Ensuring wealth seamlessly
transfers from one generation to the next has always been important
for private bankers. But as global wealth continues to grow, banks
are dealing with changing succession planning demands from
extending education programmes to vetting pre-nuptial
agreements.
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When India’s billionaire Ambani brothers became embroiled
in a highly-publicised dispute over the split of gas reserves from
their family company, Reliance Industries, it became clear what can
happen when structured succession plans are not put in place.
The brothers had disagreed over how the gas
reserves from the Krishna Godavari basin would be dealt with
despite making an agreement on how to split the assets following
their father’s death in 2002. While the brothers have recently
reached a peace deal, the whole episode has highlighted how fraught
the transition of wealth from one generation to the next can
be.
As global wealth increases, knowing how to best transfer wealth
between generations is becoming increasing important. The booming
wealth in emerging nations is driving increased demand and breadth
of service for succession planning services for private banks.
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By GlobalDataBroadening role
Private banks are now assisting their clients
on everything from vetting their children’s circle of friends to
examining pre-nuptial agreements. Succession planning can also
address a number of other issues that are common to private banking
clients: privacy, consolidation of assets, tax planning and
philanthropy.
This planning centres on structures that can
help the transition process and education that helps to prepare the
next generation for their responsibilities.
Jacqui Brabazon, global head of marketing for
philanthropy and key clients at Standard Chartered Private Bank,
says there has been increased focus in recent times on succession
planning.
Standard Chartered provides both structures
through its fiduciary services and skills through its education
programmes.
As with many private banks, succession planning
at Standard Chartered is approached on a bespoke basis to create a
structure that best addresses the client’s concerns and
aspirations, says the bank’s global head of trust and fiduciary,
Mark Jackman.
Wealth ‘what ifs’
Karina Challons, head of specialist tax and financial
planning at HSBC Private Bank, says a large part of succession
planning is getting clients to think about the ‘what ifs’.
“Sometimes I say: “You know it yourself but
what happens if you drop dead, who do your children talk to? Who
can they go to, how do they get around these issues, have they
thought about this?’ And a lot of them haven’t, they think that it
will get sorted out,” she says.
Challons says HSBC Private Bank helps to link
clients globally with their lawyers and accountants who advise on a
range of issues from estate planning and wills, to pre-nuptial
agreements.
Support structures
Challons says clients are much more focused now
on helping their children, not just in terms of helping to train
them, but putting support mechanisms around them, and asking who
would help them out in the event of a sudden death.
“Clients are asking questions now that they
never did, it’s not just about tax planning, it is now about ‘how
do I protect my children?’,” she says.
“Whereas at one time they would never have
thought about it now they have to prepare for future generations.
What am I giving my children? Is [the wealth] a benefit or a ball
and chain’, which I never saw years ago,” she says.
Typically Challons provides succession planning
for clients with assets of £20m ($25m) and above, although HSBC
Private Bank does provide planning for clients with upwards of £2m
in investible assets.
“People have these issues at different levels
of their wealth, and as their wealth builds, the problems can
change and get bigger,” Challons says.
“We look at how you can hold wealth as
efficiently as possible, and what happens if you die or leave the
country – all the what ifs. We look at these and identify where
there are concerns, problems, what they need to address and we come
up with recommendations,” Challons adds.
Personal experience
When offering succession planning advice, Swiss bank Pictet
& Cie is positioned better than most, having been a family-run
bank for more than 200 years.
The current managing partner, Ivan Pictet, is
due to step down at the end of this month. In a Wall Street
Journal interview earlier this month he said that for the
ultra-high-net-worth segment, the efficient transfer of ownership
and management of family assets to the next generation will become
a more pressing issue in the next five to 10 years.
“Wealthy families in Asia will need to take
into better consideration the issue of succession planning. Family
governance will play an increased role in the future,” Pictet
adds.
Pierre-Alain Wavre, chief executive of the
family office at Pictet, says there is not a one-size-fits-all
approach to succession planning at the bank, so how clients are
assisted depends on the size of their assets.
For clients with CHF$5m ($4.4m) of funds the
issue is not transition of wealth but asset allocation and risk
profile, he says.
The most important consideration for clients
with assets of CHF10m to CHF50m is whether client’s children have
sufficient financial knowledge to manage their legacies correctly;
this transition is typically handled by their usual relationship
managers. Pictet’s family office takes over the succession plans
for clients with more than CHF100m .
Crisis changes
Opinions are divided over which
direction the global financial crisis will push succession
planning, but its impact is undeniable.
Challons sees increasing demand for clients
preparing their children to take over wealth, which has been
heightened by the financial crisis.
She says pre-crisis a lot of entrepreneurs had
built up their businesses and children were a product of this
wealth.
“The credit crunch changed a lot people,
because they started to realise that because they built their
money, they know how to handle it but their children aren’t
necessarily ready for this,” she says.
“A number of my clients have said to me: ‘Our
children are not ready for this, they haven’t gone through what I
have, they didn’t build something and they are now going to have to
take responsibility’.”
Emerging trends
An emerging trend is the reluctance of clients
to immediately hand over substantial wealth in wills and keeping
assets in trust for longer, according to Challons.
