Private banking is growing as a distinct discipline within Islamic finance. Both within the Islamic world, and among international banks, the need to provide Shariah-compliant offerings to high net worth individuals is going to become steadily more important.

Partly, this is a function of demographics: the rising wealth of the Muslim world. It is hard to put precise figures for the world’s 1.6 billion Muslim population, but Cap Gemini and Bank of America Merrill Lynch reported in their most recent World Wealth Report in June that the number of high net worth individuals in the Middle East stood at 400,000, representing a 10.4% increase during 2010. Between them they had combined wealth of US$1.7 trillion at the time of the survey, up 12.5% year on year.

“The Islamic world has experienced superior growth rates in terms of wealth generation, especially during the last two years,” says Stefan Leins, thematic research analyst at Credit Suisse. He notes that the largest part of the global Muslim community is in Asia, where wealth grew at an average of 5% a year from 2000 to 2009 before leaping 15% from 2010 to 2011. “Much of the Islamic world’s new wealth has been created by the emergence of a growing middle class in large parts of Asia and the Middle East. This leads us to the assumption that wealth generation in the Islamic world is not only superior but also sustainable.”

On top of that, Islamic banks themselves are becoming more sophisticated, and clearly see high net worth advice as a vital source of revenue, particularly as more and more mass market Muslims achieve greater wealth. In Malaysia, Islamic private banking has been a discrete field of finance for years, and it continues to grow. “Moving forward you will see a lot more momentum in Islamic private banking,” says Badlisyah Abdul Ghani, CEO of CIMB Islamic in Kuala Lumpur. And it’s not just because of demographics, but because of the sense that Islamic finance – tied as it is to real, tangible assets – is increasingly seen as resilient in an economic downturn. “Arising from the recent crisis, much of the wealth that used to be managed by conventional private bankers is now coming into the hands of Islamic private banks,” he says. “Islamic banks are now forced to come up with a framework that would be able to facilitate the needs of these high net worth individuals.” Because it is perceived as being more safe? “One of the reasons is that perception,” he says. “The other is centred on pure diversification of exposures, and who manages their funds. They want to be able to spread out a bit in terms of who is managing their wealth.”

CIMB has had a distinct Islamic private banking business for several years; at Maybank, executive vice president Choong Wai Hong says that “establishing an Islamic private bank brand is something we’re exploring right now.” For him, part of the prompt is the fact that Middle Eastern money is becoming increasingly prominent in Malaysia. “Some of these customers are more discerning in what they expect,” he says.

International banks, too, see private banking as an increasingly vital part of an Islamic offering. “It is an area which is getting to be very important,” says Wasim Saifi, global head of Islamic and consumer banking at Standard Chartered. “You’ve got customers who are quite sophisticated. Shariah compliance is an important need, but on top of that they need to balance it with the commercial aspects of that proposition. Unless and until you have a Shariah compliant range of products available, your appeal is not to the entire market.” He says it has become an especially important focus for Standard Chartered in the Middle East, particularly in Saudi Arabia, Qatar, Kuwait and parts of the UAE. “These are places where having a Shariah range of products is becoming a very important plus for a private bank.”

Leins at Credit Suisse says Islamic private banking has “absolutely” emerged as a new discipline. “Many global banks that are active in private banking, such as Credit Suisse, have started to structure a whole range of private banking services in a Shariah compliant way in order to meet Islamic clients’ demands.”

At Citibank, Ahmad Shahriman Mohd Shariff, Islamic banking head in Malaysia, adds: “A separate discipline is required if one considers all the additional obligations and considerations an Islamic investor would have with regards to his wealth.” These aren’t as straightforward as one would think: for example, Shariff points to zakat, a pillar of Islam you can roughly translate as philanthropy, which has quite specific rules for calculation that must be adhered to (see box). “While in the past, these needs were met by Islamic investors privately, there is an opportunity for Islamic financial institutions to offer commercial solutions that will help Islamic investors to meet these needs.”

Clearly, the available product suite to sell to Islamic HNW investors has improved considerably over the years, and continues to do so with every new sukuk. “The most popular instruments in Islamic investing would be the sukuks, especially in the MENA region and Malaysia,” says David Pinkerton, chief investment office of Falcon Private Bank, which is owned from the Middle East. “They have become fairly liquid, and provide investors with fixed income, which is very popular among Islamic HNWIs.” It is common for bankers to insist that Shariah compliance is not a constraint but an opportunity. “Restrictions imposed by the Shariah on investments that are available for Islamic investors should not be seen as a disadvantage,” says Shariff. “The financial crisis in 2008 has shown that there is wisdom in the restrictions imposed, and that Islamic investors who followed the restrictions saw their wealth protected during the crisis.” Shariff would like to see more product development in Shariah-compliant risk management tools, and broader wealth management solutions, but in terms of investment products, that is rarely raised as a problem these days.

But not everyone agrees with that assessment. John Sandwick, a Californian who spent much of his youth living in the Gulf before becoming a Swiss private banker tasked to bring in Arabian private clients, started his own advisory business, called Islamic Wealth & Asset Management, seven years ago in Geneva. He did so partly because his clients were asking for investments that were halal, yet in fact within the private bank many of the assets in their private banking accounts were actually haram, illegal under Shariah, because they were interest-bearing, which is prohibited.

To his mind, most of the process of asset management under Islam ought to be the same as conventional: you start with a client profile, evaluating risk appetite and investment objectives; then you create an investment strategy to fit, typically in an income, balanced or growth strategy; and then you go and buy the appropriate securities. Since it’s only the last of those processes that is any different in Islam, he set about building his approach to asset management the same way, and to do that, he decided he needed a comprehensive database of Shariah-compliant securities, or at least funds. “An asset manager has to examine all the possible securities in the investable universe,” he says. “If he doesn’t, then he is driving blind, and he is not doing his job.”

The first surprise he got was to learn that no such database existed, so with the help of some graduate students in the UK, he set about building one. The next surprise was that the resulting universe was small: 850 Islamic products. And when he filtered out funds that were too small, new, opaque, illiquid, or didn’t have a suitably robust fatwa to assert their Islamic compliance, that number shrank to 150. “It’s pathetic,” he says. “There are 66,000 suitable funds in the conventional universe.” Be that as it may, 150 has proven sufficient to build the sorts of growth, balanced and income portfolios he believes should be widely available for Islamic investors, and he says they have performed exceptionally well, not just in terms of returns but the various measures of the risk involved to get them. “While there are only really 10 fixed income funds to examine, and I would much prefer there to be 2,000, it so happens that 10 does the job. It’s an awful situation to have so few Islamic funds but we have reached the point where there are enough to achieve investment goals in a professional manner.”

