Risk, return and reward

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Written by the Economist Intelligence Unit on behalf of Barclays Wealth, this third volume of Barclays Wealth Insights examines how wealthy individuals grow and preserve their wealth.

It is based on three main strands of research. First, the Economist Intelligence Unit conducted a survey of 790 mass affluent (with at least $100,000 in investable assets), high net worth (with at least $1 million in investable assets) and ultra high net worth individuals (with in excess of $3 million in investable assets). Respondents were spread across a number of key international markets, with the highest numbers of respondents from the United States, United Arab Emirates, Singapore, Hong Kong, United Kingdom, Spain and Switzerland. The survey took place between January and September 2007. This was supplemented with a series of in depth interviews with experts on wealth; and a number of case studies of family businesses.

Our thanks are due to the survey respondents and interviewees for their time and insight.

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Risk, return and reward

  1. 1. Barclays Wealth Insights Volume 3: Risk, Return and RewardIn co-operation with the Economist Intelligence Unit
  2. 2. About Barclays Wealth ForewordBarclays Wealth, the UKs leading wealth manager with £126.8 billion client assets globally at 30 June 2007, serves affluent, Barclays Wealth aims to provide clients with the means to manage their wealth successfully. For this reason, we are committed tohigh net worth and intermediary clients worldwide. It provides international and private banking, fiduciary services, investment investing in research that will enable us to better understand and forecast the opportunities for wealth creation now and in the future.management and brokerage. Barclays Wealth was voted Global Investor’s Wealth Manager of the Year for 2007.Thomas L. Kalaris, the Chief Executive of Barclays Wealth, joined the business at the start of 2006. Barclays Wealth Insights is a series of research reports created in partnership with the Economist Intelligence Unit. In this, the third, volume of Barclays Wealth Insights we focus on how wealthy individuals consider ‘Risk, Return and Reward’ throughout their lives andBarclays Wealth is part of the Barclays Group, a major global financial services provider engaged in retail and commercial banking, the role that each plays in their approach to investment and planning their legacy.credit cards, investment banking, wealth management and investment management services with an extensive internationalpresence in Europe, the USA, Africa and Asia. It is one of the largest financial services companies in the world by market We have worked with a panel of experts, drawn from academia, industry and financial circles, to provide unique insights into thecapitalisation. With over 300 years of history and expertise in banking, Barclays operates in over 50 countries and employs over attitudes of men and women on a broad range of wealth matters. The series of surveys of wealthy individuals from around the world,127,000 people. Barclays moves, lends, invests and protects money for over 27 million customers and clients worldwide. seeks to create a definitive picture of what being wealthy means in the 21st century.For further information about Barclays Wealth, please visit our website www.barclayswealth.com We hope you find "Barclays Wealth Insights: Risk, Return and Reward" an interesting read and we invite you to look out for future publications in the months ahead.About this reportWritten by the Economist Intelligence Unit on behalf of Barclays Wealth, this third volume of Barclays Wealth Insights examines how Thomas L. Kalariswealthy individuals grow and preserve their wealth. Chief Executive Barclays WealthIt is based on three main strands of research. First, the Economist Intelligence Unit conducted a survey of 790 mass affluent(with at least $100,000 in investable assets), high net worth (with at least $1 million in investable assets) and ultra high net worthindividuals (with in excess of $3 million in investable assets). Respondents were spread across a number of key internationalmarkets, with the highest numbers of respondents from the United States, United Arab Emirates, Singapore, Hong Kong, UnitedKingdom, Spain and Switzerland. The survey took place between January and September 2007. This was supplemented with aseries of in depth interviews with experts on wealth; and a number of case studies of family businesses. Our thanks are due to thesurvey respondents and interviewees for their time and insight.For information or permission to reprint, please contact Barclays Wealth at:Barclays Wealth Insights, Barclays Wealth, 1 Churchill Place, London, E14 5HPTelephone +44 (0)800 851 851 or visit www.barclayswealth.com 1
  3. 3. Our Insights Panel Key findings Jeremy Arnold, Head of Barclays Wealth’s Advisory business individuals seeing them as an important part of their asset Appetite for risk is an important allocation. Despite this appetite for more alternative asset factor in wealth creation. classes, there is a large knowledge gap, with only around Fergal Byrne, Author of Barclays Wealth Insights Report one-third of respondents questioned for the survey professing • The wealthier the individual, the more likely they are to agree confidence in their knowledge and understanding of them. that a high appetite for risk, or a willingness to take risks, has More generally, less than half are confident in their knowledge Professor Randel S Carlock, Ph.D, Senior Affiliate Professor of Entrepreneurship and Family Enterprise at INSEAD in France influenced their ability to generate wealth through business of more mainstream aspects of personal