The high percentage of
first-generation wealth creators in Asia-Pacific needing to
transfer their legacy has heightened awareness of family office
services in the region. But Paul Golden finds attracting wealthy
Asian families to the concept takes a careful mix of expertise,
location and overcoming cultural barriers.
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By GlobalData
It appears to be what Americans call a
“no-brainer”. Take the family office concept, so widespread among
European and US family wealth, and introduce it to the rapidly
expanding pool of first and second generation ultra high net worth
(UHNW) Asian families.
If only it were that simple. A lack
of adequate estate and succession planning traditions, fed by a
cultural aversion to sharing family wealth, is making it tough to
get family office structures off the ground in the world’s
fastest-growing wealth region.
“There are enough wealthy families
in India to create demand for new family offices,” says Richa
Karpe, director of investments at multi-family office firm
Altamount Capital Management.
“But Indian families do not like to
put all their eggs in one basket, so a pure discretionary
management model will not work. Families like to retain control on
the decision making process in investments.”
A study conducted by VP Bank and
Switzerland’s University of St Gallen found that UHNW families in
Asia were characterised by a strong desire for confidentiality and
secrecy and uniform unwillingness to give anyone full wealth
disclosure – including their own family members.
Growing
awareness
That is not to say the interest in
the family office model among wealthy Asian families is not there.
The 2007-2008 financial crisis raised questions among UHNW families
as to whether they could (or should) invest their assets in a
different way.
This has been coupled with a
growing realisation that the next generation will have to rely more
on professionals and organised structures and processes.
Bank Pictet & Cie (Asia)
managing director Jean-Claude Erne expects the number of wealthy
families in Asia to continue to grow. The VP Bank/University of St
Gallen (see chart) study estimates Asian single family offices
could grow to about 120 by 2015.
Many established single or
multi-family offices from Europe are showing an interest – or even
establishing a presence – in the Asia-Pacific region to take
advantage of investment opportunities and lower tax rates. Although
careful attention will have to be paid to assessing the types of
family office services or structures these Asian families need.
Mark Smallwood, Asia-Pacific head
of wealth management solutions at Deutsche Bank Private Wealth
Management, says the real challenge in Asia is to define what a
family office is.
“In Europe the ‘family office’ is
often better described as a private family investment office,
typically staffed and with an ethos towards asset management,”
Smallwood explains.
“In Asia it would be better
described as a private family enterprise with the staffing and
ethos directed towards operating the family business, followed by
satellite investments including private equity and liquid
investments.”
Cultural challenges to
succession planning
Estate and succession planning is
perhaps the greatest challenge facing wealthy families in Asia
Pacific.
It is estimated that as much as 80%
of wealth in Asia will move to the next generation over the next 15
years, yet the transfer mechanisms for the transfer of assets are
informal at best.
At worst, there are examples across
the region of major families with rudimentary succession plans
finding themselves embroiled in lengthy and damaging court
cases.
This creates an obvious opportunity
in helping wealthy Asian families focus their minds on long-term
governance planning and oversight of the family wealth for future
generations.
The use of private trustee
companies is growing rapidly, where families are establishing their
own trust companies in a tax neutral manner to create one further
level above the core family enterprise.
This higher level provides the
opportunity to co-ordinate other family assets under what becomes
the holding structure and to use this platform as the basis for the
family’s governance and succession plan.
“Perhaps the private trustee
company could be the basis for the term family office to supersede
the ‘family enterprise’ as the governing structure,” adds
Smallwood. “Particularly as the family moves from second to third
generation and the core business reduces in significance to the
overall family wealth as it begins to diversify.”
Location, location,
location
Once the needs of these families
and the scope of services they require have been agreed, the
location of the office is the other vital component.
According to Erne, most families
will choose to set up in cities that have high-quality
communications networks, a reliable legal (and tax-friendly) system
and a reservoir of highly skilled manpower where English is widely
spoken.
Singapore and Hong Kong are well
positioned in this regard, suggests Erne.
“Melbourne can certainly be an
interesting place as well, but more for Australian families –
Australia being ‘outcentered’ for family offices who need to deal
on an international basis,” Erne suggests.
“However, as time goes by, one
should look at the possible emergence of Shanghai and Mumbai as
alternative family office centres.”
