How advisers can capitalise on Asia's next-generation problem

There is a dichotomy developing among current and next-generation family business leaders in Asia that looks set to become a key battleground for private banks in the region.

A qualitative Barclays Wealth survey of children of business families with at least $45 million across six Asian markets underscores a generational interplay. While the majority in line to inherit business wealth believe their parents see them as irresponsible, they themselves see their elders as too cautious in their investment approach.

“This throws up significant issues in terms of how you pass on this business wealth because you are looking at a next-generation problem,” observes Peter Brooks, behavioural finance analyst with Barclays Wealth.

“Current business leaders will have an objective to manage the business goals of the next generation. But that creates tension over whether the best thing from a wealth management perspective is to start raising risk-taking to drill down to the next generation.

“Ultimately greater risk-taking, as long as it is appropriate, is what is going to ensure that the wealth continues for the next generation and perhaps beyond. So there is a conflict as to how these two generations are approaching this issue at the moment.”

One potential implication is that private banks will be called upon to build higher risk allocation into family portfolios. It will be the implementation of investment choices that will perhaps provide wealth managers with their greatest opportunity to build sustainable family relationships.

Brooks notes that business leaders in China, for instance, commonly engage in manufacturing, meaning the growth of their businesses is dependent on any number of commodities markets.

“A business is a concentrated risk asset in its own right,” he says. “When considering family asset allocation, you may want to avoid anything that provides exposure to commodities markets if you are already exposed to that asset class. It's about making sense of the total wealth picture, helping clients to understand the purpose of the investment piece which runs alongside their business.”

Still, when the children of business owners were quizzed over what would determine their choice of private bank, the top answers were good local presence, brand reputation and online banking facilities.

This highlights one of the major challenges private banks face: finding the right level of servicing touch for the next generation, who have grown up in an IT age with minimum banker interaction, while at the same time positioning to provide value-added services.

One consideration is that the children of business owners have no reason to bank with the same person or institution their parents did, since they don’t have that long-standing relationship. In a world where ultra-high-net-worth individuals are multi-banked, engendering intergenerational family loyalty becomes the golden ticket for wealth advisers.

“It will be about growing your relationship alongside a family as they go through the various stages of their business,” says Brooks. “The opportunity is there for private banks to position themselves as the conduit to all of a family’s financial services.

“The key to maintaining this family relationship will be about being the sensible lead adviser and first port of call for a family. An adviser who can position themselves as making sense of that multi-banked relationship, that is the piece that will give you the advantage.”

Brooks believes the proliferation of family offices will gather pace across Asia as wealth increases and businesses develop and become more complex.

“Ultimately, entrepreneurs see themselves as the human capital that will generate more wealth for their family than they could ever achieve by running an investment portfolio,” he states.

“Why would they want to give up time to manage these multi-bank relationships when they would be better served concentrating on running their business? There will be an increasing need for a family-office-type structure to help them make sense of all this.”

He expects Asia’s local banks to take the lead in handling wealthy family relationships, at least initially. But as deregulation continues in Asia and access to its capital markets becomes easier, international banks will be better placed to play a bigger role.

One myth the survey seems to debunk, though, is that the next generation is spoiled. In fact, the study suggests that the children of business owners are motivated to make their own mark.

“They want to build on the family success and they want to build their own businesses,” says Brooks. “There is a nice contrast between the perception from outside of ostentatiousness and the real sense of responsibility and motivation they feel to do something in their own name. They want to continue the entrepreneurial spirit within the family.”

The Barclays Wealth survey undertook 48 interviews in total across Singapore, China, Hong Kong, Taiwan, India and Indonesia. Most interviewees were male and under 35 years old.

Asked if the survey was of sufficient scale to draw useful conclusions about succession dynamics, Brooks concedes: “I can’t say any of this is statistically robust.”

But he points out that as a group the next generation is seriously under-researched. “Often at the start of researching a group like this you have to take baby steps to get an idea of what the attitudes are and what is interesting before you embark on something deeper, otherwise you tend to end up with huge surveys that take a scattergun approach.

“We have enough now to look at some qualitative issues and directional affects which will lead to future research digging further into some of the most interesting issues.”