finance, such as endeavours. Some 60 per cent of high net worth individuals estate planning or retirement planning. (See page 10) agreed with this statement, compared with 36 per cent who Professor Teodoro Cocca, Chair for Wealth and Asset Management at the Johannes Kepler University of Linz, Austria had investable assets below $1 million. When it comes to investments, however, individuals irrespective of investable Leaving wealth to dependents assets tend to have similar appetites for risk. Interviewees Professor John Davis, Senior Lecturer in Business Administration at Harvard Business School questioned for the report corroborate this, saying that many is seen as important... wealthy individuals often become more risk averse after they • Just under 60 per cent of respondents agree that they want to have realised their wealth. (See page 5) make sure they can pass money to the next generation. Grant Gordon, Director General of the Institute of Family Business Ensuring financial security for children is also seen as an The reason investors behave important motivation for amassing and protecting wealth. Filtering the results for only those respondents who have Lisa Gray, Founder of Gray Matter Strategies and author of The New Family Office as they do is becoming more children, it is the third most important motivation after widely understood. financial security in retirement and a better personal lifestyle. Kevin Lecocq, Chief Investment Officer, Barclays Wealth (See page 18) • At the intersection between finance and behaviour, considerable work is being undertaken to understand the Russ Prince, President of Prince & Associates behaviour and personality of investors. This goes beyond ...but many worry about the simple discussions of risk to take in broader concepts including composure, financial expertise and even irrational effect that sudden wealth Michael Sonnenfeldt, Founder of TIGER 21 biases. Taken together, these characteristics make up an might have. individual’s “financial personality”. (See page 8) • The desire to pass wealth to the next generation is sometimes tempered by concerns that leaving too much money could cause Catherine Tillotson, Partner of Scorpio Partnership Wealthy individuals have a problems for the benefactors. Increasingly, wealthy individuals are growing appetite for less keen to ensure that their dependents receive financial education to prepare them for wealth and, in some cases, are adding Didier von Daeniken, Head of Barclays Wealth in Asia traditional asset classes but stipulations to their wills, such as the requirement that a may lack knowledge to university education is to be completed. (See page 20) Felix Wenger, Banking Partner at McKinsey understand them. • Asset classes such as hedge funds, private equity and derivatives are filtering down from the institutional to the retail space, with growing numbers of high-net worth2 3
  4. 4. IntroductionOver the years, experienced investors have become used to cycles in thefinancial markets and come to recognise that it is essential to prepare forboth good times and bad. A benign climate can turn into a financial storm Investmentsand back again, and to weather these sudden changes in the environmentrequires sound planning, expert advice and good navigation skills.Just as market conditions change over time, so do the financial objectivesand motivations of investors. An entrepreneur in the wealth accumulation and riskphase of their life may have a very different consideration of risk, returnand reward in comparison to someone who has already made theirmoney, and a different consideration again to a retired individual The link between risk and wealthconsidering their financial legacy. The economist Milton Friedman often noted that there is no Russ Prince, President of Prince & Associates, a market research such thing as a free lunch. In the world of investment, this firm specialising in private wealth. “Quite simply, you need toThis report examines how risk, return and reward can be applied as means that if an investor wants to generate a higher investment take high risks to generate high returns. At the same time, youinvestors make the journey through life, from the early wealth return, they will need to take on more risk and expect to invest need to bear in mind that what constitutes risk for an over longer periods of time; and if they want to take less risk entrepreneur, who has a deep understanding of his business, isaccumulation phase through to the decisions they make about passing they need to settle for lower returns. How much risk wealthy different from the risk one takes with investment.”wealth down the generations. It also explores the challenge of matching individuals feel comfortable bearing and how they feel about risk can determine, therefore, the financial results that they canfinancial advice with changing personal circumstances, the role that risk “You need to bear in mind that expect to achieve through investment.and behaviour play in our approach to investment, and the key what constitutes risk for an entrepreneur,considerations when planning a legacy for dependents. The survey shows that wealthy individuals do indeed have an appetite for risk. Some 60 per cent of those with assets over who has a deep understanding of his US$1 million said that a high appetite for risk had been an business, is different from the risk one important influence in their wealth creation in comparison with 36 per cent of those with assets under US$1 million. This takes with investment.” finding suggests a clear correlation between levels of wealth and willingness to take risk. “Willingness to take risk has always been an important factor in the success of the wealthy, particularly the ultra wealthy,” says4 5
