Wealth mismanagement

Category: Japan, Global, U.S.A.
By Maya Ando

Japan’s most affluent unacquainted with family office concept

As 2013 drew to a close, the global economy was showing solid recovery with the US annual growth rate pegged at 3.2% in Q4. At the same time, emerging markets were cooling, their GDP growth wilting, a marked change in a segment which had exhibited remarkable development in recent years.

Nevertheless, underpinning the new general positivity is the specifically encouraging fact that global wealth has doubled since 2000. It now totals an aggregate US$241 trillion in AUM – and, within that, boasted a 4.9% rise over the first six months of 2013, according to a Credit Suisse wealth report released last October.

Breaking this finding down into ownership segments, the US kept pride of place as the richest country with $72.1 trillion held by entrepreneurs and their family offices. Japan, the world’s third largest economy, is in second place in this category, with approximately $22.6 trillion held by 2.6 million high net wealth individuals (HNWIs). Among these, 2,885 people have over $50 million in assets as individuals, while a further 861 people fall into the ultra high net wealth individual (UHNWI) category with each one holding $1 billion worth of personal wealth.

Despite Japan’s shrinking population, the report noted that this group of wealthy individuals is actually expected to grow by 85% over the next five years, to as many as 4.9 million HNWI individuals. So not surprisingly, there has been a marked increase in global family office investment activities. For the world as a whole, there are about 2,500 family office operations; and of these perhaps 120 are Asia Pacific-based, in locations from Singapore and Hong Kong to Australia.

Interestingly, Japan’s wealthy families with active investment profiles more or less match those of Australia, and collectively the two groups amount to nearly half of Asia’s existing family offices.

However, Japan’s HNWIs are off the radar of private banks, excepting the group of emerging entrepreneurs. Traditionally, wealthy individuals have tended to hold their assets in cash, stocks and property. Emerging wealthy individuals are more adept at managing their businesses and assets. So with these surmountable assets being kept out with the banking milieu, Citibank and many other foreign private banks have focussed their efforts on attracting these local HNWIs – without much success, claims an Asia Asset Management source.

In Japan, the majority of HNWIs and UHNWIs are involved in family businesses. And some of them are believed to have family office-like investment entities. But no Japanese family office with an integrated investment system is known to exist, as yet.

Yutaka Aiyama, a former chief economist of Keidanren (the Japan Business Federation), says: “Japan’ HNWIs don’t feel the need to increase their assets, because they already have more capital than they can spend in their lifetime. So the majority of UHNWIs’ assets are either in property or holdings of their own, privately-founded companies. As a result, their investment strategies are limited.”

In fact, the family office concept is very new to Japan and so few people, even among this elite group, know much about it, he explains. At the same time, however, there is an emerging trend in which auditors, legal advisors and ex-brokers are increasingly establishing family offices to offer a total solution, one-stop-shopping service for asset management of late.

Still, Japan’s family office platform is not yet broadly recognised and its development is far behind other Asian centres, including Hong Kong, Singapore, Thailand, Malaysia and China.

A significant reason for this Japanese lag is that the country’s domestic bank business model has almost exclusively been concentrated on corporate finance.

Patrick Kawasjee, COO of The Bernina Trust Company, Limited, a Tokyo based trust company, explains: “Recently the mega trust banks, such as Risona Bank and Mizuho Trust and Banking, have been making an effort to provide trust services to HNWIs. Traditionally the major trust banks’ services focused on institutional clients in pursuit of scale. Due to their inflexibility to deal with the intricacies of each individual’s estate circumstance, their trust services are limited to standardised (cookie cutter) products.

“Providing the ideal solution to meet the needs and wishes of each HNWI could be very time consuming and requires a comprehensive knowhow on dealing with estate issues. In this situation, the family offices operating with the “buy side” perspective prove to be more effective. The concept of the multi-family office is a recent phenomenon in Japan and the true demand should lie with families with 500 million yen (US$4.9 million) and up.”

Mr. Kawasjee also points out that there is substantial need for family office services, not just for investments but also for holistic private banking services by independent specialists, as individual investors are pulling back from the mega “sell side” financial institutions and becoming increasingly borderless.

Succession issues are another possible growth area in this regard, especially now that Japan is progressively facing serious issues with the acceleration of the “greying” trend on its population.