“A lot of them don’t want their children to get
a huge sum of money and therefore take away an incentive to work:
you’ll find a lot of them saying, ‘I want them to get a job, I’ll
help them get a house but the big money is not coming till later’.
People are a lot more aware of the problems,” she says.
Nick Tucker, UK and Ireland market leader at
Merrill Lynch Wealth Management, agrees that the sense that wealthy
people do not want their children to be reliant on their
inheritances is more prevalent now than it was 10 to 15 years
ago.
Brabazon says post-crisis the level of
education required will be deeper.
“The global financial crisis has highlighted,
more than ever, the need for those taking over businesses to be
properly prepared. Sound business skills and judgement can not be
overlooked,” she says.
HNW education
All four private banks
operate programmes to engage the children of clients (see box
outs). This has a three-fold purpose – giving current clients added
value, building relationships with children of clients so that when
wealth is passed on to these children they continue to bank there
and providing the clients’ children with the opportunity to mix
with peers in similar circumstances.
Pictet provides summer training for selected
clients’ children and a forum for high net worth families, known as
the
Family Consilium, to meet and discuss issues impacting
transition of family wealth.
Wavre says the clients’ children are taken
through various departments, from private equity and hedge funds,
to financial products and trading rooms.
“We try to give them a complete view of what a
financial institution is and how it works,” Wavre adds.
Financially literacy
Wavre emphasises that despite succession
planning not being a core business, there is a tremendous need for
families with wealth between CHF10m to CHF50m to financially
educate their children, even if the children will not pursue
financial careers.
“A lot of financial institutions have had a lot
of bad press, and somebody who has CHF40m to CHF50m is afraid that
bad types are going to influence their children, because they are
not educated enough to understand what is going on,” he says.
“Maybe 10 years ago we had more demand for us
to train children who wanted to be involved in the financial world
and have financial career, whereas now there is a concern that even
though their children might become something totally different,
they still need the financial education to navigate the financial
world,” he says.
Merrill Lynch Wealth
Management has also discovered that pitching its education
programmes at the right level is equally important. First started
in 2001, its Global Investing Programme started as an annual event
for between 30 to 40 children aged 18 to 23 and has evolved into a
twice-yearly event based in London.
“One of the things we learnt from the first
couple of programmes is the variation of knowledge made it quite
challenging,” says Tucker.
“You pitch it too high – you leave half the
audience feeling left out, you pitch it too low and half the
audience feel it is not worthwhile,” he says.
Increased interaction
Tucker says an evolution has occurred in the
past few years to include broader issues, including philanthropy
case studies, which has been very well received.
One of the main benefits of such programmes is
the interaction it provides for children to mix with other children
who come from family wealth.
“It is an EMEA-wide programme, so you have
client’s children from the Middle East, Europe and UK, all mixing
together which they enjoy. Last year for the first time we did a
class of 2001 reunion, where we got people back together seven to
eight years later to see how they have evolved,” Tucker adds.
The efforts dedicated to programmes have an
element of self-interest. Banks want to build relationships with
these wealthy youngsters, to ensure they continue to be the bank of
choice when the young assume control of the family’s wealth.
“It is a great way for us to engage with these
guys who will ultimately be our clients at an early age. Hopefully
what we do for the client’s children is to get them to see Merrill
Lynch as people rather than some big bank, to put a human face to
it,” Tucker says.
Changing
attitudes
Attitudes to wealth succession can
differ considerably country-to-country and between newer or more
established wealth.
Recent research by Campden into Russian HNW
families found more than half (56%) of wealthy Russians did not
involve family members in their businesses, with only 32% of
respondents saying they would encourage their children to become
involved in the family business. 72% said that family members did
not currently have a stake nor would be entitled to do so in the
future.
Wavre notes differing attitudes towards
succession between entrepreneurs and older family wealth, with
newer wealth more geared towards financial returns rather than
maintaining assets and more willingness to hand over wealth to the
next generation.
“Old money is still very attached to making
sure the son will take over the company and a sense of family
continuity. If the money has been made more recently, the new trend
is to more manage that wealth in transition like you would manage a
private equity fund, or a venture capital fund,” Wavre says.
He suggests that newer wealth might manage 90%
to 95% of its wealth in a relatively conventional sense, with the
remaining 5% being used for venture capital.
“With the old generation, because the main
asset was the company, the idea was more to split assets. One son
would have the company and others might have cash extracted from
the company. With more recently acquired wealth, those people
retire a lot earlier, secondly they are more active perhaps with
philanthropy – so they hand over more quickly to the next
generation,” he says.
Another way to engage younger wealthy
individuals is through technology.
“Giving online access is incredibly important
and if you’re not then you are positioning yourself as a bank that
is out of touch,” Tucker says.
Successful succession?
Despite banks investing significant
resources and time into succession planning, how successful they
are in transferring wealth between different generations remains an
inexact science.
Private banks spoken to for this feature could
not provide any concrete data around how successful any succession
practices are.
Several suggest that their primary goal is to
find the best fit for their clients, and do not keep statistics on
how successful they are transferring wealth between
generations.
It begs the question, could private banks be
doing more to understand how successful their succession plans are?
And can banks do more to ensure acrimonious family squabbles, like
the Ambani brothers, do not happen again?