  5. 5. Appetite for risk – an international comparisonManaging 56%France riskCatherine Tillotson, a partner at wealth consultancy firm Scorpio Partnership, 36%US/Canada Portugal UK 80% 25% 52%Spain 54%Switzerland 63%Italy 58%Dubai 52%Hong Kongagrees that business appetite for risk can be very different to investment 63%Singaporeappetite for risk. “We often see attitudes to risk change after people haverealised their wealth, through the sale of a business, for example. Wealthy 84%South Africaindividuals tend to become more risk averse than they have been in thewealth creation phase of their life.”This is in line with the Economist Intelligence Unit survey, which Kevin Lecocq, Chief Investment Officer at Barclays Wealth,finds that there is a broadly similar appetite for high-risk points to different risk attitudes that he has observed betweeninvestments among investors with assets in excess of US$1 newly wealthy entrepreneurs and second or third-generationmillion as there is among those with assets below that threshold. wealthy. “The second and third generations tend to be moreIn other words, while high appetite for risk is seen as an familiar with market risk, and have seen markets go up and The survey also reveals some interesting differences between entrepreneurial culture that is now becoming established there.important influence on the wealth of those at the upper end of down over long periods of time. Newly monetised particular countries with regard to their willingness to take risks. More developed countries, such as the US, Canada and the UKthe asset spectrum, those same individuals do not necessarily entrepreneurs, on the other hand, tend to be less familiar with For example, respondents living in South Africa are most likely to appear towards the bottom of the list. One reason for this maytake more risks in their investments once they are wealthy. the idea of market risk, and tend to have a preference for more agree that a high appetite for risk has been an important factor be that these countries have more established market cultures absolute-type returns, which aren’t dependent on directional helping them achieve the wealth that they now hold. This may where a greater proportion of people acquire wealth through movements in financial markets” he says. well reflect some of the social and economic problems the less risky paths, such as income from a job, inheritance or country has faced in its development, as well as the burgeoning marriage, in addition to the entrepreneurial route.6 7
  6. 6. Any discussion of risk needs to bear in mind that there are many anomalies inBehavioural the way people generally think about risk. Studies suggest, for example, that losses loom larger in people’s minds than gains; that people are not good at understanding what happens when you add risks together; and that people tend to be systematically overconfident in their financial abilities.approaches to risk Perceptions of risk also vary according to culture. For example, decisions. By taking into account more irrational approaches to Professor Teodoro Cocca, Chair for Wealth and Asset Management decision-making, researchers have been able to develop a at the Johannes Kepler University of Linz in Austria, notes that nuanced analysis of an investor’s financial personality. This goes Swiss investors are heavily weighted towards Swiss equities, which beyond traditional risk models, which often made unrealistic they tend to see as lower risk than US government bonds, even assumptions about people’s attitudes to risk. though, in principle, they should be higher risk. In this case, as with In addition to an assessment of how much risk an individual many other examples that depend on cultural differences, it is the may be willing to bear, a financial personality profile also perception of risk that is different. includes other aspects, including composure (how nervous or Scorpio’s Ms. Tillotson argues that many different aspects of an comfortable people are with their investments); perceived individual’s life and personality influence their attitude to risk. “You financial expertise; and willingness to delegate financial need to think about where people are in their life and the wealth management of their affairs. cycle,” she says. “You also need to take into account a variety of personal and emotional issues. Just looking at risk is pretty old- “You need to think about where people fashioned. We are now seeing some cutting-edge research in behavioural finance to understand different dimensions of what are in their life and the wealth cycle.” some people call an investor’s ‘financial personality’.” Until recently, the intersection between finance and behaviour was rarely explored, but new research is now being undertaken to look at a broad range of psychological influences on financial8 9
  7. 7. In pursuit of diversification An appetite for alternatives Each individual’s investment preferences and future investment investors to reduce exposure to market returns, which depend onNotwithstanding volatility at the time of writing, the past few years have plans are personal, but collectively, these preferences reveal some general directional movements within financial markets, towardsseen a dramatic increase in the scale and distribution of wealth. Buoyant interesting trends. The survey compared the assets in which a more stable return profile. respondents had invested over the past three years with theirfinancial markets, the ongoing process of globalisation and greater planned investment over the next three. While 48 per cent of respondents say that they planned to invest in stocks over the next three years, this is much lower than theaccessibility to investment tools have all contributed to a strengthening Two trends stand out. First, there is a move away from equities. 