Sandwick’s broader objection, though, is that if nobody else really has the database that he has, then how are they conducting asset management? “If you do not have full information on your investable universe, you cannot do asset management,” he says. “People tell me they do Islamic asset management. I say: no you don’t, you do random product sales. If you don’t have the entire universe to select from, I don’t know what you’re doing but it’s not asset management.”

Sandwick’s assertion rests on the assumption that other banks have not done the same level of research that he has, but nevertheless he has a point. There is a dearth of the sort of fund-of-fund or multimanager diversified investment products that are commonplace in the conventional mainstream. What one has instead, particularly from the international banks, is a slew of structured products underpinned, at some level, by derivatives. “Derivatives are the garbage of the professional asset management universe,” he says. “The Bill and Melinda Gates Foundation manages $36 billion. Go find me a single derivative position in there. Go to Calpers; there’s a modest amount, but only when it meets specific investment objectives. Professionals don’t buy this crap. Muslims are told it’s all they’ve got. It’s shameful.” Where, he asks, are the straightforward balanced portfolios? “If I go to [an international banker in the Middle East] and say: show me your conventional US dollar balanced portfolio, he’ll reach on his shelf and get something right away,” says Sandwick. “If I say: give me the same thing – back-tested, optimized, with all your global sorting and filtering – but with fatwa, he can’t do it.”

This touches on another point: private banking is often seen as a source of innovation in Islamic finance, in order to create equivalents to conventional world securities. It is impossible to spend more than an hour at an Islamic finance conference without hearing someone call for more and faster innovation, but a counter-argument runs that the real priority should be doing the simple things right.

On top of that, the differences in Shariah interpretation, particularly between Malaysia and the Gulf, make it difficult to think of a single investment universe that applies to the whole Islamic faith. “It’s a challenge everyone faces,” says Choong at Maybank. “When customers come from the Middle East, we have to be very sensitive about how the same principles of fatwa are interpreted there and here. It’s quite tricky.”

Beyond investment, Islamic private banking is undergoing the same transition as its conventional equivalent in Asia: a shift from pure investment advice to true wealth management. “The special needs of Islamic HNW investors have progressed from finding good Shariah compliant investment opportunities, to having a comprehensive Shariah-compliant wealth management solution,” says Shariff. That includes Shariah-compliant estate planning, takaful (insurance) and zakat (see box).

Pinkerton says that beyond selection of compliance securities, this largely mirrors the conventional world. “Shariah-compliant high net worth individuals have the same basic needs as the conventional investors in terms of capital preservation and income generation.”

But here, too, there are distinct differences. Choong at Maybank points to the concept of faraid, or wealth distribution; this governs the treatment of inheritance under Muslim law. “It is quite specifically governed by Islamic laws,” he says. “How you distribute, to whom – there is no conventional option that a customer can opt for. It is very clearly defined.” Maybank has built the capability within its trustee business to deal with this Islamically, and Choong thinks this will be “one of the anchors” of an Islamic private banking offering.

Whatever form it takes, private banking is going to continue to grow within Islamic finance, simply because every relevant factor is growing: Muslim world wealth; investor sophistication; acceptance of Islamic finance; and availability of investments. There is, quite simply, no reason for it to do anything but grow.

BOX: Islamic philanthropy

The Muslim principle of zakat requires believers to give a fixed proportion of their wealth to charity, although the proportion given – and what constitutes wealth – is widely debated. Additionally, Muslims are encouraged to make voluntary contributions, or sadaqat. Consequently philanthropy is an enormously important part of Islamic wealth management.

“The pattern of giving is not much different from the conventional world, but I think there is more giving among the Islamic high net worth than the conventional, because they see other benefits over and above what they get in this world,” says Badlisyah Abdul Ghani at CIMB Islamic. “Not necessarily the volume but the number of times that they do such giving is more, and they don’t announce it.”

Shariff at Citibank Malaysia agrees. “In general, from an Islamic perspective, philanthropy should be done discreetly with no publicity.” He says Islamic investors approach philanthropy first by calculating their zakat obligations, then adding voluntary donations. “In certain countries, Islamic investors have the option of fulfilling zakat obligations either privately or through a state appointed organization,” he says. “Regardless of the option chosen, an Islamic investor would require good advice on how to calculate the amount of zakat payable, and where possible to tie payment of zakat to tax planning as well.” This, he says, is an area where Islamic financial institutions need to do more to work out how they can provide appropriate solutions to investors.

The requirement for philanthropy has also found application in the fund management world. Last year Maybank’s Islamic banking arm created a fund through which parts of the returns go to a particular Shariah-approved charity; it represented an easy and compliant way to fulfill philanthropic duties.

Private wealth clients in Asia are facing intense market volatility and uncertainty for the second time in three years. The bad news is that almost all investment classes – equities both global and local, debt, property and commodities, everywhere from the US to Europe, Japan to China – face a deeply unclear and likely negative outlook. The good news is that compared to the global financial crisis of 2008, clients are much better prepared this time.

“There is a very marked contrast between what we’re seeing this time and what we went through in 2008 with private clients,” says Arjuna Mahendran, managing director and head of investment strategy at HSBC. “At the retail end of the market, they are going through the same experience as 2008: huge redemptions, forced selling, and a general state of panic. But high net worth clients are different. Because a lot of them used derivative instruments in 2008 and got burned, they learned their lessons and have deleveraged.” That leaves them less exposed this time, with more liquid investments and lower risk.”Most of them are looking at this as a guarded opportunity to pick things up fairly cheaply.”

Alongside the ructions of today’s market, there are other, longer-term trends at work in Asia private banking. Many of them stem from a key theme in Asia: the first generation who have built wealth approaching the end of their working lives and pondering how, or if, to pass the management of that wealth to the next generation. There are numerous knock-on effects of this trend, discussed in more detail in this report. Among them are an increasing professionalism in the way people manage wealth: corporate structures, family offices, more diversified portfolios, and a greater use of financial advice.

