IFCs and the Asian Wealth (R)evolution

For most of us ‘the financial crisis’ was something that emanated in the US in 2007, but this year also marked the 20th anniversary of another period of severe economic turbulence – the Asian financial crisis.

July 1997 saw the collapse of a number of Asian currencies, originating in Thailand and spreading across south-east Asia as a result of exaggerated national foreign reserves and consequential de-stabilising foreign investment flows in the region. It was a hugely impactful event that ultimately saw economies in Asia seek emergency rescue packages from the International Monetary Fund and endure years of economic turmoil.

Twenty years on and the Asian picture is, in most respects, quite different. Growth and wealth creation are still very much on the agenda, but governments in the main are now much more astute in their growth strategies and aware of global market forces.

The latest Global Wealth 2017: Transforming the Client Experience report, compiled by the Boston Consulting Group, for instance, shows that Asia Pacific was the fastest growing region globally last year in terms of private financial wealth with almost double-digit growth (9.5 per cent), considerably outstripping the global average of 5.3 per cent. The indications are that this upward trajectory is set to continue.

Just as significant, particularly given the Asian experience in the late 1990s, is that the propensity for Asian investors to look to overseas markets is increasing rapidly. The China Private Wealth Report 2017 published by Bain & Co. and China Merchants Bank, for example, shows that the proportion of High Net Worth Individuals (HNWIs) with overseas investment has risen 56 per cent in 2017, up from 19 per cent in 2011.

Away from south-east Asia and the same report found that private wealth is growing across the Asian continent. The Middle East is growing impressively too – by an impressive 8.5 per cent - with investors there placing just as much of a focus on internationalising their wealth planning strategies and diversifying their investments as their Far East counterparts.

So why is all this pertinent to IFCs?

For its part, Jersey has invested heavily over the years in extending its reach to emerging markets. Today, 50 per cent of the work done in Jersey comes from outside of the GMT zone, with the Far East, in particular Greater China, as well as member states of the Gulf Corporation Council (GCC) now key markets for Jersey. The likelihood is that relationships with these markets will become even more important as Brexit unfolds.

It is our view that IFCs can play a crucial role in meeting the evolving needs of Asian wealth management, in a number of different ways. To illustrate that point, Jersey Finance has sought to tackle this head on by providing fresh insights into global financial flows through independent research to develop a compelling and honest narrative for IFCs in an Asian context, and to give Asian investors the confidence they need in an increasingly complex environment.

Two white papers produced this year in conjunction with Hubbis are a case in point, and particularly significant when reflecting on Asia’s transformation over the past 20 years. The How to Service Chinese Wealth as it goes Global and Driving Forces Behind GCC HNW Investors reports both identify some key challenges facing wealth management practitioners supporting HNWIs in China and the GCC, but also go some way in suggesting opportunities where IFCs can add real value.

Succession Planning

In particular, the surveys provided evidence of an acknowledgement in both regions of the importance of succession planning and asset protection for future generations, and in tandem a real drive by wealthy individuals towards the globalisation of their wealth.

Amongst Chinese investors, legacy planning was the main priority (47 per cent) when it came to wealth planning, whilst more than half of professionals working with family businesses in the GCC (55 per cent) saw business succession planning as the most critical issue for Middle East families today.

At the same time, though, the reports also found a gap between this desire for succession planning and how to achieve it, including some real misconceptions around wealth planning. Most significantly, the overwhelming sense across both regions, particularly China, was that wealth planning involves a loss of control over their assets – an attitude shared by 88 per cent of Chinese and 56 per cent of GCC respondents.

In addition, there is also still a clear reluctance to engage with third-party support, with practitioners in both regions emphasising the prevailing perception that the local wealth management solutions available to support businesses and families with transferring their wealth to the next generation are not sufficient. 

This is a particular issue in China, the survey found, where the first generation of HNWI family members are often still alive. They can be hesitant to cede control of their assets since they were the ones who accumulated it initially, and according to a wealth report by the Williams Group wealth consultancy, 70 per cent of wealthy families lose their wealth by the second generation, and a surprising 90 per cent by the third generation. 

As a result of all of this, there is a tendency amongst wealthy Asian families to default to deferring succession decisions. That can prove costly in the long-run and much work is needed to shift this view to one where succession planning is not just about investing or distributing assets, but about ensuring a long-term plan is in place for a family as a whole.

However, whilst there is a clear disconnect between the acknowledgement that succession planning is vital and the ability to put effective succession planning measures in place, there are real opportunities here for experienced IFCs like Jersey who are used to managing complex cross-border family wealth flows.