64 per cent who had invested in this asset class in the previous Second, respondents expressed a desire to increase their three years. This finding is corroborated by other research. Theinvestor culture around the world. exposure towards less traditional asset classes, such as hedge members of TIGER 21, for example, reduced their equity funds, private equity, structured products and derivatives. Taken investments from 37 per cent of their portfolio in 2005 to 30 per together, these results suggest a preference by some wealthy cent in early 2007.The increase in the number and accessibility of different types Michael Sonnenfeldt, Founder of TIGER 21, a New York-basedof assets is transforming the world of investment and the high net worth group with more than US$8 billion in total Table 1: Investment over time – asset classes of choicepossibilities available to wealthy investors are now greater than assets, points out that diversification can be a difficult conceptever before. In recent years, investors have been able to take to grasp. “You have to understand what you are trying to In which of the following vehicles have you invested in Past three Next three the past three years and, in which of the following do years % years %advantage of a growing number of asset classes, with hedge diversify,” he explains. “For example, some investors may think you plan to invest in the next three years?funds, private equity funds and derivatives all becoming more they are diversifying when they buy ten stocks, rather than one. Individual stocks and shares 64 48accessible to retail investors. But, if all the stocks are driven by the same fundamental factors, Property 41 35 they won’t actually achieve any diversification.” Personal pension 42 35Wealthy investors are now better able to spread risk more widely Investment trusts 20 19by adding different types of assets to their portfolios. By giving Bonds 26 20themselves exposure to a wide range of assets, investors aim to “You have to understand what you are Private equity/co-investing 11 15achieve greater levels of diversification and obtain the same level Hedge funds 20 21 trying to diversify.”of return for a lower level of downside risk. Commodities (eg, gold) 17 18 Tracker funds 23 20 Experts agree that part of the challenge is that people are notExperts say that wealthy individuals often have a good Derivatives (futures, options, CFDs etc) 10 11 naturally good at assessing mathematical relationships, orunderstanding of the benefits of diversification, but have more Currency 11 10 correlation, between different assets. They find it difficult to seedifficulty putting it into practice. “I would argue that most Structured products 8 9 the big picture and understand the impact of combining many Alternative assets (fine wine, antiques, art etc) 12 11wealthy people are certainly aware of the general concept of small investments. Gilts 9 8diversification and its benefits,” says Felix Wenger, BankingPartner at McKinsey management consultants in Zurich, “but Credit/leveraging 7 5 With this in mind, the next section examines the extent toare often uncomfortable with how to apply it or do not know which investors are diversifying their portfolios, and looks atwhat the exact implications are.” some of the asset classes they are considering to help them achieve the right mix.10 11
  8. 8. The only assets in which respondents expect to increase their Rising levels of wealth in Asia have fuelled demand for banking Table 2: Past investments – a comparison by wealthinvestments are private equity, hedge funds, derivatives, structured services, and the sophistication of local investors means that Assets between In which of the following vehicles have you invested Assets under Assets overproducts and commodities. Indeed, these are areas where wealthier levels of service offered must be high. "Private banks in Asia need US$1m and in the past three years? US$1m % US$3m % US$3m %individuals have already made significant investments in recent to ensure that bankers in the region have a good understanding Individual stocks and shares 55 68 77years. Respondents with assets in excess of US$1 million are more of the impact these instruments can have on an investment Property 42 38 48likely to have invested in hedge funds, derivatives and private equity portfolio," says Mr. von Daeniken. Personal pension 52 36 40in the past three years than those with assets below that threshold. Investment trusts 14 23 27Respondents with assets over US$3 million were even more likely to “In the Middle East, research conducted Bonds 20 29 36have invested in these vehicles. One reason for this is structural – Private equity/co-investing 5 13 21most of these investments carry a minimum investment that is by the EIU has also revealed a growing Hedge funds 19 21 25sufficiently high to restrict them to the top wealth brackets. Commodities (e.g, gold) 11 20 23 appetite for structured products, Tracker funds 24 22 23“Investors in Asia have strong appetites derivatives and private equity among Derivatives (futures, options, CFDs etc) 4 12 19 Currency 9 11 14for many of the more exotic investment the more sophisticated investors.” Structured products 5 8 16 Alternative assets (fine wine, antiques, art etc) 10 13 15vehicles, such as structured products.” Gilts 5 12 12 In the Middle East, research conducted by the EIU has also revealed a growing appetite for structured products, derivatives Credit/leveraging 7 7 7Didier von Daeniken, Head of Barclays Wealth in Asia, says that and private equity among the more sophisticated investors. OfAsia has very shrewd investors who have a tendency to be very particular interest in the Middle East are products that are The search for diversification is another factor that is contributing The extent to which investors have appetite for