The Challenges of Multi-Generational Wealth Management in Asia

When the octogenarian billionaire Cheng Yu-Tung listed his jewelry retailer, Chow Tai Fook, on the Hong Kong Stock Exchange in December, Reuters noted that it “paved the way for his younger generation to strengthen its position in China’s glittering market.”  Indeed, his oldest son, Henry Cheng, is chairman while Henry’s son Adrian and daughter Sonia run parts of the business. [See “Gold Tycoon Rides Crest of Asian Boom” (subscription required) in the Wall Street Journal in December 2011.]

The initial public offering also provided a window into the burgeoning wealth in the region and the dynamics — and concerns — that many wealthy Asian families face as they contemplate succession plans and the challenges of passing their wealth on to successive generations. These topics will be a key focus at the upcoming CFA Institute Asia Pacific Investment Conference in Hong Kong on 7 March, where two highly regarded experts — Christian Stewart, managing director of Family Legacy Asia (HK), and Barbara Hauser, an independent adviser to global families — will share their views.

For private wealth managers, understanding the unique needs of Asian wealth holders has never been more important. According to the 2011 Asia-Pacific Wealth Report from Merrill Lynch Global Wealth Management and Capgemini, Asia’s high-net-worth individuals controlled US$10.8 trillion in 2010, up 12.1% from the previous year, while the population of high-net-worth individuals in the region grew 9.7% to 3.3 million, exceeding that of Europe for the first time and making the region the world’s second-largest market after North America.

“Asia-Pacific remains a region of enormous wealth creation, spearheaded by China, India and Japan, which continues to outpace global levels,” said Michael Benz, head of Asia-Pacific Wealth Management at Merrill Lynch Global Wealth Management, in a press release. “The increasing sophistication and demands of Asia-Pacific high-net-worth individuals mean that those wealth management firms that can leverage across their businesses are best-placed to better serve their clients’ needs.”

Unlike Europe, where wealth tends to be “old money” that was made generations ago, Asia’s wealthy elite are often entrepreneurs or business owners. This presents interesting opportunities and challenges for wealth advisers.

In a 2010 article, “Family business succession planning: East versus West”, Asia Pacific Investment Conference speaker Christian Stewart reflected on some of the differences between the ways that overseas Chinese families in Asia tackle succession planning and family governance and how this might differ from an “American” approach.

One of the disparities noted by Mr. Stewart is a lack of professional advisers, which he posited may be due to a desire for confidentiality. “A wealthy family may not want to disclose details of the family wealth to a local adviser in their home country,” he says. “It is a totally different culture in Asia in terms of the use of external professional advisers, and this must have some impact on the succession process.”

Mr. Stewart suggests setting up a family council as a way to handle succession planning. In a New York Times article, he noted that “family businesses all over the world are fundamentally the same: there is an overlap between the family system and the business system. Within the Asian family system, the rule tends to be to treat everybody equally. But when these rules are applied to the business, sooner or later it will lead to internal conflicts. The majority of Asian family businesses fail because of internal conflicts, and a lot of that stems from applying family-system rules in the business.”

The family council offers a forum for discussing these overlaps, while a family constitution formalizes the rules about who is in the family council, how the council makes decisions, and how it votes. “The key thing about this is having a fair process for the family members to make decisions together,” Mr. Stewart said in the article. “It’s all about joint-decision making.”

Strong family governance is key in succession planning. Asia Pacific Investment Conference speaker Barbara R. Hauser is a trusts and estates lawyer by background who focuses on family governance, family offices, family business continuity, offshore trusts and the coordination of generational transitions. In a recent article for the CFA Institute Private Wealth Management Newsletter, she noted that “in Asia, families are beginning to turn to family constitutions as a tool to keep the family (and family business) together, adapting a ‘Western’ concept into their own close family system.”

All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.