Rethinking the Wealth Management Model for Serving Asian Family Businesses
At the CFA Institute Asia Pacific Investment Conference in Hong Kong earlier this month, Christian Stewart outlined the unique challenges confronted by Asian family business groups and their wealth management advisers.
A lawyer by training, Stewart has plenty of experience to draw upon: during a nearly two-decade-long career in wealth management, he has run both the wealth advisory team for the Asia Pacific at JPMorgan Private Bank and the trust and private client group at PricewaterhouseCoopers in Hong Kong. In 2008, Stewart founded Family Legacy Asia, a consulting firm specializing in family governance.
In most Asian countries (China being one major exception), family-controlled business groups comprise 60% or more of listed companies with market capitalizations of more than US$50 million, according to the Credit Suisse Emerging Markets Research Institute. This is an important segment for private banks and other wealth management service providers, and was the focus of Stewart’s presentation.
His key points include the following:
- Internal family conflict is prevalent among Asia’s high-net-worth (HNW) families, Stewart said, and is a major factor contributing to the disintegration of firms controlled by Asian families.
- In many cases, too much attention and emphasis are put on the “business system” and too little on the “ownership system” and especially the “family system,” Stewart argued.
- Establishing a family governance structure is critically important, he contended, and facilitating communication in well-planned family meetings is a key activity for effective wealth management advisers.
- Given this context, trust companies and family offices in Asia need to rethink their business models and provide services that cater to the important and often overlooked needs of Asia’s HNW families and family business groups.
“Shirt Sleeves to Shirt Sleeves in Three Generations”
In most cases, family businesses seldom survive three generations — and firms in Asia are no different. For much of the life of a company, the founder dominates. As ownership becomes segmented in the second and third generation, the business dynasty begins disintegrating, Stewart said. Still, there are isolated exceptions. The Ayala family dynasty in the Philippines, for example, has thrived for more than 180 years.
Nonetheless, the majority of Asian family businesses fail not as a result of external factors but rather because of internal factors ranging from family feuds to the fragmentation of ownership and the disinterest of family shareholders. In planning for a long-lasting legacy for the family business, founders often pay too much attention to the business itself and to management succession in particular, when the key focus should instead be placed on the system of ownership and the family system (see Box 1 below).
The design of the ownership system and the family system must provide for flexibility in “recycling” share ownership; unfortunately, Stewart said, such flexibility is often not provided by traditional trust structures.
Family Governance Structure
Trust structures cannot be effective without a proper family governance structure, Stewart told conference delegates. In setting up a family governance structure, a family meeting of all members is an important first step. A family council can then be formed consisting of key family members who are “elected” during the family meeting. A family constitution can then be drafted, discussed, enhanced, and eventually “ratified” by the broad family membership in a series of family meetings. With this system in place, families can effectively develop a range of policies to guide their actions.
Family meetings are obviously key to the family governance structure, and they need to be carefully planned to ensure fruitful outcomes, Stewart said. Meetings must be designed to encourage participation and sharing, and such an approach is often likely to be different from a family’s norms of communication in social settings. Stewart observed that while the majority of wealth management firms in Asia have run seminars and workshops on the technical aspects of trusts and family governance for HNW families, it appears that most have not yet taken the extra step and begun facilitating actual and effective family meetings for client families.
Trust Companies in Asia: Rethinking the Business Model
According to Stewart, the following characteristics are common among trust service providers in Asia:
- Trusts are viewed as a product not a service.
- Trusts are viewed as a way to gather assets under management and grow revenues for a firm’s investment division.
- Settlors in most cases keep the terms of the trust secret and little information, if any, is disclosed to family members. Settlors also make the investment decisions, and generally maintain effective control of the trust.
- The providers make minimal efforts to facilitate effective family meetings for client families; in addition, family governance structures are typically not well designed.
- Trust officers tend to have an accounting, legal, or company secretarial background.
- Private banks dominate the industry and, in general, the level of investment in trust services businesses is relatively low.
Stewart said he believes that important needs of Asia’s wealthy families are not being addressed — and neither trust service providers nor client families are necessarily aware of the shortfall. He made the following suggestions for rethinking the business model:
- Trust service providers must proactively facilitate more open communication between patriarchs (trust settlors) and other family members, and encourage greater transparency with regard to the family wealth and the family business.
- Providers must work to establish a family governance structure alongside well-designed and flexible trust structures.
- For providers, a different kind of staff mix may be needed. As a complement to traditional legal and administrative staff, firms would do well to consider hiring coaches and mentors; family meeting facilitators; and specialists in family dynamics.
Stewart said that he does not anticipate such changes to the industry will be forthcoming in the near future, since the predominant measure of success in the industry remains investment revenue growth. As a result, family businesses that realize they need advice on governance and family dynamics are often driven towards creating their own family office or joining a multifamily office — or possibly even establishing a private trust company.
Family offices may be the near-term winner. According to Stewart, they have been adapting their business models to more effectively help family business dynasties attain the elusive objective of sustaining their legacies for as many generations as possible.
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.