absolute andinvolved in investment decisions. "Investors in Asia have strong Shariah-compliant. The region has seen huge development in the to the popularity of these assets. Adding some private equity, market returns portfolios varies. “Intuitively, absolute returnsappetites for many of the more exotic investment vehicles, such Islamic finance sector in recent years and this is rapidly filtering hedge fund or derivative exposure to a portfolio can help to make a lot of sense and we see that more wealthy individuals areas structured products," he says. "They also have a good through to the asset management arena, where considerable reduce overall levels of risk by spreading it across a wider range of thinking in those terms,” says Lecocq. “Assets like hedge funds,understanding of the way in which these instruments can help product development is now taking place. assets. More interestingly, these specific financial instruments can which are an early example of an absolute return investment,them to actively manage risk." deliver financial returns that are not so closely aligned with the derivatives and structured financial products, can all be used to behaviour of markets as a whole. Instead, they aim to generate a manage risk, reduce volatility and stabilise results.” specific rate of return regardless of what the market is doing. “Assets like hedge funds, which are an early example of an absolute return investment, derivatives and structured financial products, can all be used to manage risk, reduce volatility and stabilise results.”12 13
  9. 9. “Willingness to take risk has always been an important factor in the success of the wealthy, particularly the ultra wealthy.” Russ Prince, President of Prince & Associates14 15
  10. 10. Fewer than half of the respondents questioned for the survey are Interestingly, the survey suggests that both older and wealthierKnowledge confident in their knowledge and understanding of key aspects of affluent individuals tend to be more knowledgeable. This personal finance – the least understood are private equity and corresponds to experts’ views that the financial sophistication of venture capital (36 per cent), bonds (34 per cent) and hedge funds investors tends to increase with wealth. Part of the reason for (27 per cent). With private equity and hedge funds attracting this is that, as they grow wealthier, they are more likely to be in growing interest from sophisticated investors, it is clear that, in contact with personal advisers and private bankers. many cases, knowledge has not yet caught up with appetite.and understanding Financial education has historically been an integral part of the Table 3: Revealing the knowledge gap service that private bankers provide for the wealthy. In this new and more complex environment, the educational role has How confident do you feel in your knowledge % who are become even more important. Today, it can include everything and understanding of the following? confident of finance from the regular communications on market developments and Retirement planning 49 products, to more tailor-made and specific workshops on Estate planning 47 particular financial assets, such as private equity or derivatives, Funds and other collective investments 45 with presentations given by key players in these markets. Stock market 40 Tax planning 39 According to research from McKinsey, knowledgeable and Capabilities of private banks 39 sophisticated investors also tend to take more responsibility for Investing in private equity and venture capital 36 the management of their financial assets and delegate less. Mr. Bond/debt market 34 Wenger makes a distinction, however, between perceived andWith the pace of financial innovation continuing to accelerate, decisions about Investing in hedge funds 27 actual levels of financial knowledge. “You find that some peopleportfolio allocation can seem extremely complex, even for an experienced It is easy to understand why many wealthy investors are who say they do not understand enough have high levels of financial knowledge and vice versa,” he says. “Interestingly, confused about hedge funds. There are about 10,000 hedgebusiness person. “There really is an enormous range of investment funds currently operating worldwide. Hedge fund assets have delegation behaviour is driven by perceived sophistication.” risen almost threefold in the past five years to US$1.75 trillion,possibilities,” says Mr. Sonnenfeldt of TIGER 21. “It’s hard to be on top of One area where some private banks are getting increasingly according to consultancy firm Hedge Fund Research. Originally, involved is in educating the offspring of the wealthy. Some, the concept behind hedge funds was that they aimed toeverything, no matter how smart you are. We see former entrepreneurs, who particularly in the US, organise so-called “wealth bootcamps”, generate positive results whether the market went up or down. where teenage and older sons and daughters convene with theirdon’t understand derivatives and people coming from Wall Street, who might They achieved this largely by offsetting risk, or hedging, against peers to learn about their financial responsibilities. Some argue, market falls. Over time, however, hedge funds have become however, that the most important work needs to be done at abe world-class traders, but don’t understand private equity.” increasingly specialised with many different trading strategies. much earlier age, and that an appreciation of money needs to be instilled during childhood. As they start to tackle the challenge of “You can’t really look at hedge funds as an asset class per se,” passing wealth down the generations, this is just one of the says Mr. Prince. “You have to look through to the underlying considerations that the wealthy must take into account. investments and strategy in each fund. Financial education can play a key role here. The better and more financially educated the investor, the more likely he or she is to include hedge funds and alternative asset classes in their portfolio.”16 17
