In line with the many regulatory, tax and general transparency-driven developments globally, there is a growing focus within Asia’s advisory community on how to make the best use of trust and other structures as part of the various wealth planning options available to HNW clients.
Date: June 2012
Tags: Wealth planning, Estate planning, Succession planning, Trusts, Insurance
Ranging from the appropriateness of estate and succession planning structures to the ability of advisers to service clients’ needs in relation to wealth transfer effectively – private banks and wealth management organisations in Asia are grappling with how to address these and other challenges.
Ultimately, the pitfalls relate to there not always being enough care taken, nor advice given to a client.
The focus must therefore be on ensuring the most appropriate solutions are found and then implemented for each client.
These were further thoughts from the roundtables in Hong Kong and Singapore with leading industry practitioners – hosted by Hubbis in partnership with by Amicorp Group.
The use of trusts
The 21st century presents family businesses with a unique situation complicated by both the diversity and rate of change, explains David Stone, director of structuring and product development for Amicorp Group in Asia.
"Especially in Asia,” he adds, “families have always needed to find ways to preserve their traditional identities and values while allowing the current generation to pursue its own direction. The traditional identities and family bonds of Asian families are interwoven with family business and wealth interests. These areas are now being impacted by cultural, generational, technological and economic developments.”
Such trends, alongside the backdrop of regulations such as FATCA and the movement of the next generation to live in Western countries, are having an impact on the choice of jurisdiction for trusts, for example, based on what the different trust laws provide for clients.
Too often trusts are used as a catch-all to put in the relevant assets a client has, and sold as any other product, say market experts.
"There are a wide variety of jurisdictions and corresponding types of trusts and foundations available, each with different characteristics,” explains Stone. “A selection can be made depending on the specific situation of a family, and the location of the beneficiaries, or second generation inheriting the business.”
In addition, the influence of the movement of family members into Western jurisdictions is presenting challenges for families when looking at how to structure their trusts and other solutions based on emerging tax requirements.
One of the challenges relates to the fact that clients don’t necessarily know all these issues. However, this is often due to the fact that some advisers selling the trust initially don’t fully understand how the structure works over the longer term.
This is one of the pitfalls of the fact that wealth planning has been popularised in the last year or two.
"Too many people in the industry think of a trust as a product and it is therefore often mis-sold,” explains Bernard Rennell at HSBC Private Bank.
The focus should, however, be about thinking of the long-term objectives and working backwards to put in the right structures, he says, rather than using a trust as a way to offer something additional to a client.
But this is easier said than done. While HNW individuals and families in Asia face many of the same issues as those in other parts of the world when it comes to private wealth planning, a number of particular issues are more common or of greater significance to this group, says Marcus Leese, a partner at Ogier, the law firm.
He explains that these issues include such factors as:
"These factors and others have combined to limit the use of traditional private wealth planning – particularly trusts – by many HNW individuals and families in Asia,” explains Leese.
Among the most popular trust structures under BVI, Cayman, Guernsey and Jersey laws, for example, which can address many of these issues, are reserved powers trusts, structures which relate to specific statutory regimes, and private trust company (PTC) structures.
PTCs seem to be one of the increasingly-common solutions in Asia as part of the effort to tackle emerging issues relating to family businesses and succession planning.
"Some people regard PTCs as a cheaper solution to a professional trustee,” says Nigel Rivers of TMF Group. “But, in reality, professional support to run the trust properly is still required.”
PTCs can provide a good balance on the decision-making board between those family members and professional managers who have sufficient knowledge of the assets and the underlying business and those professionals who can provide guidance on the role of the trustee, he explains. But only if properly understood and put into practice.
Another emerging area of focus includes long-term dynasty planning, with patriarchs looking at what will happen for their grandchildren and greater-grandchildren.
As a result of the growing variety of options, advisers should be looking to specialists – whether independent trustees or bank-owned trustees – to provide the ongoing service.
Another view was that advisers should only be involved at the outset, and then they should pass responsibility for the ongoing advice.
This relates to the expectation over the need for family office-type offerings to take a more professionally-run approach.
Proper governance
A key next step with any structuring must be building a governance system around the trust – which ensures the right people from the family will be making the decisions. The trust itself, or the trustee, cannot do this alone.
For example, one of the common missing links in the set-up and governance process is in terms of covering aspects such as how boards are constituted, and how agreements which govern how various parties operate – including the boards, the protective committees and the enforcer committees.
This process also needs to consider aspects such as how the family as a group is going to deal with the typical and predictable conflicting issues which arise – for example who can work in the family business; whether family members get paid for their work; and whether family members get feedback and performance appraisals.
