Why smooth succession planning need not be a myth

 

Loosely inspired by the Murdoch family, the HBO series Succession has gained a strong following for the Machiavellian exploits of its characters. While the drama is over-the-top, it nevertheless reflects possible tensions and challenges faced by families with high net worth (HNW).

 

The challenges of legacy planning may not always take on the epic scale of empires run by affluent families in the limelight, but plenty of high net worth individuals (HNWIs) are nevertheless seeking bespoke and specialised advice on the best strategies to manage their vast estates — and preserve their personal success stories.

 

Closer to home, the demand for such expertise has sharply spiked with a jump in the number of Ultra High Net Worth (UHNW) clients, primarily from North Asian clients setting up family offices (FO) in Singapore since 2018. According to a 2021 Business Times article, “221 single and multi-family offices opened in the Republic last year, up from 129 in 2019, 22 in 2018”.

“Given the relatively short history of wealth management in Asia, with most wealth passing from founders to the second generation, we have not had much awareness, exposure or used cases to learn from when it comes to succession planning the Asian way,” notes Mandy Tham, Assistant Professor of Finance (Education) and Academic Director of the Master of Science in Wealth Management programme.

 

“I always believe that the Asian way of succession planning is unique to our cultural norms and beliefs, and we cannot just port over Western succession philosophies and hope that these fit the Asian context.”

 

We chat more with Mandy on leading trends in managing family offices, and areas in which wealth management specialists should upgrade their knowledge base to ensure successful legacy planning — especially in a climate of uncertainty brought on by technological advancements, economic upheaval, as well as strategies for managing the needs of HNW families here in the region.

 

Why the Little Red Dot is a hotspot for UHNWI

The growth in family offices in Singapore is a testament to the maturity of the private wealth management landscape in Singapore, according to Mandy. The city-state is home to a talented pool of senior wealth professionals, a global network of top league private banks, a strong central bank, and a rapidly developing ecosystem. This includes a professional array of service providers in regulatory compliance, tax, corporate secretary, human resources, as well as fintech players that support the banks and asset managers with digital financial services solutions.

 

Governmental bodies like the Monetary Authority of Singapore (MAS) have also devoted efforts to develop the local family office scene, such as through the Variable Capital Companies (VCC) framework. The VCC is a corporate structure that can be used for a wide range of investment funds and provides fund managers greater operational flexibility and cost savings, and provides fund managers with greater operational flexibility and cost savings.

 

Further approaches to woo global FOs to Singapore include efforts to educate prospects on FOs and the attractiveness of Singapore as a wealth management hub, initiatives to set up a family office association as a one-stop guide-post for prospects and FOs, work-study degree schemes to develop a pipeline of talents starting from tertiary education, generous continual professional development subsidies, and attractive incentives like the Digital Accelerator Grants (DAGs). The lattermost grant supports Singapore-based smaller financial institutions and FinTech firms that adopt digital solutions.

 

“These imply that everyone, even educators like myself, have to upgrade our knowledge and skill set when it comes to staying relevant in educating the next generation of wealth professionals,” explains Mandy.

 

“There are even opportunities for educators to specialise in family education research.”

 

Need for wealth management experts with relevant skillsets

As Mandy explains, “It is not hard to decipher that there is a demand for talented and seasoned investment professionals, especially as Singapore positions itself to serve the highest value segment of clients.”

FOs are generally leaner than a private bank, and an investment professional at a FO often does not have the luxury of support by an in-house team of product, trust, insurance and structuring specialists. As such, finding the right collaborator with the necessary expertise may be a solution for managing an FO.

 

Furthermore, according to the UBS Global Family Office (GFO) report 2020, FOs are also pivoting to trending investment themes including healthcare technology, digital transformation, automation and robotics, smart mobility, and green tech. Investment professionals have to also adapt to the investment paradigm shift, especially towards private equity investment in these noted technology-driven sustainable investing sectors.

 

Another major development driving up demand for wealth management experts is the growth in FOs hailing from Greater China. Wealth professionals who wish to serve this FO segment must develop specialised skills, including regulatory and legal knowledge of the Chinese market, professional business etiquette and language ability, cultural knowledge and sensitivity, client relationship management and network acquisition techniques.

 

The new digital economy and recent economic upheavals also require updates to risk management strategies, including investment risk, cyber risk, confidentiality risk, geo-political risks, regulatory compliance risk.

 

“In particular, moving forward, most FOs expect to devote a larger budget to digital/technology risk management and there will be a growing demand for experts in this area,” explains Mandy.

 

The rules of When, How, Where, What, Who/Which

For families or HNWI unsure of how to begin their legacy planning journey, Mandy suggests turning to the essential questions of “when, how, where, what, and who” as a starting point.