  11. 11. Keeping it in the familyWealth and the Almost three-fifths of respondents agree that having enough money to family leave to the next generation is a key motivation for securing their wealth. Filtering these results for respondents who have children, the motivation of financial security for dependents becomes a higher priority. Almost two-thirds of respondents (66 per cent) consider it to be an important motivation, ranked behind only financial security in retirement and a better personal lifestyle. Transferring wealth to their family has always been one of their most important concerns. And it probably always will be.” “Many wealthy people are doing a less than good job at transferring wealth in Table 4: Wealth creation – the motivations an efficient way.” What are the main motivations for you % who think to amass and protect your wealth? important Important it may be, but Mr. Prince believes that often the wealthy Financial security in retirement 82 are not dealing with this issue well. “Many wealthy people are A better personal lifestyle 78 doing a less than good job at transferring wealth in an efficient Ability to enjoy the finer things in life 66 way,” he says. “You have to remember that talking about death Being able to travel extensively 60 and dying causes discomfort to a lot of people. So the tendency is Financial security for children 56 to avoid the question. Plans aren’t updated enough to take into Ability to retire early 54 account changes to the law, tax or lifestyle. And, of course, by Being able to afford a large property in a good area 53 definition very few people know if their plans were any good.” Private education for children 51 Experts say that it is important to first build a good Enjoyment of making money 48Wealthy individuals have always sought to pass wealth down the generations, communication process and focus on the family’s goals. “We find Being able to help others (eg. through philanthropy) 47 a lot of people focusing on the vehicle, such as a trust, to transfer Status 45but it is nevertheless an area that is fraught with difficulties. the wealth when they really should be focusing on defining the Being able to afford more than one property 36 family goals,” says Lisa Gray, Founder of Gray Matter Strategies, aHow does one prepare dependents for sudden wealth at a ultra-wealthy individuals such as Warren Buffett and Bill Gates US wealth consultancy. “The first priority should be to put in placeyoung age, and does this course of action preclude benefactors have stated their intention to leave the vast majority of their estate the right governance structure – to make sure that they have the “I often ask financial advisers to the wealthy: ‘What do you thinkfrom making their own way in life? Is it perhaps a better idea to to philanthropic causes, it is tempting to conclude that the desire right process to communicate and set goals for the family. If that’s is the most important goal for wealthy people?’,” says Mr.leave the bulk of a fortune to philanthropic causes? These are to amass and protect wealth for the next generation is becoming done properly, then finding the right legal and financial vehicle to Prince. “Most advisers say diversification. Well, diversification isissues that the wealthy must grapple with as they consider their less prominent. Our survey would suggest, however, that the transfer wealth becomes much more straightforward.” certainly important but, in my experience, the centralresponsibilities to the next generation, and they form the basis motivation to ensure financial security for children is still important, preoccupation for most wealthy people is their families.of the remainder of this report. although there is a recognition among some survey respondents that it is not a good idea to leave large sums of money toIn an era in which entrepreneurship and enterprise are becoming dependents. High profile cases aside, philanthropy seems to beincreasingly well-trodden routes to wealth, and in which only a moderate motivation for amassing and protecting wealth.18 19
  12. 12. Inheritance not always a good thing Some experts believe that only one in ten family fortunes make “A feeling of unworthiness is common,” he says. “Children oftenAmong the wide-ranging economic phenomena Adam Smith addressed in his it to the third generation. A recent American adage captures this ask themselves: ‘How come I have so much money? What haveseminal book, An Inquiry into the Nature And Causes of the Wealth of Nations, is insight: “From shirtsleeves to shirtsleeves in three generations.” I done to deserve this?’ Children in wealthy families can also One key reason is that inheriting great wealth can cause suffer from low self-esteem if they feel that much of theirthe question of how to transfer wealth across generations. “Riches, in spite of the problems for the recipients. success is due to the wealth they have inherited, rather than what they have achieved themselves.”most violent regulations of law to prevent their dissipation, very seldom remain The survey reveals that some wealthy individuals are increasingly aware of the potential problems of leaving their children greatlong in the same families,” he wrote. Despite the best of intentions, family wealth and suggests that they no longer automatically assume “Many children just find it difficult to that their children should be their prime inheritors. More thanfortunes rarely survive across many generations. one-third (34 per cent) of those surveyed agree that it is not a deal with inheriting