A difficulty is that various parties have different views on what they want out of the trust, and how they think it will work.
As a result, everyone needs to aligned and clear on the objectives and decision-making processes, say practitioners.
Getting the right advice
A pitfall in this whole process, however, comes back to the ability of an adviser to explain the complexity of the structure and keep clients up-to-date over ensuing years with advice and guidance on the best way to manage the assets in the trust.
As a result of poor advice, some HNW clients can end up with dozens of BVI companies.
Worst still, the knock-on effect of clients having bad experiences when setting up a trust or other wealth planning structure is skepticism.
At the same time, there is too often a reliance on the banker to bring the trustee to regular meetings with the client, which practitioners say creates the potential for problems to arise with any ongoing monitoring and supervision.
The approach, instead, should be to assess and manage risk directly – which in practice means having direct access to clients to ensure they are advised properly on an ongoing basis.
Another approach, say some bank-owned trustees, is to ensure that the trustee puts into the agreement a requirement for an annual meeting to ensure everything is kept up-to-date. This is also beneficial for clients to feel comfortable and more in control.
Not always a trust
According to Christian Stewart, managing director of Family Legacy Asia, while wealth management professionals often equate the succession planning process with setting up some type of trust structure, to offer benefits such as preventing ownership fragmentation within family businesses, there are also pitfalls to using trusts as a tool as part of wealth planning for families.
"They can create a false sense of security,” he says. For example, family wealth might fail as a result of family conflict, and putting the business into a trust won’t automatically protect against this.
The danger with trust solutions, therefore, is that they might be too simple.
In many cases, an RM or trust specialist will only talk to the patriarch or founder, so gets one perspective on how succession will play out, and on how ownership should be structured in the future.
However, says Stewart, there is often no testing in reality with the family about whether this is acceptable. “It is therefore crucial to have family meetings involving the wealth manager, lawyer and business founder, to identify the structure in the future and whether this will work in practice,” he explains.
Other question-marks arising
The impact of clients squeezing banks on fees for trust and other wealth planning services is also unrealistic for the sustainability of good advice, add practitioners.
Transparency in pricing is a major issue in wealth planning in Asia today, explains Angelo Venardos at Heritage Trust Services.
One potential option is the industry becoming more disciplined and not wavering on fees, given that it isn’t good for anybody if a client gets bad service simply because the provider or adviser isn’t getting paid enough on an ongoing basis to deliver the level of service required. So getting reasonable fees to guide families through various transitions is critical for the industry to do what it should be doing.
In line with this, the concern raised by some practitioners is that while they position trusts as long-term structures, the industry isn’t geared up to support this. This is where the litigation and reputational risks then arise, they add.
Yet not all banks are latching on to the benefits of offering wealth planning as an alternative angle from which to grab a client’s attention and lure their business.
"With our trust business,” says Rennell, “clients don’t have to bank with us, so we don’t use it as a way just to generate assets under management and to make an account ‘stickier’.”
Instead, he adds, family governance and succession planning is a serious business in its own right.
However, there is a question-mark over whether banks are even the right types of organisations to be providing clients with advice about their trusts, since law firms, for example, potentially provide better continuity in terms of the advice. Clients can then use the banks or independent firms as the platforms to hold their assets.
This all requires education for the client about the professionalism required to find the right wealth planning structures and solutions – rather than them thinking of choosing the right solution as the same type of multi-banking approach they take to their investments.
A broader range of instruments
While advisers have a range of structures and solutions at their disposal to support wealth planning, these have been applied in a simple way. And with increased regulations demanding transparency, a greater variation of tools is being used – both now and most likely going forward.
An example of this is the use of life insurance in Asia, says Thomas Vonrueti of Swiss Life.
Most advisers have used a single traditional product for years – namely Universal Life – while in other regions a much broader range of insurance solutions have been deployed to address clients’ wealth planning needs, he explains.
"The implied simplicity of the product as well as double-digit commission certainly fueled its popularity,” says Vonrueti. “Modern life insurance solutions such as Private Placement Life Insurance (PPLI), which has been an essential wealth planning tool in the US and in Europe, allow clients not only to address liquidity provision needs but also to assist in estate- and tax planning as well as segregation of private and company assets.”
Such solutions can be adjusted to the specific circumstances of the clients, taking into account the relevant jurisdictions of them and their families, he adds.
With the increasing commoditisation of products in private banks, one of the major differentiating factors for banks is the ability to provide customised solutions that demonstrates clear benefits to clients.
"Here, modern life insurance solutions such as PPLI will play a more important role in Asia as well,” says Vonrueti.