 

“The first challenge is to pen down succession planning as a top priority on their list and not let business needs relegate succession planning to be something that ‘I’d do when I have time’,” say Mandy.

 

For example, the late Taiwanese tycoon Wang Yung-Ching of Formosa Plastics, once the richest man in Taiwan, died in 2008 without a will. He had three wives and a family feud subsequently broke out.

 

“When the family structure is more complex, planning should start as early as possible, in order to minimise chances of family feud and ultimately wealth destruction,” shares Mandy.

 

She also notes that while founders are aware that they should start succession planning, they often struggle with figuring out the best way to start. In this respect, the MAS and EDB have dedicated units to spearhead outreach and create awareness of the Singapore FO ecosystem among the targeted audience and the larger public, explains Mandy. Institutions like SMU also lead the conversation through information sessions to deliver awareness of FOs.

 

For HNWI who are multi-jurisdictional, a key challenge becomes “where to set up the FO or other legacy planning and wealth management structures?”. Family members would often wish to live in the location of their FOs: As such, is Singapore preferable to other wealth management hubs for the family to live in? Is Singapore a viable gateway for them to expand their operating businesses?

 

Another typical challenge is understanding the various types of wealth planning structures including the FO and their suitability to the long-term goals of the families. For instance, what can a FO bring for my family? What other structures are suitable besides a FO? Families planning an FO are also usually hard-pressed to find trusted and competent employees to manage the office: Who can they hire from the external labour market? Who in the family should be involved in the FO? Which banker or private bank can the families seek advice from? Who can the FO principals trust?

 

Uniquely Asian perspective

Mandy points out: “Personally, I do not think that succession planning is a cultural taboo, especially for Chinese clients from Mainland China who acutely recognise their needs for business succession planning since most have one child, and hence, the odds are high that this limited choice of an internal successor might not be interested nor competent.”

 

In contrast, in ASEAN countries, where family units are larger, the patriarch/matriarch might be lulled by a false sense of security in numbers, thinking that there would naturally be at least one successor among the multiple children.

 

“With younger generations being better educated, information on succession planning being more readily available, and the gradual maturity of wealth management in Asia, I’d bravely say that the mindset is changing,” says Mandy.

 

“To put it bluntly, many would have realised that death and taxes are two certainties in life that require careful and prior planning."

 

While dynamics are unique to each family, family tensions most often develop due to a lack of intra-generational and inter-generational communication. The traditional Asian culture emphasises respect for the elders and this, at times, creates a top-down, unilateral communication style among many Asian families. The younger generations are expected to respect the decisions of the elders, hence, “there is no forum for bilateral dialogue between parents and children, across from senior siblings to junior siblings”.

 

The complexities of conflict resolution
Within families, regardless of economic statures, conflicts are rarely addressed and nipped in the bud through proper communication and mediation in the early stages.

 

“Perhaps they are too emotionally involved, and under the false belief that conflicts will resolve themselves in the future because blood is thicker than water,” muses Mandy.

 

“Hence, we kicked the can down the road until a family feud begins.”

 

She recommends for smaller families to take time to engage in regular communication channels through informal family events like dinner gatherings, or for larger families to plan a formal family assembly in order to, ideally, gain the buy-in and commitment of all family members. To take the solution further, larger families can set up a family constitution which includes the establishment of a family council and sub-committees under the family council.

 

Another common family tension trigger occurs when an heir feels their share of inheritance is unfair relative to that of others. However, fair and equitable distribution does not necessarily equate to giving equal ownership in the family business or equal shares in indivisible assets to each child. In the famous case of Yung Kee Roast Goose in Hong Kong, its founder willed 35% share of the business to each of his two eldest sons who helped in the business, and smaller shares to his remaining two children and his surviving spouse.

 

“His motivation most probably stemmed from a fair and equitable ownership distribution to the two sons who helped in the business, but he had failed to distinguish between ownership succession and management succession,” says Mandy.

 

By giving equal shares and not specifying a clear heir designate, the two brothers ended up fighting. The other siblings took the side of the second brother who had more management education and transferred their shares to him, while the mother, being traditional, transferred her shares to the eldest son.

 

“This was a tragic family feud that eroded the family legacy,” says Mandy.

 

“Instead, asset or estate equalisation could be carried out by giving non-heir designates other assets equivalent to the value of company shares.” Mandy also suggests insurance solutions as common tools used to achieve asset or estate equalisation goals.

 

In short, legacy planning is a multi-faceted and highly complex undertaking, requiring the commitment of multiple stakeholders, who may sometimes have competing interests.

 

Coupled with today’s fast-changing economic climate, wealth management experts need to be equipped with soft skills to navigate sensitive dynamics, as well as the expertise to capture and decipher developments in investment insights, in order to offer personalised life guidance to their ultra high net worth clients.