Why durable portfolios need both active, passive strategies
Fund managers and investors need to ask themselves...
The world is increasingly complex, and uncertainties about the future have only contributed to financial anxiety. A September 2016 survey of 50 wealth management professionals conducted by Hubbis and Jersey Finance, has found that for China’s high-net worth (HNW) and ultra-high net worth (UNHW), there are two primary financial needs. First, wealthy Chinese individuals are seeking ways to diversify and protect their wealth. Second, wealthy individuals need proper succession planning for personal wealth and family businesses.
To achieve their goals, China’s wealthy are moving to new wealth management options, in particular cross-border solutions. The study found that the two greatest hurdles facing Chinese clients as they begin to transition their wealth, are uncertainty about where to start the process, and the perceived lack of good options and advice. In addition to these hurdles, China’s wealthy also face the daunting challenge of investing in unfamiliar markets, like overseas financial products and real estate, combined with a lack of full understanding of the implications of inheritance taxes in mature markets.
More structuring is needed
Key drivers for cross-border structuring out of China are asset planning, family succession, and the diversification of wealth. These drivers are linked to the protection of wealth and the establishment and protection of an individual’s legacy. While use of a will is commonplace and well understood, other structuring plans are still developing.
Trusts and foundations are not well understood and are therefore underutilized. The Hubbis/Jersey survey revealed that the biggest misconception about wealth structuring is a perceived loss of control. More than two-thirds of Chinese families felt this way about wealth structuring options and solutions.
For structures that include estate and succession planning, pre-empting conflict is essential for advisors to Chinese families. Respondents to the survey reported that the most likely part of the process to create strife, was the use of wrong or unnecessary structures. This was followed by a mix of factors including family disputes and giving the wrong advice about what clients need.
Transparency is vital to a smooth transition with minimal family conflict. Advisors need to work with family leaders early in the process to clearly and frequently explain to the next generation of family members the dynamics of the family wealth and status, and to then educate them on the implications of inheriting, managing, and investing that wealth.
The openness to new approaches for wealth management is growing at the same time as other changes. For example, ‘legacy’ has taken on new meaning for the wealthy in China, who are now increasingly concerned with leaving both material and spiritual wealth. Commitments to good virtues, education, and philanthropy are now a part of the wealth succession conversation.
Increasingly, wealthy Chinese say they want to leave the majority of their estates to charity or philanthropic causes. To accommodate this desire, family office structures have grown from near non-existent levels several years ago, to an incredibly popular choice today, especially for UNHW individuals. Survey respondents expect an increase in this trend in the next five years, predicting that more than half of Chinese families will opt for a family office structure.
Providing proper counsel
Generally, however, China’s HNWs and UHNWs have yet to diversify their assets. Additionally, there is limited knowledge of how risks are best managed and the varied solutions available for achieving their financial goals.
Overcoming the hurdles of uncertainty and undersupply of good advice to protect and grow wealth, while diversifying across borders requires deliberate planning developed with good counsel. This counsel must be collaborative – wealthy Chinese individuals take an active role in managing their investments and their assets.
There are signs that they may entrust wealth professionals with more management, building trust and strong relationships will be key. The recent volatile environment has increased demand for financial planning and expertise in wealth management among such individuals in China.
Growing awareness of regulatory complexity has also contributed to demand for services. The Organisation for Economic Co-operation and Development’s Common Reporting Standard (CRS) will create a new level of transparency and compliance requirements for global investors. Individuals are concerned with the implications of the global push for tax transparency, and the impact that the CRS will have on existing structures that may cease to be compliant as the tax and reporting laws change.
Anxieties aside, to properly serve China’s wealthy, wealth managers need to cater their services and offerings based on what their clients are now looking for in fiduciary providers. The survey identified the three most important elements wealth managers must offer their clients: offering tailored approaches, a high degree of personalisation, and instilling confidence in clients that they are in sound hands. Finding the right expertise with the right level of experience has never, therefore, been more important.
Geoff Cook is chief executive officer of Jersey Finance
12 Jan 2017