To see the report as it ran in the magazine, click here: Forbes Wealth Management v2

Another is an increased interest in estate planning, from straightforward wills and probate to training younger generations about wealth management – even including children. And a third is a more hands-on approach to philanthropy, often among newly wealthy individuals who have first-hand experience, and a clear memory, of genuine poverty.

One thing’s for sure: Asia is increasingly the engine of wealth generation, and correspondingly an important focus for wealth management. In October, Merrill Lynch Global Wealth Management and Cap Gemini released their closely-watched Asia Pacific Wealth Report, which found that Asia had overtaken Europe as the world’s second biggest market of high net worth individuals, measured either by population or combined wealth; on either measure, it’s only a matter of time before it overtakes North America for the top spot. One week later, the Credit Suisse Research Institute released its Global Wealth Report, finding that Asia Pacific accounts for 36% of all global wealth creation since 2000, and 54% since January 2010.

In this changing environment, there is a need for tailored, individual wealth management advice that does more than push a product. “The first question should not be: do you need life insurance, or a trust structure,” says Hugues Delcourt, CEO for private banking for Asia at ABN Amro. “It should be: what are your goals, your objectives, your constraints? What do you want to achieve? Then we can start talking about solutions.”

PART 1: INVESTMENT

Older and wiser, Asian private banking clients are approaching today’s market volatility with caution. But bankers say there is still a willingness to engage in markets and take a long-term view.

“Those with a strong opinion on a company or sector are seeing an opportunity to enter, in a gradual fashion,” says Arjuna Mahendran at HSBC. “But they don’t throw all their eggs in one basket.”

It’s largely a safety first environment. “With falling macro momentum and an expectation of choppy markets, UBS has recommended clients to position more defensively for quite some time,” says Alexander Kobler, Head of Investment Products & Services, Asia Pacific, UBS Wealth Management. “High dividend and high yield stocks are an ideal way to gain defensive equity exposure, with the security of a stable income stream in demand from investors right now.” He favours rebalancing cyclical exposure towards defensive sectors such as telecoms, healthcare and consumer staples, and focusing on companies with stable earnings, solid balance sheets and high dividends. “In addition, hedge funds can benefit in this environment,” he adds. “Given the current market volatility as well as the speed and magnitude of directional changes, we prefer trading strategies within the hedge funds space.” It is not a universal view: some are tired of hedge funds failing to deliver.

One particular challenge in this environment is working out where the safe havens are for investment. In some ways, the answer is simple. “The best safe haven is to be properly diversified,” says Hugues Delcourt at ABN Amro. “Yes, have a little bit of your wealth in gold, or treasury notes, but putting everything there? That would not be very wise. In these difficult times we ought to come back to the real fundamentals: risk profile, investment horizons and diversification.”

But it’s also arguable that safe havens have never been harder to find. “Safety is very costly nowadays, be it in terms of close to zero returns or high costs of protection strategies,” notes Kobler.

Throughout this year, the answer has typically been gold, but even that fell dramatically in October, albeit from all time highs. “Our advice is that gold was bound to have a bit of a correction, because it was becoming exponential in terms of price appreciation in the last few months,” says Mahendran. “But our basic advice is to start accumulating below US$1500 for another burst upwards. Gold remains in demand as central banks are debasing their currencies and facing inflation.”

Some felt gold had simply become too highly valued to be a sensible investment anyway. Speaking just before the major price decline, Lee Boon Keng of Julius Baer said gold was “somewhat overplayed” as a safe haven. “Gold and other precious metals are no longer safe havens but speculated commodities. Would I put gold as an important part of my portfolio right now? At these prices [$1800 at the time of the interview] probably not.”

But it does have good fundamentals. “Right now, strategic investors are still encouraged to build up exposure to gold as a means of diversification and portfolio insurance,” Kobler says. “Compared to the Swiss franc and Japanese yen, gold does not have a central bank that tries to prevent further appreciation. Thus, the metal can be viewed as the purest-play hedge against prevailing sovereign and currency risks.” Corrections in the gold price simply provide good opportunities to enter, he says.

In terms of currencies, two in Asia stand out: the Singapore dollar and the Chinese RMB. The Singapore dollar is expected to benefit from the fact that the Swiss franc, the traditional safe haven currency, has now been capped against the euro. “We are telling our clients that amidst all these uncertainties, we need to focus on the things that are the least uncertain,” says Lee. “One is that after the SNB fixed the Swiss franc, we will see the establishment of a replacement as a safe haven currency, and that is likely to be the Singapore dollar. The make-up of the economy is fairly similar, both have the rule of law, they are key financial centres and have similarly high governance standards. That is going to make the Singapore dollar a very attractive currency to have over the course of the next couple of years.” What to do with the Singapore dollars is a different question: Lee advises clients to look at high yielding Singapore stocks, including real estate investment trusts (REITs).

The RMB is a different story. While still not fully convertible, it is becoming an increasingly internationalised currency, with the so-called dim sum bond market thriving (with a few dips and glitches) in Hong Kong, and RMB bank accounts appearing both there and increasingly in Singapore. “Our clients have been building positions in RMB,” says Mahendran. Lee at Julius Baer argues that problems in Europe and the US will prompt China to increase the speed of the internationalization of the currency, which ought to mean it will appreciate steadily; over time, as investment products for offshore RMB develop, they are likely to prove extremely popular with overseas clients. Julius Baer itself is launching a China equity fund, and has combined with Singapore’s DBS to create a product investing in dim sum bonds. And a host of mutual funds for offshore RMB have sprung up in the last 18 months, including big asset management names such as HSBC, UBS, Schroders, Barclays Capital, Singapore’s Fullerton Asset Management, and – soon – BlackRock.

One problem with assessing a client’s risk tolerance is that it’s one thing to explain a possible decline, another to experience it. “Risk tolerance is not a discussion that takes 20 minutes and then you fill out the forms,” says Delcourt. “It’s very different to say to a client: ‘can you take a 20% decrease in your portfolio?’ and then the decrease actually happening. Nobody likes losing money, but when you are confronted with the reality of losing 20% of your portfolio, you may realise there were a few things you were hoping to do and can’t do anymore.”A proper understanding of a client’s true risk appetite is key.

That said, the dangers for private wealth clients do not seem so acute this time. “2008 basically pointed out the perils of leverage and derivatives: those were considered the two most toxic elements,” says Mahendran. “So everything else is considered relatively safe.” Within that, clearly emerging markets appear to have the better economic prospects, so advisers tend to suggest allocations to Asia on both the debt and equity side. While Asian equities tend to be hit with those in the developed world – unfair as that might seem – Asian debt has remained more resilient. “Asian debt in general is managing this volatility quite well,” says Mahendran. “Spreads haven’t widened as much as in 2008.”

