5 Ways To Successfully Manage A Generational Transfer Of Wealth
There are five key principles for managing family succession to ensure a seamless transfer to the next generation
More than two-thirds of wealthy families expect a generational transfer in the next 10 to 15 years, but managing such transitions successfully can be challenging. This is especially true in Asia, where cultural issues often make it difficult or even taboo to discuss handing over to the next generation. Yet handing over the reins to the younger generation need not be messy. Here, we look at some basic principles that help ensure a smooth transfer.
Given all the complex concerns involved in generational transfers, it is extremely important to start planning early. “Succession is a process and a journey all families go through, and not a oneoff event,” says Edith Ang, executive director of the family advisory group for UBS Wealth Management in Asia Pacific, who shared her years of experience working with wealthy families in the region.
Preparing the next generation to be leaders requires early involvement and education about their roles as future stewards of the family and their business. “Clear and ongoing dialogue as to roles and expectations between both generations is imperative,” says Ang. “To this end, Asian families sometimes benefit from having a third-party neutral adviser to act as a bridge between both generations.” Family offices can play a role in this transition and are increasingly being used to prepare the next generation.
“Families need to pay attention to communication and governance—to make clear the frameworks of ownership, control and management, as we move from a single decision maker to potentially joint decision-making."— Edith Ang
Build solid foundations
A successful transfer from one generation to the next needs to be enshrined in a robust legal structure that ring-fences risks and makes sure that all the people the family wants to protect are taken care of. And this should not be a set-and-forget document that is locked away in a safe for decades.
Families need to have regular reviews of structures and family agreements to ensure that they are up to date and relevant to the changing circumstances of the family.
These documents will form an important element of the foundation that succession is built on, but there is more to it than just the “hardware” of contracts and agreements. The “software” is just as important. “Families need to pay attention to communication and governance—to make clear the frameworks of ownership, control and management, as we move from a single decision maker to potentially joint decision-making,” says Ang.
A transfer to the next generation might see decision-making move from a single patriarch to a much larger group of siblings and cousins. This can be fraught with potential conflicts, so a family constitution drafted jointly by the family members can address questions such as how to resolve disputes, what are the roles and expectations of each family member, and what is the family vision and legacy to be passed on.
As family wealth passes down the generations, it becomes increasingly diverse. What may have started as a Hong Kong-focused property business owned by one family can ultimately become a much broader enterprise. Younger family members are also likely to have bigger horizons and see the world in a different way to their forebears. “The next generation are global citizens yet Asian at heart,” says Ang.
This could mean that both the business itself and family members are spread around the world, giving rise to much more complex issues when it comes to planning for succession—and therefore all the more reason to take on board the first two principles.
A successful generational transfer in the 2020s may require robust asset holding structures that can take into consideration potentially different nationalities and domiciles to effectively segregate family, business and personal assets for optimum risk management.
Some wealthy families in Asia also want to make sure that people outside the family are provided for, such as valued longterm employees of both the company and the family. This can add to the scope of planning needed.
What worked for the older generation may no longer reflect the style of younger generations when it comes to managing the family’s wealth and business affairs.
“The senior generation prefers a tight circle of trusted and long-term advisers, a single point of contact, solutions to be thought through and presented after having been vetted by trusted advisers,” says Ang. “They prefer face-to-face meetings and are not so keen on digital communication platforms.”
The younger generation prefers a different approach. Trust is still important, but they are more likely to work with a team of specialists and favour a broader discussion that is open to new ideas. They are also more likely to consult their networks for referrals and opinions before coming to a decision. This more professional approach to decision-making may be more suited to the world the next generation is facing: a constantly shifting environment, shorter business and economic cycles, and digital disruption that is changing how business is conducted on a global scale.
Accepting this change in style rather than focusing on a one-size-fits-all approach is an important step in modernising the way the family runs its business and affairs.
Philanthropy has long been important to wealthy families in Hong Kong, but it has typically been seen as separate to wealth management. For the next generation, it is much more common to use investments to effect social change while also achieving financial returns—as seen in the growing popularity of impact investing. Roughly one-third of family offices are now involved in impact investing, according to UBS, and 39 per cent expect this proportion to further increase as the next generations take over.
Also, as the management of the family business becomes increasingly professional, it may suit some family members to concentrate their energy on managing the family legacy through philanthropic efforts that further the vision expressed in the constitution.