaysia, I have yet to receive requests from my clients here to do any impact investing.”
According to GFO16, successful succession planning is a key and looming priority, with 15% of family offices expecting a generational transition in the next five years and 43% in the next 10. Only two out of five (43%) executives participating in the study has personally experienced a successful transition, pointing to a number of factors such as a willing and able next generation, an older generation prepared to give up control, and a flexible and trustworthy family office.
Mohar says succession planning becomes a challenge when the potential successors see wealth or position as their right. “This leads to conflict. Therefore, there is a need to develop a stewardship mindset among the family members. They need to be leaders who are interested and concerned about the well-being of all of the family members. If this can be achieved, then succession planning can be facilitated in a more efficient way.”
He adds that a family office’s role in succession planning is very important to ensure a smooth transition. “The common thing between the family and the business is the ownership, or the shares. It is not just about management and business succession; the ownership requires succession as well. Let’s say a family member decides to exit the business after the third generation — what is the policy for that?
“You cannot assume that a lawyer, for example, can solve the succession planning by himself alone. He may be good at drafting legal documents, but in succession planning, there is also the emotional dimension. It is not just papers involved.”
In the past, investment risk was viewed as the most serious form of risk, taking precedence even before family data and confidentiality risk, banking/custody risk and family reputation risk. Investment risk used to attract the highest levels of internal and external oversight and written risk management procedures, policies and guidelines when managing family offices.
This year, however, there has been an increase in the controls put in place to manage family data and confidentiality and family reputation in the current age of digital communication, according to GFO16. The report finds that 69% of family offices now have internal oversight for family data risk and confidentiality while 62% have this in place for family reputation risk.
Yap expects this to happen in Malaysia as well. As the company has possession of all the family’s information, they are very concerned about their data being uploaded online. To make its clients feel more at ease, Whitman Independent Advisors still keeps its clients’ information in physical files.
“These families, on their first visit to Whitman, ask: ‘How do you make sure that the information I give you is protected?’ This has always been the number one question that we need to answer. For affluent families, information protection is very important. These people have assets everywhere, so it has always been a priority to address this issue and make sure that they feel comfortable since we want to run this business.”
A family office is about creating trust and relationship with the families, says Ong. By agreeing to provide all the information about the family, they are placing a lot of trust in the service provider.
“The keyword in family office is trust. Our Asian culture is a very cautious one, so family office providers need to work very hard to gain the families’ trust. Once this trust is gained, it is very important to retain it by placing the clients’ needs first,” he says.
When planning his clients’ portfolios, Yap gives them some advice to help them make better investing decisions. Diversification is one of the things he advises them to do.
“We always advocate that if you want to preserve your wealth, you cannot afford to put all your eggs in one basket. For example, putting 90% of your money in properties is very dangerous,” he says.
“What I suggest to my clients is to perhaps place 50% of their wealth in properties and another 50% in liquid investments, which can be parked in different currencies. It is also very important for currencies to be diversified. No matter how much you make in your investments now, if there is a currency war among the different trading nations, you may end up losing money.”
Making investments based on your life goals is also very important, says Yap. When there are new clients on board, he always begins with holistic financial planning. This is where he gathers all of the client’s information, including the companies, properties and bank accounts that they hold.
“Then, we detect their goals. For example, if they are planning to migrate, we will need to facilitate their asset transfer, cash flow and currencies. If they plan to retire soon, we will need to start building the cash flow rather than investing in properties,” he says.
“Some of my clients who are older and do not have much active income anymore may not want to service instalments. Thus, we will try to control their liability exposure and loan repayments so that they do not have more commitments.”
He adds that if the clients’ investment goals are not linked to their stage of life, the investments may not work as they will not be able to match the cash flow with the family’s time horizon. “For example, the children or grandchildren need a lot of money when they go overseas to study. If you do not manage your cash flow properly now according to that need, you may end up with a cash-flow problem, especially those who are heavily invested in property.”
Another important principle is risk-controlled investing. Yap says when clients are young and energetic, they may be able to tolerate all kinds of risk. They could even afford to lose their capital and recover it later.
“But once you are in your fifties, your wealth is supposed to last beyond your retirement, so the risk tolerance changes. That is why risk-controlled investing is important. The purpose of it is to make sure that the
hard-earned wealth is well preserved over generations,” he says.