Hedge funds, he says, are out of favour since they have not performed well; long-only funds are fine, but clients have a greater need to understand exactly how they operate. “The client wants to understand intrinsically what a long only fund is investing in, rather than plunging in.”

But no matter how bad the markets, investors have to do something. “You can’t remain uninvested when Asia is running at historically high levels of inflation,” says Mahendran. “In Singapore inflation is running at 9.5%. Clients realise they can’t just keep their money in cash; they’ve got to make their assets work for them to keep pace with inflation so they don’t lose the value of their wealth in real terms.”

And as Kobler says: “The time will come over the next months where the higher risks will also be rewarded with higher returns.” Timing is everything.

PART 2: FAMILY OFFICE/ESTATE PLANNING SECTION

In recent years many banks, such as UBS, Credit Suisse and Citi, have launched dedicated family office business units; others, whether or not they have separate units, report an increase in the amount of business in this segment. It’s no surprise: family wealth drives Asia.

In October Credit Suisse launched a comprehensive study of family-owned companies (not family office wealth management, but the corporate growth at a family level that drives the trend). Everyone knows the heavyweights – the Mittals, the Tatas, the Samsungs, the members of Li Ka-Shing’s family – but in fact across Asia’s 10 major markets there are more than 3,500 family-owned companies with a market capitalization of more than $50 million. 1,279 of them have a market cap of greater than $500 million. All told, family businesses account for 34% of Asian nominal GDP, and 32% of market capitalization, but in some markets the figure is far higher: 83.2% of the Philippines market cap, for example, with Singapore and South Korea both over 50% too.

“An interesting difference to Europe is that these are businesses that are relatively young,” says Nanette Hechler-Fayd’herbe, head of global financial markets research for private banking at Credit Suisse. “38% of them were listed after 2000. Many of them are first-generation led, whereas in Europe there have usually been several generations. They are at the early stage of their life cycle compared to their peers in Europe.” That in turn means more family office investment structures. “As family businesses grow and create wealth for the family, there is a movement towards a more professional investment approach as well. It goes hand in hand.”

Naturally, this is all linked to the succession theme too. “Succession from one generation to the next will accelerate over the next decade,” says Agnes Au-yeung, Head of Family Wealth Advisory, HSBC Private Bank. “The new generation of family offices will have to adapt to the needs and values of the baby-boomer entrepreneurs, who cherish new ideas and values, and who are concerned about continuity and leaving a legacy.”

Amy Lo, Head of Ultra High Net Worth for Asia Pacific at UBS Wealth Management, agrees. “One of the main reasons for this change [growing interest in family offices] is generational transition,” she says. “While we see many family businesses being successfully handed over to the younger generation, some families decide to divest and continue the legacy in the form of investments of philanthropic activities, transforming from a business family into a wealth management family, while staying entrepreneurial and continuing to look for new opportunities.”

But it’s not an area where many people appear satisfied with what they’ve done. A recent UBS Family Advisory study surveyed 120 ultra high net worth families globally, finding that 76% were concerned about protecting their wealth, but only 25% considered the way they approached the issue to be sufficient. “32% said that lack of know-how was the biggest show-stopper in putting a structured approach to family wealth protection in place,” says Lo. Good estate planning, she says, should involve not just the senior generation but junior ones too, “in a dialogue about the core values of the family and what the family wants to achieve in the long run. Many families make the mistake of limiting their efforts to the legal structuring, while missing the point of the true reason of such a structure. Successful legacy building involves a clear long term family strategy and thought through governance system,” which might include the drafting of a family constitution or the creation of a family council, she says.

A big part of family office advice is structural. “For those that want to get started, we help them with the structure and definition of governance,” says Marcel Kreis, head of private banking for Asia Pacific at Credit Suisse. “That is crucial to the success of the operation. We discuss issues of legacy and asset protection, help them with the formulation of investment policy if that’s required, and provide any financial services they need.” Kreis’s colleague Hans-Ulrich Meister, CEO for private banking globally, adds: “All over the world, with family offices, you have to push them on succession. If succession is not timely you can lose everything you built up in the last 30 to 40 years. It is such an important part, especially in companies who might need years preparing for a successful transition.”

But investment advice is naturally crucial too. Banks report that with more formal structures, risk management becomes more sophisticated and time horizons for investment tend to grow – perhaps allowing people to invest in illiquid asset classes like infrastructure, which improve diversification. That said, many family offices did lose a lot in the financial crisis from illiquid alternative investments. “Form these lessons many families have started to define risk buckets,” says Au-Yeung. “They may set aside a bucket as a nest-egg, or the start-over-again fund, while managing another bucket with a higher risk level or a thematic focus so that that combined buckets meet the aggregate needs of the family.”

For banks, this is growing business, as more and more institutions broaden from a traditional focus on investment management to a far more rounded sense of partnership with family wealth. “I look at the relationship manager as being a conductor, being able to play with a number of musicians,” says Hugues Delcourt at ABN Amro. “An orchestra without a conductor plays a cacophony. A conductor without musicians doesn’t entertain his audience. I believe in a private bank that is a partner to our clients: not only to advise on whether an investment should or should not be made, but to structure wealth in a way to achieve their objectives.

“The private banking model of the recent past in Asia was much more transaction-oriented,” he adds. “It still is, to a large extent. We ought to move to a more client service approach, and wealth structuring is fundamental part of that advisory scope we need to provide.”

Family office structures can take a variety of forms, “ranging from a trusted assistant to a virtual family office managed by an ex-senior banker, and in more mature cases to an entity with an independent legal status and staffed by well-qualified professionals,” says Au-Yeung. Such professionals can be in high demand: Credit Suisse’s most significant private banking hire this year was Bernard Fung, who formerly managed the wealth of the UK’s Sainsbury family.

