One way affluent families ensure their wealth is preserved for generations to come is to gather family members together and hammer out a strategy for making sure that happens.
This strategy, sometimes called a family constitution, can be a wide-ranging document beginning with a family's "mission and vision" and extending into more detailed guidelines, such as the roles and responsibilities of individual family members, to investment policies and practices. Ideally it includes a plan for after the CEO steps down.
It all sounds sensible. But Asia's wealthy families are only beginning to talk about drafting these documents. One reason is in Chinese culture, the eldest son often takes the reins of the family business, easily solving the problem of succession planning. That custom has broken down, however, so families are looking for ways to ensure their businesses are secured and their wealth doesn't vanish.
"The most sophisticated families in Asia have initiated that process now," says Grégoire Imfeld, vice president of family office services for Asia at Pictet Wealth Management.
The most logical explanation for why this step hasn't been taken by many families is so much of the wealth accumulating in Asia is in the hands of the "first generation". That's most often a commanding entrepreneur who is used to calling the shots and who may view a written document like a family constitution as a tool for wrestling away control of his business as well as his wealth. Other newly well-to-do families haven't bothered with hammering out a written family strategy because they aren't ready.
In China, the average ultra-high-net-worth individual is a relatively young 53 years old, says Wealth-X, a group that tracks the affluent. And then there's the fact 90% of China's wealthy are in that first generation and are still busy getting wealthier, Wealth-X says. The group defines ultra-wealth as having at least US$30 million in total assets.
Surprisingly, the lack of a written document detailing how the family business, as well as the owner's wealth, will be passed on, is an issue throughout Asia, even in locales with more of a history of affluence. In Singapore, 60% of the super-wealthy are entrepreneurs, Wealth-X says, yet a PwC survey last year found 89% of family businesses in the city-state don't have a "robust and documented" succession plan. Without a succession plan, the family business can flop before your grandchildren reach high school.
Writing some type of strategy document is the easiest way to avoid falling prey to the oft-quoted Chinese proverb: "Wealth does not pass three generations." The aphorism actually exists in one form or another in many cultures. Imfeld has collected 10 of them, with one of his favorites originating in Mexico: Padre bodeguero, hijo caballero, nieto pordiosero, or, father merchant, son gentleman, grandson beggar.
The biggest transition in Asia is between the first and second generations, a shift Charles Long, head of Greater China at BNY Mellon Wealth Management in Hong Kong, says is "probably a bit more profound in Asia" than in other cultures, since so many of Asia's wealthy second generation studied at universities away from home, often in Europe, the U.S. or Australia. That time away offers the children of the newly wealthy perspectives and experiences far different than those of their parents, and they often return with defined ideas of what they want to do with their lives, which are sometimes at odds with the parents.
Imfeld finds the same phenomenon. "I get called by a lot of second generations using the constitution document as a tool to get either recognition or acceptance from the father of their desire to run the business," Imfeld says. It's not unusual for these children to consult an expert, often a lawyer, to help craft a strategy document to present to the family head. Often he (or she) rejects it and "it's back to square one for the kids," Imfeld says.
One way BNY Mellon avoids this confrontation is to ask the patriarch or matriarch to simply talk about what he or she believes is the family's "mission." It gets the discussion moving on key topics, and there's no reason to write it down, Long says.
The private bank typically introduces the idea of why planning and governance are important by reminding clients of the truth to that Chinese proverb: wealth rarely lasts three generations. In fact, 70% of wealthy families "lose control of their assets and family harmony" in the first 1-3 generations," according to The Williams Group, a family-wealth consultancy. When asked why, more than 60% of families surveyed by the Family Office Exchange blame financial markets or the economy, while in fact, 60% of family wealth disappears because of a lack of communication and trust between family members, The Williams Group found. Failures in financial planning, taxes and investments accounts for 3% of losses, the researchers said.
Once the importance of communicating and trusting family members has been discussed, BNY Mellon encourages family members to sit down and talk about their values. The goal is to figure out what values everyone has in common, and to unearth those that haven't been shared. It's a conversation that can take surprising turns. Long recalls a family meeting when a mother broke into tears when she learned why her daughter cited "integrity" as a key value. It turns out the daughter's views were cemented after she took a stand while she was attending university that resulted in her being wrongly disciplined by the school. Her actions – which involved confessing to violating school policy along with some friends – cost her several friendships in her last year of college. The experience taught her it wasn't always easy to do the right thing.
One of the goals of this sometimes difficult process is to make sure values like integrity get passed down through the generations, and that your grandchildren and great grand-children understand the values of behind the wealth they are enjoying. "The biggest issue is sometimes families aren't as open here," Long says. "The challenge is getting them comfortable and making them understand it's better to sit and work this stuff out now rather than reading about it in the press when things go the wrong way."
One way you can put your family's values into action without involving big issues like which child gets to be the next CEO is to work on a philanthropic project together that involves distributing the family's wealth based on your shared principles. Long warns that wealthy families shouldn't begin to think about starting a philanthropy without first establishing good communication with fellow family members and fully understanding the scope of your family's values. "You first need to develop the communications skills, the shared vision. You need to build the right skill set," Long says.
Imfeld agrees the traditional approach to creating a family constitution in Asia hasn't worked given the dynamics of Asian families, and he says he also speaks with families about values as a way to counteract their concerns about wealth not surviving through the generations. It's essential for families to create a vision for not only how financial capital is managed and transferred from generation to generation, but also how more intangible "capitals", such as spiritual, human, intellectual and social capital, will be transferred, he says.
"For successful transmission, you need to take into account all those capitals," Imfeld says. "Wealth is not only money."
Source: Barron's Asia