 For instance, the survey found that more than half of respondents in the GCC (53 per cent) believed that the family office model is the most popular structure amongst GCC families. Given that family office work is such a well-established part of Jersey’s private wealth landscape, this puts the jurisdiction in a good position.

In fact, we are already seeing a trend for private wealth vehicles with Asian investors to be re-domiciled from less advanced jurisdictions to Jersey structures, driven by a specific demand for robust succession and multi-jurisdictional wealth planning.

The reality is that if wealthy individuals and their families do not bridge serious gaps in their understanding of succession planning, they risk costly legal battles and needless public squabbles. Specialist IFCs are well placed to add real value in supporting families exactly where they need help, but it will take concerted efforts and a focus on relationship building to shift attitudes and help investors familiarise themselves with structures and issues.

Education

Meanwhile, the surveys also highlighted that a significant amount of education is needed in both the Far East and the GCC around international regulation.

The OECD’s Common Reporting Standard (CRS) and Automatic Exchange of Information (AEOI) are obvious examples, but there are also other reporting requirements coming on stream, as well as increased restrictions on capital flows, and reforms to immigration programs and property ownership taxation rules (such as in the UK and Australia) to be aware of. In particular in China, increased scrutiny of overseas transfers will create more complications for investors to move money from the mainland.

The surveys show that there is a lot of ground to make up in this area. In both regions, wealth practitioners revealed that their biggest concern in advising families around reporting requirements was that clients do not reveal enough information about their situation and assets (23 per cent in China and 42 per cent in the GCC).

With HNWIs in China and the GCC demonstrating a growing appetite to increase their overseas investment to diversify investment risks and capture market opportunities, understanding their reporting obligations in this new era of financial transparency is absolutely fundamental. A failure to do so is likely to cause real headaches in the future. It’s a real challenge, given that in Asian cultures, privacy remains fiercely guarded when it comes to personal wealth.

Seeking out wealth management advisers who are experienced in managing cross-border wealth in line with the latest global regulatory standards should be a priority for Asian HNWIs, and again there is further potential here for IFCs with governance, compliance and reporting experience to support and add value.

It is clear that some significant support and education is needed. Specialist IFCs, such as Jersey, have the capacity to act as centres of excellence on cross-border tax transparency in light of regulatory initiatives like CRS and AEOI, working with wealthy Asian individuals to support their cross-border ambitions and requirements in a complex regulatory and reporting environment.

Interestingly, the surveys suggest that targeting the next generation of family members may prove most fruitful in this regard, with many of those having been educated overseas and tending to be more understanding that wealth preservation goes beyond investing assets and should be part of developing an overall succession plan.

Role for IFCs

Informed by the financial crisis two decades ago, there is no doubt that Asian markets are considerably more experienced and sophisticated than they were in the late 1990s, but still against that backdrop it is understandable that there is an air of caution amongst some HNWIs when it comes to venturing into global wealth and succession planning.

The white papers we have published in recent months have articulated some real challenges for Asian HNWIs and their advisers, as a new generation of wealthy Chinese and GCC individuals are having to grapple with the concept and practicalities of international succession planning.

However, they also identify a number of opportunities for IFCs. The professional support those Asian markets receive now from advisers, on and offshore, will be instrumental in re-shaping the region’s attitudes towards global structuring, and IFCs can play a hugely valuable role in applying their knowledge and experience to help HNWIs meet their objectives. Jersey’s commitment to providing insights in this area, alongside its sound regulatory practices, expertise and positive outlook should position it is as a key player as the Asian wealth landscape continues to evolve.

Geoff Cook
Geoff Cook is an experienced Chair and non-executive director. He has led significant business enterprises for more than three decades and helped major international groups to grow and prosper. As a Chartered Director, Geoff has deep knowledge of corporate governance, global regulation, and risk management. He has authored numerous articles and papers on cross border investment and the role of International Finance Centres (IFCs) in the global financial system. Geoff is an Advisor and non-executive director to a select number of Family Office, Private Capital, and Advisory boards. He was appointed Chair of Mourant Regulatory Consulting in 2021 and Chair of Quilter Cheviot International in 2019 to lead and develop the firm's international strategy. Geoff is also Chair of Apex Financial Services (Jersey) Ltd, a leading fiduciary and is presently Chair of the Society of Trustee and Estate Practitioners (STEP) Global Public Policy Committee. He was formerly the CEO of Jersey Finance and Head of Wealth Management HSBC with extensive international cross border experience across various sectors.