Lo at UBS distinguishes three separate groups. There are ultra high-net worth families in Hong Kong and Singapore, who are sophisticated and have reached a natural point where it makes sense to separate business interests from financial assets; they use investment specialists who coordinate sourcing and screening of investment opportunities. Then there are clients in China and India. “They are quickly picking up in terms of professionalizing their wealth management and are very active in enhancing their knowledge as well as seeking ways of adapting the western family office concept to their business driven, high growth environment,” she says. “One of the main challenges for UHNW families in these countries is the fact that most of the family wealth is tied to a family business. In such a situation, the first critical step in creating a family office usually lies in diversifying this concentration risk and adopting an asset allocation approach to managing their wealth for the long term.” And the third group is European family offices establishing a presence in Asia in order to be in a better position to gain suitable exposure to the Asian growth story, typically through a Hong Kong or Singapore hub.

It can be a tricky market to service. “In our experience, single-family office clients require a much higher level of service and attention,” says Au-Yeung; HSBC services them through its HSBC Private Wealth Solutions business, which manages over US$100 billion of these assets worldwide. “Family members can be quite hands-on, especially with investment decisions.” There is perhaps a suspicion that needs to be addressed too. “Our advisers need to continually validate our objectivity to client families. To assure their independence, our advisers are not incentivised by product sales, nor measured by asset gathering.” And advice has to be customised – it’s not a one-size-fits-all sort of market. Lo says: “Due to the highly personal nature of the work, we have found that most families prefer to set up their own, bespoke, family office with a combination of their own trusted employees (often having served the family business for many years) and external experts with specialist skills,” including lawyers, accountants and tax advisors as well as investment professionals.

That said, it’s still an industry in its infancy. “The family office is a relatively new concept, with many still studying, comparing, developing and evolving their models,” says Au-yeung, who adds that family offices in Asia typically follow a US and European-style pattern. She says more and more families are using this approach, but says it is unclear how widespread they will become. “The definition is vague, and family offices tend to be very private,” she says. “We expect families to lean towards single-family offices as they prefer their affairs to be managed internally and separately from other wealthy families.”

Another theme that often comes from family wealth management is the impact on the family itself. “As an administrative centre supporting the family’s governance structure, the family office provides a unique platform to improve and promote communication and harmony among family members.” Perhaps this is one reason that multi-family office structures are relatively rare in Asia. But they do have some merit. “Rising costs, a difficult investment climate, and a desire for a breadth of services tend to drive families to partner with larger multi-family offices,” says Au-Yeung. Lo says multi-family offices serve the needs of, at most, six or seven families; this sort of model is more common than third party-owned commercial service providers branded as family offices (multi client family offices, as Lo calls them), which can serve as many as 50 families – a model that is common in the United States.

Above all, though, Asia is characterised by a stronger sense of possibility, and of momentum in new wealth generation. Delcourt summarizes it like this. “Europe has a tendency to look at tomorrow as a zone of risk. Asia has a tendency to look at tomorrow as a zone of opportunity.”

PART 3: PHILANTHROPY

Like family office structures, philanthropy is professionalising in Asia. “There are increased expectations of transparency and accountability and evidence of social impact,” says Cynthia D’anjou-Brown, senior philanthropy and governance advisor, HSBC Private Bank, which manages more than US$1 billion in assets and handled US$50 million of donations on behalf of clients in 2010. She says the definition of what constitutes philanthropy is broadening, from informal charity to structured grant-making, to investments with social value. The young generation is having an impact here. “There appears to be a high engagement of donors at a younger age and a trend towards working with family members,” she says.

Philanthropy in Asia differs from the rest of the world in some crucial ways. One is the dominance of education in giving programs. A recent study by UBS and INSEAD found that education is likely to account for 35% of giving in Asia in 2011; the next biggest cause – poverty alleviation – accounts for just 12%. “These are strong cultural roots that support education, tied to Confucian, Hindu and other Asian traditions,” says Jenny Santi at UBS Philanthropy Services. And many who have risen from poverty recall either their lack of education or the gift of being the first in their family to receive it. “One of the most deep seated reflections they have is that they were deprived of a high quality education, so want to give back in that sector; or they recall that the only reason they were successful was because somebody gave them a handout and made a difference in their lives,” she says.

Other banks confirm this: D’anjou-Brown says nearly half of the donations HSBC administered on behalf of charitable trusts and foundations in Hong Kong over the period from July 2010 to June 2011 were allocated to educational projects, compared to one fifth for social services and one tenth to health and medical services. Few philanthropists in Asia donate to environment or conservation themes, animal protection or culture.

One can argue that the Asian cultural emphasis on family is also relevant to the way people give, and distinguishes it from more individualist approaches in North America. “In Asia the older dominant religions, the social structure of the clan, and collectivism breed a culture of caring for the large extended family and community,” says D’anjou-Brown.

The UBS study found that giving was chiefly domestic, although D’anjou-Brown says there is a trend towards giving internationally – particularly what she calls “diaspora giving”. In particular she sees a growth in donations to mainland China.

As with estate planning, much of the important advice given around philanthropy is structural: choosing the legal entity for giving and ensuring it is properly set up in terms of succession, flexibility, tax advantages, liability, privacy and compliance. “A charitable trust or foundation managed by a professional or corporation trustee is an excellent choice because it provides better succession arrangement and need not rely solely on individual directors as in the case of a company,” says D’anjou-Brown. It is vital to be clear on what a donor wants to achieve, and how to measure it. Measurable results are a renewed focus in Asian giving.

The rise of governance also has an impact on philanthropy. CSR Asia says that 87% of family businesses participate in CSR activities, though only 53% have a policy and 39% have clear CSR goals and targets.

Many banks report an increasing insistence on direct involvement in charitable initiatives. “Rather than ‘I donate so much to such and such an organization’, people want to be able to help advise on a  philanthropic project, and to get involved,” says Delcourt. “It’s not just about a financial return, but for people to get their own return – to see that what they do has a positive influence, and a multiplying factor. We continue to support a number of institutions which are applying the private equity way of thinking to philanthropy.”

One of the most striking patterns in Asian private banking is the number of clients who are among the first generation of their family to achieve wealth, and are wrestling with issues about passing it on to the next. One of the areas where this first-to-second theme is being most clearly expressed is in philanthropy.

“Ultra high net worth client families consider inter-generational transfer of wealth to include creating a philanthropic legacy: something the family founders will be remembered by, or to continue their lifetime charitable interests,” says Tee Fong Seng, vice chairman and head of ultra high net worth private banking for Asia Pacific at Credit Suisse. “Our clients in Asia increasingly tell us they want to involve their next generation in their philanthropic activities.”

