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Investing
15 Sep 2021 6 min read

The Largest Wealth Transfer of all Time is Upon us

Investing

The Largest Wealth Transfer of all Time is Upon us

Wed Sep 2021 6 min read
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The Role of Family Offices in Generational Wealth Transfers

In what has been dubbed as the Great Wealth Transfer, a staggering USD 15 trillion is in the process of being transferred to a new generation by 20301. This is the result of an ageing generation that has accumulated wealth and is now nearing retirement. With Asia being home to a large percentage of the world’s billionaire population, it’s an important time to think about the role of family offices in assisting with generational wealth transfers. This is particularly important because generational wealth transfers are extremely complex. Families must navigate a web of legal, cultural, interpersonal, and commercial intricacies.

Asia is home to 36% of the world’s billionaire population, and 22% of the world’s ultra-high-net-worth individuals (UHNWI)2.

COVID-19 has also intensified the spotlight on wealth transfers and raised new concerns. In Knight Frank’s 2021 survey of wealth managers, 60% of the respondents said that they, or their clients, had changed their attitudes towards intergenerational transfers in the light of the pandemic, and 28% reported that generational wealth transfers are among their top three worries.

There are several possible reasons for this. The first is the old Chinese adage that wealth does not sustain beyond three generations. This is compounded by three other considerations: family businesses are now much more complex, industry 4.0 has thrown up new challenges, and the overhang of COVID-19 continues to weigh on asset prices.

Wealth preservation and growth: risks and opportunities

As wealth preservation becomes front and centre, it’s important to understand the challenges that wealth holders face, as well as the opportunities that exist for the next generation.

In Knight Frank’s survey of UHNWIs in 2021, a massive 80% said their biggest wealth concern was the ongoing disruptions caused by COVID-19.

Other concerns raised were domestic government policies, tax issues and geopolitics.

On the flip side, the next generation brings an expanded investment outlook which could potentially help to mitigate these concerns.

According to Wealth-X, millennial and Gen Z investors possess a broader outlook than their forebears. This happens naturally, as they have greater access to information than previous generations as well as higher levels of education, and global work experience. Some may have also had early exposure to leading their family businesses. This generation is also known to look keenly at innovation and developments in Industry 4.0.

With this expanded worldview, the new generation is more likely to pursue new spheres of growth such as alternative assets.

This is corroborated by a BNP Paribas survey of over 100 ultra-wealthy next-generation investors in 2020, which found that 24% had already established investment arms for asset management and alternative investments3.

Next generation investors also place greater premium on environmental, social and governance causes, green investments and philanthropy.

Capgemini’s 2020 survey of HNWIs indicated that 41% of the HNWIs aged below 40 were interested in sustainable investing, compared to just 16% of those aged over 604.

These attitude shifts have far-reaching implications for how families should navigate their transfer of wealth. Chief among them is the need to address complexities arising from multiple and diverse stakeholders with shared responsibilities.

As portfolios that were once helmed by a patriarch or matriarch move to investment committee models, it becomes imperative to establish formal processes and agreements to ensure that the family wealth is managed in accordance with established guidelines.

Governance frameworks are essential

It’s recommended that governance frameworks are designed to guide the operations of the family. A good structure for governance is essential to preserving wealth and reducing family conflicts as it defines roles and responsibilities

A survey by Hubbis5 shows there is much to be done in the field of governance. In its poll of wealth-management experts in Singapore and Hong Kong in 2020, only 13% of the respondents expressed the belief that their clients had done well in the area of governance.

In another 2020 study by UBS6, six guidelines were recommended to help keep a family office’s performance in line with its goals. These include:

  1. Strategic asset allocations
  2. Succession planning
  3. Sustainable investing
  4. Impact investing
  5. Private equity
  6. Opportunism

Aside from the complication of migrating multiple decision-makers to a committee model, businesses and family structures are growing in complexity. Family members often have different investment strategies and markets of interests which may also incur different legal and tax considerations.

However, setting up a framework to address differences is not a one-time process. Once established, the process calls for regular reviews and adjustments. With a variety of legal structures, as well as a wealth of partnership opportunities available, family offices are in a strong position to help improve governance as they embark on wealth transfers.

Succession planning is critical

Smooth and effective transition of management from one generation to the next requires sensitivity and transparency. However, cultural and familial factors often impede frank dialogues due to a reluctance to address succession and mortality, or a fear that the younger generation will be stricken by a sense of entitlement. Families might need professional guidance to find a balance between these two. Research also supports this.

Fewer than 50% of wealthy Asian families have formal succession plans in place7, concludes Hubbis.

The reality however, is to achieve a smooth transition, each generation must be prepared for the risks and opportunities that lie ahead. By facilitating dialogue and framework-setting, family offices can minimise and mitigate conflicts. They can also seek out bespoke investment solutions that offer a wider range of investment options and flexibility to address the needs of each generation. With more investment options and greater investment flexibility, the next generation can then transition gradually to the driver’s seat.

The bottom line

If only 61%8 of wealth-management professionals in Asia believe that families are prepared to transfer their wealth to the next generation, much work remains to be done. Family offices can play an integral role in managing multigenerational relationships and we believe their most important role is to find investment solutions that meet each family’s need for wealth preservation, growth, and risk mitigation.

LU Global’s comprehensive range of bespoke and flexible investment options covers both alternative assets and mutual funds to suit a range of risk appetites. This also presents unique opportunities to invest in fast-growing markets and sectors, including alternative assets. We build flexibility into our investments by offering lower minimum amounts and shorter investment tenures. This serves to benefit families which are trying to balance disparate risk appetites and investment preferences. To find out more about LU Global’s bespoke private market funds, download our app today.

  1. Wealth-X, 2019, Family Wealth Transfer Report 2019
  2. Knight Frank, 2021, The Wealth Report
  3. BNP Paribas, 2020, Banking, Entrepreneurialism and the Next Generation of Wealth Holders
  4. Capgemini Research Institute, 2020, World Wealth Report 2020
  5. Hubbis & Jersey Finance, 2019, Asia’s Great Wealth Transfer
  6. UBS, 2020, Global Family Office Report
  7. Hubbis & Jersey Finance, 2019, Asia’s Great Wealth Transfer
  8. Hubbis & Jersey Finance, 2019, Asia’s Great Wealth Transfer

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