Singapore puts up its
hand
Singapore has a policy of promoting
itself as a location for international family offices as well as
trust business, international charities and fund
administration.
It tends to do this through
specific taxation exemptions and by having the regulator work
closely with industry groups and bodies, explains Christian
Stewart, founder of Family Legacy Asia.
“In contrast, the Hong Kong
government has always taken a hands-off approach and does not
appear to be proactively promoting family office business,” Stewart
adds.
“Nevertheless, despite the
different approaches of the two governments, both jurisdictions
should be equally attractive locations.”
Myer Family Office managing
director Graham Reeve agrees that Singapore is working to make its
financial environment more attractive to family offices.
“There is some evidence that
Indonesian families are setting up family offices [or investment
offices] in Singapore due to the financial environment in that
country,” he says.
Asian family offices – in the US
and European sense – are developing slowly as most of the
activities associated with a US or European family office are still
embedded in the family operating business.
Family office appetite
driven by the young
Over the next decade, Reeve expects
family offices to become more popular in Asia as the
western-educated children of Asian families return to the region
influenced by their experiences.
While there are no family
office-specific incentives in Australia, the Melbourne-based Myer
Family Office MD says its advantages as a location include an
absence of death or gift taxes and a tax concessional pension
(superannuation) environment.
“The government is moving slowly to
establish Australia as a financial centre with some tax relief on
interest withholding, for example,” Reeve adds.
“Australia also has a booming
economy compared to most other locations, which presents strong
opportunities for families to do business here.”
Melbourne predicted to be
family office centre
Richard Boyce, family office
director at Pitcher Partners, predicts Asian family offices will be
domiciled in key financial centres such as Melbourne in line with
growing family wealth and globalisation of investments.
While there are limited regulatory
advantages to moving an established family office to Australia,
Boyce refers to stable government and policy making as providing
for a predictable, long term wealth creation environment.
“Residency issues can be managed
though the regulatory framework and advances in technology mean
that domiciling activities in Australia is becoming more attractive
to access local management and opportunities,” he says.
An appropriately experienced
partner with international tax and compliance experience will
provide the required administration services, adds Boyce.
“Being hedged into the Asia-Pacific
region with on-the-ground experience and domiciled in Melbourne
would be advantageous to a long-term investment growth strategy,”
he says.
The main downside is that if the
family office investment entity is resident in Australia it will be
subject to tax on its worldwide income. Reeve is also critical of
some of those supplying family office services in the country.
“There are enough wealthy families
in Australia to create demand for new family offices,” he says.
“The market is constrained by the
number of suitable providers, not by the supply of wealthy
families. Unfortunately, many suppliers [both old and new] think
they service families by ‘flogging products’, which is not what is
required.”
Dubai pitches for family
office business
Dubai has been perhaps the most
proactive location to bid for Asian family office business. The
Dubai International Financial Centre (DIFC) took a long look at
family offices and commissioned a report on how they are
constituted around the world.
On the back of this research, it
decided to allow family offices to incorporate in Dubai as normal
limited companies providing they had a single employee based in the
DIFC. The centre also operates a fast-track visa service for
employees.
Since the DIFC introduced its
single family office initiative at the end of 2008, dozens of
wealthy Asian families have relocated to the emirate.
These include a number of large
Middle Eastern families but also non-resident Indian and Pakistani
families, as well as families from Singapore.
Attracting the right
talent
An additional consideration,
concludes Stewart, is availability of talent.
“To create a formal family office,
the tendency is to look for an experienced banking or investment
professional to head it up,” he says.
“You are typically looking for
someone who has the maturity and experience to be able to navigate
successfully within the family, provide sound professional advice
on the investment management side and add value, for example
because they also have an interest in helping with family
governance or philanthropy.”
Because Hong Kong and Singapore are
the banking and finance hubs of the region, this type of candidate
is often going to be living in one or other of these locations.
Even if the family is based in or
originates from another part of Asia and the business is based in
that country, the family office head may still live in Hong Kong or
Singapore.
In this instance, the formal family
office is set up where the head is based and that person travels on
a regular basis to visit the client family in country.
The hurdles to wooing Asian HNW families to the family office
model could be difficult to clear. But the prize, netting Asia’s
ballooning ranks of HNW families, is set to attract growing numbers
of banks and wealth managers eager to crack Asia’s family wealth
code.