There are lots of drivers to this trend. One is the fact that the first people to achieve wealth often have a very clear recollection of what it was like to have none – to be poor, in fact. “Given the massive wealth transformation we have seen in Asia, we notice many wealthy individuals grew up with very little,” says Jenny Santi at UBS Philanthropy Services. This creates a moral sense of a need to give back. There’s also the necessity of getting younger people involved to continue existing programmes. “Continuity of your philanthropy may require the engagement of the next generation, and in doing so secure a place for them in the family enterprise,” says Cynthia D’Anjou-Brown at HSBC Family Office Services, part of HSBC Private Bank. “This is especially potent when family members are not part of the family business but wish to make a contribution in other areas of family governance. Preparing everyone to actively participate often requires coaching and education.”

Alongside that, patriarchs also tend to fear that the next generation – which has grown up in prosperity – will have no appreciation of what it was like to struggle, and this also informs a need both to give and to seek the involvement of younger family members.

Interestingly, though, bankers report that younger generations are often more keen to give, and structurally better at it. This coincidence of interest also tends to have a knock-on benefit: binding the family together. “The next generation themselves are also more willing to lead the charitable organization and be actively involved as they tend to be more conscious and aware of the need and desire to give back to society,” says Tee. In Tee’s experience the older generation has been more focused on building the wealth and has had limited time for philanthropy along the way. But they also like the idea of “involving the different members of their family to work together and come together as a family to pursue a common cause, and in doing so, to keep the family together and in harmony.”

A shift to second generation involvement in philanthropy can also coincide with a markedly more ambitious approach to governance. Michael Troth, who is responsible for trusts and estate planning at Citi Private Bank, says charitable giving by a first wealthy generation tends to be personal and not necessarily well organized. “The next generation is looking to institutionalize their charitable giving,” he says, focusing on governance and running their philanthropy “more like a business”.

Tee agrees. “The next generation are prepared to sit on the board and provide leadership and support to a foundation or trust, and are also keen to make fieldtrips to visit the projects that they are supporting,” he says. This is something charities themselves like to see: it helps the longevity of a project as well as giving a personal connection to the donation.

“In Asia, the concept of institutionalizing charity-giving is still very new,” Tee adds. “So while there are many wealthy families in the region, few foundations exist. With the second and third generation having studied in the West and observing what is happening there in relation to giving, wealthy individuals and families in Asia are starting to formalize their giving to charity.” He cites a report saying there were 643 private foundations in China by the end of 2008, and that number is growing at a rate of 30% to 40% each year.

So what structural issues should people be considering when giving wealth? “The first thing is, what do you want to achieve?” asks Troth. “What is the timeframe you are looking at – is it something that should survive you? Is the project totally dependent on you, and if so, what are your succession plans?” Other issues include developing a consistent funding plan. “The easy part is putting the structure together from a legal and tax perspective.”

D’Anjou-Brown agrees. “To start, it is important for those wishing to engage in philanthropy to have a clear idea of what they wish to achieve,” she says. “For without this clarity, the chances are greater for drifting away from rather than drifting towards or – better yet – driving their philanthropic agenda.” She says research is important, as well as awareness of the available tools. “One also has to consider that a mix of grant-making styles – from pure charity to venture philanthropy – have value in particular situations and resonate with different donors.”

There are distinct differences in the ways that people give in Asia compared to the rest of the world. One of them is the motivation of tax. “In the west and the US in particular, there are potentially tax breaks for giving to charity, often on income and estate taxes,” says Troth. “In Asia, taxation is not really a big motivation for giving.”

The other is where the wealth goes. According to a new study by INSEAD and UBS, education is the big differentiator in Asian giving: the survey expects it to account for 35% of giving in Asia in 2011. The next biggest cause – poverty alleviation – accounts for just 12%, followed by health with 9% and disaster relief 5%.

Why is that? Santi at UBS says it is partly to do with cultural traditions. “There are strong cultural roots that support education, tied to Confucian, Hindu and other Asian traditions,” she says. Additionally, those that rose from poverty often recall a lack of education, or being the first in their family to receive it, having a particular resonance as they look to give back to society. “One of the most deep seated reflections they have is that they were deprived of a high quality education, so want to give back in that sector; or they recall that the only reason they were successful was because somebody gave them a handout and made a difference in their lives,” says Santi.

In essence, as Tee puts it: “Within Asian communities, education has always been viewed as the poor man’s ticket out of poverty.”

There are other reasons too. Education is an area that lends itself very well to this trend for improved governance. If you’ve paid for a school to be built, it’s not that hard to discover if it’s happened: you can go and look at it. Education-related giving is relatively transparent and easily measured. INSEAD – itself a top place of study – found that Asian educational institutions are often better organized than other socially oriented institutions. It quotes Chew Kheng Chuan, the chief university advancement officer at Nanyang Technological University in Singapore, as describing universities as “leading the professionalization of philanthropic funds solicitation across Asia.”

At the other end, religious giving occupies a much lower proportion of philanthropy in Asia as in the west. Americans, in particular, are much more likely to donate to their local church than people in Asia are.

One other finding of the study was that giving is overwhelmingly domestic. Only 23% of giving from Hong Kong crosses a border, 16% from Malaysia, 6% from India and 3% from the Philippines (Singaporeans give the most across borders, at 33%, probably reflecting the relatively low level of neediness among a small and wealth domestic population).

That said, individual bankers say that cross-border giving is increasing – which gives those bankers more of a role to play. “There is a lot of cross-border giving,” says Troth. “Some of our families are also significant shareholders of major companies; they generally have some kind of foundation which deals with their domestic charitable giving. What they’re coming to us for is to help them structure their international charity giving. They tend to take care of their own in-country philanthropy.”

Wherever the money goes, bankers agree there is a shift in the expectations of what that wealth will then do. “Patterns of Asian giving are changing,” says Tee. “Unlike the traditional philanthropists of old, there is a new era of change makers who shun armchair philanthropy and prefer to roll up their sleeves in engaged giving.  As the worlds of charity and business converge, the nouveau riche seemingly prefer to apply their resources, ideas and networks, and enter collaborative partnerships to maximize the desired social transformations.” This is reflected in different models. “Hence, rather than large sum one-time direct donations, there is a shift towards a philanthropic model based on targeted giving and sustainable outcomes. Today, more philanthropists are keen to embrace impact driven philanthropy and hence a greater interest in microfinance, venture philanthropy, social businesses and responsible investments.”