great wealth. It good idea to leave large sums of money to dependents. raises all kinds of questions. With The whole question of passing on wealth can be a fraught one, wealth comes responsibility and, argues Ms. Tillotson. “It’s a very difficult area,” she says. “Many children just find it difficult to deal with inheriting great wealth. unfortunately, it’s not easy to teach It raises all kinds of questions. With wealth comes responsibility responsibility to young people.” and, unfortunately, it’s not easy to teach responsibility to young people. We are definitely seeing an increased incidence of the wealthy not leaving money to their children for this reason.” Children in wealthy families can experience some common problems, says Randel Carlock, Senior Affiliate Professor of Entrepreneurship and Family Enterprise at INSEAD in France, who has also worked as a consultant with family businesses.20 21
  13. 13. This question of achievement through one’s own endeavours is One option for wealthy individuals concerned about the impactparticularly important for the members of the TIGER 21 high networth group, who struggle with finding the “right” amount ofwealth to pass on to their children. “This is one of the things wediscuss most,” says Mr. Sonnenfeldt. “Our members are veryconscious of the potential to deprive their children of the that sudden wealth will have on their offspring is to turn over the bulk of their fortune to philanthropic causes. This is a course of action that has recently received substantial press coverage thanks to the actions of very wealthy, high-profile individuals such as Bill Gates, Pierre Omidyar and Warren Buffett. In Asia, Family Inc.challenge and gratification of creating success if they leave them billionaire philanthropist Li Ka Shing shared his hopes on this Passing ownership and wealth down the generations in a family businesstoo much money. Still, many members would like to share the subject at an awards ceremony last year. “In Asia, our traditionalfruits of their own success with their children and grandchildren values encourage and even demand that wealth and means environment poses a distinct set of financial and management issues. “In ourto help cushion their financial future.” These comments echo pass through lineage as an imperative duty,” he said. “I urge andWarren Buffett’s view about how much money to leave to his hope to persuade you, especially all of us in Asia, that if we are experience, as ownership is passed from one generation to the next, familychildren: “Enough money so that they would feel they could do in a position to do so, that we transcend this traditional belief.”anything, but not so much that they could do nothing.” shareholders proliferate and decision making can become more difficult,” says “In Asia, our traditional values Jeremy Arnold, Head of Barclays Wealth’s Advisory business.“Our members are very conscious of encourage and even demand thatthe potential to deprive their children Some family members may not want to work in the business who also works as a family business consultant. “But parents wealth and means pass through and seek to sell their shares such as in the instance of the need to be realistic about their children and to consider who isof the challenge and gratification of Wates family (see the accompanying case study). In addition, really capable of being in the business and who is not. I tell lineage as an imperative duty.” there will come a time when the family can no longer provide families that it is unlikely that all their children will becreating success if they leave them suitable managers for the family business. enthusiastic, capable and co-operative. More than likely at least Whether this highlights a trend towards greater philanthropictoo much money.” one will not want to be part of the family business.” activity is a contentious point. While the actions of Mr. Gates, The emotional undercurrents in a family business can also be Mr. Buffett and others are certainly huge in scale, one should very strong, says Professor Carlock. “Freud said that the two He adds that families tend not to plan for this issue. “It’s notOne response to this question is to put stipulations in a will not necessarily conclude that bequests to charitable causes are important dimensions of a successful life are work and love. unusual to find that family businesses have 80 per cent or moredefining the circumstances under which assets will be becoming more frequent. Philanthropy has gone hand in hand We try to have important work relationships and important of their aggregated wealth totally tied up in their familytransferred to the next generation. A recent survey by PNC with wealth for centuries – consider, for example, the Victorian relationships. In a family business, all your eggs are in one business. And most family businesses cannot be easily dividedWealth Management in the US suggests that wealthier people entrepreneurs Andrew Carnegie, Joseph Rowntree or Jesse Boot, basket, so it is much more intense. You are dealing with very or sold. Families need to think about building other assetsare more likely to put stipulations in their will when it comes to all of whom considered the support of charitable causes to be powerful human motivations and human needs and this should besides the family business. At the moment, this is not on thetransferring their assets. Some 57 per cent of those surveyed an essential responsibility of their wealth. be ignored at your peril,” he says. radar of most families.”with US$10 million or more in assets attach conditions beforetheir heirs can inherit. For example, some say that their children Grant Gordon, of the Institute of Family Business, emphasisesmust complete a college education, hold down a job for a “Families, by their nature, tend