Wealth takes on new meaning

24 June 2014   Category: News, Asia, Global   By David Macfarlane

Drawing directly from interviews with high net worth international families, new research by international law firm Withers has revealed that generational succession in wealthy families around the world has led to a re-evaluation of the purposes of wealth and family businesses.

According to Investopedia, a website devoted to investing education, the most commonly quoted figure for membership in the high net worth individual (HNWI) “club” is US$1 million in liquid financial assets. An investor with less than $1 million but more than $100,000 is considered to be “affluent”, or perhaps even “sub-HNWI”. The upper end of HNWI is around $5 million, at which point the client is then referred to as “very HNWI”. More than $50 million in wealth classifies a person as an “ultra HNWI”, or “UHNWI”.

Katie Graves, a partner at Withers, comments: “For wealthy families across the world, we found that simply having large amounts of money to invest is not enough to provide purpose and cohesion to the broader family group. Having come to realise this, wealthy families are responding by re-immersing themselves in active business operations or putting their wealth into effect to yield positive changes in their communities.”

However, wealthy families from different continents are at different points in the wealth cycle. North American and European families have long experienced transitioning wealth from operational business to financial family structures while many Asian families are just beginning to shift from owning operational businesses to becoming financial families on a greater scale.

Rapid economic growth in Asia has created a thick layer of HNWIs exhibiting ongoing wealth gains. Since 2007, the region is reported to have increased its HNWI population by 31%, and its aggregate wealth by 27%. By comparison, the rest of the world has seen an increase of just 14% in the overall HNWI population, and 9% in terms of wealth gain, according to the Asia Wealth Pacific Report 2013 published by Capgemini and RBC Wealth Management. In particular, emerging markets such as Indonesia, Thailand, and India are the most prominent countries in terms of adding additional assets to the global wealth total.

Global wealth has doubled since 2000. It now totals an aggregate $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 in October last year. 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 HNWIs. Among these, 2,885 people have over $50 million in assets as individuals, while a further 861 people fall into the UHNWI category with each one holding $1 billion worth of personal wealth.

Despite Japan’s shrinking population, the Credit Suisse 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.

Ms. Graves says: “In 21st century Asia, globalisation and longer life expectancy mean that traditions are being challenged. As people from second generations have been waiting in the wings through the decades, the third generation is learning the best of business practice at the world’s top universities. When the moment comes to decide the future of the family business, there are three generations with three distinctly different points of view. The younger generation typically champions a more Western and modern style approach to business practice. Through this, Asia is likely to see a shift in the life cycle of wealth; with more families shifting from owning businesses to becoming financial families.”

Cath Tillotson of Withers’ research partner, Scorpio Partnership, adds: “Maintaining commonly-held reasons for working together as a family is a continual process. It is brought under intense pressure when a family sells out of active business ownership and moves to a financial/investment-based footing (or back again).”

The research from Withers established five key lessons that wealthy families have learned through coping with succession and working to preserve their assets and family unity:

1. Transitions are complicated: Whether selling a business, setting up a foundation or passing control of wealth to the next generation, families should ask themselves ‘why are we doing this?’ at each transitional stage to find the common objectives that keep them and the family wealth intact.
2. Take your time: As a collection of individuals, and not an organisation, family businesses require a unique leadership style which should involve listening, learning, observing, sharing and understanding.
3. Leading with principle: Wealth ownership means that attention is trained on you. Family business heads should lead by example and the wider community will view wealth ownership with greater respect when it is used as a force for positive social change.
4. Recognise your limits: Within a family business there are many roles to play; no single person can play them all well. Once skills, strengths and motivations are accurately assessed (including one’s own), other family members and professional advisors can be effectively appointed to fill the gaps.
5. Giving the next generation just enough: Each generation should be able to think of themselves as the first generation. This means that those in the next generation are given everything they need to be successful and no more. For those in older generations, this also means recognising when to step aside.

Withers worked with wealth research agency Scorpio Partnership, basing the research on 16 in-depth interviews with multi-millionaires and billionaires from Asia, Europe and the US. The opinions and experiences described by these individuals were cross-referenced against the attitudes of 4,500 individuals with more than $10 million in personal wealth, who answered digital surveys on a wide range of subjects over the past two years.