Troth says part of governance is knowing exactly where your money is going and what it is achieving: that might mean requesting surveyor reports, architect reports and staggering payments, particularly when building a school or hospital, for example. “Some families may even go and visit the sites, sit down with the executives who run the organizations, and want to become actively involved. There is a huge difference between this type of philanthropy and so-called cheque book philanthropy.”

So where next? Probably more of the same: more sophistication and structure around giving; continuing interest in education; and perhaps more cross-border donation. But above all, Asia’s rich donors have a simple message: they want their money to achieve more.

Asian private wealth clients had only just started trusting the markets again. After many lost as much as half of their wealth in the global financial crisis, the years since 2009 have been characterised by steady recovery and accumulation. But the further we have got into 2011, the more it has started to resemble the bad old days of the crisis: macroeconomic problems, both in the US and Europe; capital moving on rumour and panic; and problems with debt, only this time at a sovereign rather than a banking level.

David Pinkerton, chief investment officer of Falcon Private Bank, describes global capital markets as characterised by five Ds: demographics, debt, denial, deflation and devaluation. Demographics refers to “a sharpening of the age pyramid: this huge bubble of people who drove demand in the developed markets but who are now entering the twilight of their lives, not spending as much, and are funding their lifestyle with a reduction of equity exposure,” as has already affected Japan. The other Ds – depressingly, to add another – are obvious enough, and they’re not going away any time soon. “These are the conditions in the developed markets from a long term trend standpoint,’ he says. “You are going to have periods where optimism give people some hope and lead to bear market rallies, but basically statistics are showing us that the growth isn’t there despite all these QE2 and 3 propositions.”

One obvious corollary of this is that emerging markets offer the reverse situation: youthful population, growth, demand, no debt. “We see there to be significant opportunities for growth in many of these countries,” says Pinkerton. “But the big challenge asset allocators face is whether these countries will succeed and grow in an environment where their traditional end customer – developed markets – shows declining appetite for their goods.”

It’s grim all right, and no surprise to see investors still heading for the exits. “There’s generally a defensive tendency,” says Pinkerton. “It depends on the character of the investor, but almost by definition someone that has hired a private banker has wealth to protect. So there’s an element of preserving purchasing power in the face of these devaluation forces – this is what’s been driving gold, real estate and other hard assets.” There are surely opportunities out there, but many clients have already been hurt by the phenomenon of catching falling knives by buying into declining markets in 2008, and are less likely to do so again. “If there are clients with opportunistic attitudes, it’s very short term oriented,” says Pinkerton. “I liken the mentality to looting on a battleground. There are opportunities to go out and grab financial assets that are oversold or cheap, but when you run across the battlefield to grab something you risk getting shot.”

How are private clients responding? “Most clients are extremely defensive,” says Lee Boon Keng, head of the investment solutions group in Singapore for Bank Julius Baer. “What we are telling our clients is the following: amidst all these uncertainties and volatility, what we need to focus on are the things that are the least uncertain.”

What does that mean? Well, sitting in Singapore, there may be one windfall just around the corner. “After the SNB [Swiss National Bank, Switzerland’s central bank] fixed the Swiss franc against the euro, we will probably see two things: one, the new establishment of a replacement for the Swiss franc as a safe haven currency. And two, that this safe haven currency is likely to be Singapore dollar. The make-up of the economy is extremely similar: the rule of law, they are both key financial centres, they have very good governance. And that is going to make the Singapore dollar a very attractive currency to have over the course of the next couple of years.”

If that’s true then, as Lee says, “once you have the Singapore dollars, the question becomes what you do with them.” He is advising clients to put money into high yielding stocks in Singapore, “particularly those that are stable and will be able to give you a substantial pick-up above putting the money in deposits. Then you get the stability in the Singapore dollar, with a high chance it will appreciate; and the dividend yield from stable companies like Starhub and the REITs.”

The other thing Lee sees as least uncertain is China. In his view, problems in Europe and the US are going to speed up a process already in train: the internationalization of the RMB. “The RMB is going to appreciate steadily and the Chinese will internationalize it in a much speedier fashion than the market has been pricing in.” Already, in August, China has increased the scope of Chinese issuers who can access the offshore RMB markets to all corporates; at the same time, it has announced it will allow the remittance of proceeds of offshore issues back onto the mainland in the form of foreign direct investment. That ought to mean an increased supply both from Chinese companies and international issuers, which ought to alleviate some of the supply-demand imbalance that has characterized the dim sum market to date. “It opens greater avenues for you to get involved in that space,” Lee says. “The appreciation of the RMB alone is going to offer you a significant pick-up.”

Lee is generally a fan of the whole China story, equities included. “I’m telling clients that if you look at the Chinese equity market, we are at valuations last seen in 2005 – well below valuations in 2008. Why are you waiting for that minus 10 to 15% potential drop before you dip yourself into the water? We may have bottomed out already.” Julius Baer has QFII quota and is launching a fund to invest in Chinese equities, combining A-shares (those traded in RMB on domestic exchanges) and H-shares (Chinese companies listed in Hong Kong and traded in Hong Kong dollars); on the dim sum side it works with DBS on a fund to get access to bonds. “There is a megatrend in the China story, and it is not just about China’s fantastic growth but also what is happening in the US and Europe,” Lee says. “It’s a congruence of timing and events.”

Running to Asian currencies and emerging stocks and bonds as safe havens? Are we changing our views of what constitutes a defensive asset? “It’s a question we think about all the time,” says Pinkerton. “At the end of the day, the US is probably the best house in a bad neighbourhood. The US is downgraded; Italy, Spain, Portugal and Japan have massive debt levels; which country, at the margin, has the better demographic profile, and the better diversification from a standpoint of industry? It’s still the US. That’s continuing to cause people to run into the safety and liquidity of the US treasury.”

While the investment environment is clearly challenging, most private wealth investors are at least in better shape than last time around. “I would say most clients are much better positioned this time,” says Haren Shah, investment strategist for Asia Pacific at Citi Private Bank. “You don’t get a sense of panic compared to the global crisis: that was more of a black swan event, with people off guard; nobody expected it to be as bad as it was. This is more like a slow train wreck.” While that might seem to be damning with faint praise, there has at least been plenty of warning this time: Greek debt problems have been evident for about two years now. Correspondingly, Shah says most clients are not as geared as they were and are much more attuned to risk management. “We are telling clients risk levels are definitely higher and they’ve got to be well diversified,” says Shah. “Get away from high beta to low beta. Stay in bonds, but move towards high grade from high yield. In equities, you need cheap markets – we think Japan is cheap – but be very selective in what you buy. Go for stocks with high dividends, great balance sheets, and go for bigger caps, not smaller companies. In this environment you want things that are solid.” In summary: “What we are trying to say is, go after quality.”