to be the importance of stewardship in transferring a businessparticular amount of time or reach a certain age. hopeful institutions – they tend to have successfully. “It’s vitally important that the next generation has a sense of responsibility in terms of ownership and that there is faith that things are going to work out.” an ethic of responsibility,” he says. “It’s one thing to have skills that relate to financial management and accounting, but the Families need to recognise that some family members may be softer issues are also important, such as fostering emotional unsuitable to manage the family business, or that they may have ownership in the next generation. Without this sense of other aspirations. “Families, by their nature, tend to be hopeful stewardship, it’s hard to continue a journey together as a institutions – they tend to have faith that things are going to business-owning family unit.” work out,” says Professor John Davis of Harvard Business School,22 23
  14. 14. “In our experience, as ownership is passed from onegeneration to the next, family shareholders proliferateand decision making can become more difficult.”Jeremy Arnold, Head of Barclays Wealth’s Advisory business24 25
  15. 15. Wahum Holdings is a third-generation Hong Kong family Over time, Legacy has gradually taken responsibility for aLegacy business that manufactures consumer products, building widening range of family affairs. It now provides services for materials and corrugated cardboard packaging. Over the past family members including tax planning and reporting, trust seven decades, the company has grown successfully, opening planning, corporate secretarial services and so-called concierge up manufacturing sites in several African countries. services (bill paying, balancing chequebooks, travel bookings, and so on). In 2003, Legacy also took over the administrative Mr. Chen judged that a family office structure would offer the and accounting support for the Chen Yet-Sen Family family more control over their assets. “My initial goals for setting Foundation, a philanthropic foundation that the family set upAdvisors Ltd. up a family office were primarily financial,” he says. “I wanted to named after Mr. Chen’s late father. consolidate the different investments, centralise the information and management of the assets and generally improve the asset management side of the business. I also thought that a family “If not managed carefully, a family office could serve as a platform to facilitate and promote office can easily become bloated communication and financial education among family members.” and expensive.”Case study He explored two alternatives: either setting up an independent single-family office that would be dedicated to the needs of the Mr. Chen is in no doubt that Legacy has been right for the Chen Chen family alone; or joining an existing multi-family office in family – particularly in financial terms. But, he argues, a family which a team worked on behalf of several families which had office is not for everyone. “If not managed carefully, a family placed financial assets within their custody. office can easily become bloated and expensive. Also, investment returns from family office mismanagement canFor the Chen family, a single family office provided control over their assets and a The family dedicated a lot of time to discussing the plans and, result in wealth destruction rather than wealth preservation, ultimately, decided to set up a single-family office, called particularly if you don’t have the best investment team.”more efficient approach to investment. And in the wake of the Asian financial crisis Legacy Advisors Ltd. “I could see the attractions of the multi- family office - the idea of being able to share costs across more He concludes that the most important issue is familyof 1997, it also showed that it could offer good performance. families, achieve more weight with more assets,” explains Mr. consensus. “If a family does not have or cannot maintain Chen. In the end, however, the family opted for a single-family consensus to work together as a family, or if the family office office, on the grounds that it would give them greater control idea is forced on family members by the patriarch or matriarchIn 1995, when James Chen joined the family business, Wahum “Like many other Asian families, we had become so focused on and that the professionals working for the office would always rather than through a consensual approach, it can be aGroup Holdings, he was on a mission. He wanted to transform improving the efficiency of the business that we weren’t paying be dedicated to the needs of the family. disaster. A family office is certainly not the solution for everythe way the family was looking after its wealth. Mr. Chen was enough attention to managing and preserving our wealth,” he wealthy family and perhaps only relevant for the relatively fewworried that if the family didn’t pay more attention to managing explains. “We had a very conservative, passive approach to The financial crisis that swept the Far East in 1997-98 offered ‘healthy’ families in each society.”its assets, their financial future could be at stake. investing, simply dividing up the pie among several different private confirmation that the family had taken the right decision in banks, with only casual oversight. The situation was very inefficient.” adopting the family office approach. While financial markets This section is based on a case study developed by Professor Randel Carlock at INSEAD. around the region took a battering, Mr. Chen calculated that Legacy Advisors’ risk-adjusted rate of return handsomely outperformed the returns that would have been yielded through the earlier, less efficient approach.26 27

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