Wealth Management: How to not lose it all

This article first appeared in Personal Wealth, The Edge Malaysia Weekly, on April 8, 2019 - April 14, 2019.

It is said in Asia that it takes three generations or less for family wealth to be created and lost. In Europe, there are families that have preserved their wealth for 17, 20 or even 25 generations. > Esseiva

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Asia is said to be the world’s fastest growing region when it comes to the wealthy, but this will be meaningless if they do not start planning to preserve their wealth effectively, says Alain Esseiva, co-founder of Alpadis Group.

Despite the jarring statistics that show how poorly managed assets lead to wealth erosion in the long run, rich families are still not making sufficient provisions to professionally manage their wealth, says the CEO of the Swiss fiduciary services firm, which was established in 2005.

“It is said in Asia that it takes three generations or less for family wealth to be created and lost. In Europe, there are families that have preserved their wealth for 17, 20 or even 25 generations,” says Esseiva.

Alpadis Group, which has been operating out of Labuan since 2011, recently acquired KPMG Labuan Trust Co Ltd to expand its list of clientele.

According to the Global Family Office Report 2018, nearly half of the 311 family offices surveyed did not have a succession plan in place. The report, which was jointly published by UBS Group AG and Campden Wealth Research, pointed out that there had only been a one-percentage-point increase in succession plans since the financial institutions warned of the problem in 2017.

The problem in Asia is so deeply entrenched that there is a Chinese saying that family wealth does not last more than three generations. That is because families here continue to rely on direct transfer of assets to pass on their wealth and ownership of family-run businesses to their children, says Esseiva.

Most of the time, Asian wealth is built around real assets, especially businesses, he adds. So, when the responsibility of managing wealth is handed to the children and grandchildren, they may find that they are not really the best people to take over the running of the business.

“There are different reasons as to why generational wealth dissipates quickly. But one of them is the decision to hand over the family-run entity to the eldest son, who may not necessarily be the best or the most competent person to take over from the patriarch or matriarch,” says Esseiva.

“Keeping things in the family could be problematic if the second generation of owners are not really interested in the business. They tend not to look outside of the family for someone more qualified to run the business.”

Another common issue is when the founder of the family business stays at the helm for too long and finds it hard to relinquish control or heed good counsel. “Usually such family structures are very complex and the second generation of owners may not have the same dynamics as the first generation, who built the business and grew the wealth,” says Esseiva.

Globalisation also presents daunting challenges. The wealthy and their children have the tendency to live in different countries. This requires them to adhere to the different rules and regulations of the various jurisdictions. In such circumstances, intergenerational transitions and succession planning require different skills, says Esseiva.

“They do not necessarily want to live in the country they were originally from. But when they have an international presence, they automatically face international challenges. With different domicilities, wealth succession can be extremely complex.

“Sometimes using offshore structures, such as trusts or foundations, can help the family continue to control their wealth and organise the transfer of wealth to the next generation in an orderly manner. This is important because the world is becoming more transparent.

“Clients have to understand that they cannot hide behind a structure anymore as these structures are becoming more transparent. Today, if one is setting up a wealth planning structure, it is really for succession planning and not so much for tax planning.”

The transparency he is referring to is a series of global tax regulations such as the US Foreign Account Tax Compliance Act and the Common Reporting Standard, which require disclosure of information on controlling persons, value of accounts and assets.

“Not long ago, we were in discussions with a client in a North Asian country. After a number of meetings, at which we discussed the need for intergenerational wealth transfer and how to structure it, we submitted our proposal. After numerous exchanges, the patriarch decided against engaging us. The reason was our fee, which he believed was too high,” says Esseiva.

“The family decided to keep a simple offshore company, with the personal assistant of the patriarch acting as the director and the former’s brother-in-law as the nominee shareholder. This arrangement was cheaper. Regrettably for the family, the tax law of the country was changed a year later and they were caught with this offshore structure, which resulted in them being fined tens of millions of dollars.

“When it comes to complex issues such as wealth preservation and intergenerational wealth transfer, taking the cheaper option is rarely the best course of action. It is highly advisable that families engage experts who are able to provide sound and smart counsel.”

But what discourages wealthy families from getting professional advice? Esseiva says their main concern is whether they can trust external managers and whether these managers are able to craft solutions that suit the family’s dynamics. “To address these issues, there are different structures that one can put in place, such as a private trust company or foundation, where the family can have a role and employ external advisers.

“I don’t think advisers have the answer to every problem, but we can put in place a structure that will help the family better manage the future of their wealth. Sometimes, an external adviser could spot problems that members of the family cannot and help them manage these in a better way.”

Professional advice also comes in handy in volatile market conditions, which range from low or negative interest rates to various geopolitical risks. For example, having someone keep tabs and communicate such issues helps the family office restrategise accordingly, says Esseiva.

“Many Asian families invest in real estate or their own businesses. In fact, we often find that the wealth of a family is intermingled with that of the business.

“In the past, they invested a lot in real estate because it was something they knew well and liked. But these types of investments have their own set of problems. Back then, they made quite a bit on capital gains, but it has become more complicated to get capital gains and the yields on rents are pretty low at the moment.

“For example, when a patriarch stays too long in power, say until he is 80 or 90, he may lose sight of the fact that the markets are constantly developing and that we are in an environment that is changing very quickly. He may not make the decision to move in another market or another system because he does not understand it.

“That is why proper asset allocation is important. You cannot be completely invested in your business or just real estate. You need to have proper asset allocation done, such as investing in private equity, stocks, bonds, currencies and different markets.

With the younger generation being educated abroad, Esseiva is seeing a shift in the sentiments of his clients as they understand the reasons for succession planning. “We believe that Asia is the market of the future. China, India and Southeast Asia are growing at a rapid pace. Their growth stories are pretty impressive and they are creating a lot of new wealth every year. Many families here are running successful businesses and they will need to think about intergenerational wealth transfers as they become bigger,” he says.

“Most of the wealth in the region has been around for 40 or 50 years, which is a very short period of time. People tend to think that their wealth will last a very long time because they have amassed a huge amount of money. The question they need to ask themselves is, will it last 20 generations in today’s world? I doubt it.

“For some of them who have started taking action, it will or it may. But for the most part, without proper succession planning, it will not.”