At HSBC, Arjuna Mahendran, head of investment strategy for Asia at HSBC Private Bank, says investors “should aim to put their liquid assets to work to fetch a yield ahead of inflation, which is running above 5% in Hong Kong and Singapore.” He says there are “numerous opportunities in high-yield investments” and says that defensive equities with good yields, and investment grade bonds in Asia and the US, are HSBC’s preferences today. It has overweights on Indonesia, Malaysia and Thailand now, and expects Australia and Canada to offer interesting opportunities next year. Like Lee, Mahendra also says investors are looking for exposure to the offshore RMB market.

One particular facet of the latest round of market volatility is the pronounced downward pressure on three of the key world currencies – dollar, euro and sterling – while the fourth, the yen, has done the complete opposite (much to the surprise of the Japanese, who tend to react with great surprise to any idea that their 200% debt-to-GDP laden, earthquake-recovering, politically directionless economy could be considered a safe haven in the world). At the same time, Asian currencies, and anything linked to a commodity economy, have all pushed onwards and upwards. HSBC’s Mahendran says that playing the currency depends on where the client is: if already heavily skewed to dollars, euros or sterling, “we think it would be opportune and appropriate now to consider a diversification into yen and Canadian dollars to reduce volatility,” but for clients with assets mainly in Asian currencies, “timing of conversion is crucial as Asian currencies in general are expected to appreciate.”

Currency is now, says Pinkerton, “the most important thing in asset allocation. If you were invested in the Swiss franc for safety, you lost 10% of that safety protection yesterday relative to the US dollar [the interview took place the day after the SNB intervention]. You have to put currency exposure into the equation whenever you buy equities or fixed income. Traditional instruments of wealth storage, safety and protection have been debased and devalued. It’s why gold is in so much demand.”

The world’s investors are clearly still in love with gold as a safe haven; it is at record highs. But private bankers are generally not encouraging their clients to put more money there. “Gold and precious metals as a safe haven are somewhat overplayed,” says Lee. “They have become not safe havens but speculated commodities. At these levels they don’t feel like safe haven assets anymore.”If clients want to trade gold or other metals, he suggests using stop losses and trading only with a short term view. “Would I put gold as an important part of my portfolio right now? At this price, probably not.”

The message that comes through across the board is one of caution and uncertainty. “There are plenty of opportunities,” says Pinkerton – he names hard assets, exposure to frontier markets, and private equity as examples – “but the overall environment is one of danger. It’s one that really no longer supports the old fashioned asset allocation of: buy equities and hold them for 10 years and you’ll make more than you make in bonds. That premise has been disproven in the US and Japan.”

A difficult time to give the right advice, to a client base that remembers being mis-advised not long ago. It is a time that prompts fabulous mixed metaphors from a troubled private banking community. “We kicked the can down the road, but it came home to roost again,” says one banker. There’s just no arguing with that.

Last week Dipak Jain, Dean of Singapore’s blue chip business school INSEAD, told an audience a little about his childhood in India’s northeastern Assam province. His father was blind, he said; his mother never went to school. Yet he and his four siblings have all done well for themselves – in Jain’s case, well enough to have been dean not only of INSEAD but Kellogg School of Management at Northwestern University. The opportunity to do so, he said, came chiefly from the fact that he was able to receive an education.

It’s a common story in Asia: education is the great leveller, the opportunity for one generation to transcend its predecessor in terms of wealth and influence. So it’s perhaps not surprising to find that education dominates philanthropy in Asia to a far greater degree than elsewhere in the world.

According to a new study by INSEAD and UBS, education is expected to account for 35% of giving in Asia in 2011. The next biggest cause – poverty alleviation – accounts for just 12%, followed by health with 9% and disaster relief 5%.

“It is hands down the most supported cause in Asia,” says Jenny Santi from UBS Philanthropy Services. “There are strong cultural roots that support education, tied to Confucian, Hindu and other Asian traditions.” But more than that, it perhaps reflects a sense of what some people feel they missed, or were the first to receive. “Given the massive wealth transformation we have seen in Asia, we notice many wealthy individuals grew up with very little,” she says. “One of the most deep seated reflections they have is that they were deprived of a high quality education, so want to give back in that sector; or they recall that the only reason they were successful was because somebody gave them a handout and made a difference in their lives.”

In this respect, the popularity of education reflects the generational transition so widely talked about in Asian private banking. As the UBS-INSEAD report points out, for most Asians the rise from poverty to wealth has a genealogy of one or two generations, meaning that the recollection of personal or family deprivation is very much alive within many newly wealthy families. Huang Rulun, for example, the chairman of Century Golden Resources Group, is now a noted philanthropist; and because he had to drop out of school aged 12 to support his family, the bulk of his philanthropic contribution in later life has been around educational causes in China. The generation that has made that shift wants to make sure that the new generation, who had it easier, is in some way connected or aware with efforts to help those who have yet to elevate themselves from poverty.

There are other reasons too. If you give to an educational institution, it’s usually transparent, and with an easily measurable outcome: if you pay to build a school, you can go and see it. If you give an award to the National University of Singapore for one of its medical schools, you can quantify what difference the money has made. Asian educational institutions are often better organized than other socially oriented institutions, the report says; it notes that Chew Kheng Chuan, the chief university advancement officer at Nanyang Technological University in Singapore, has described universities as “leading the professionalization of philanthropic funds solicitation across Asia.”

A forthcoming wealth management report will look in more detail at the nature of philanthropy in Asia. But it seems that more and more givers follow the advice Jain’s father gave him: “to focus on the three Rs of reading, writing and ‘rithmetic.”

So you’ve made your first million; then thirty times that. Your business has expanded and involved generations of your family. You’ve grown from what you know, the business that made you rich, into a host of investments to preserve and increase your wealth – and you realize you can no longer keep track of where the money is or what it’s doing. It is time to set up a family office.

The family office has no strict definition, but in essence it refers to families who have imposed a systematic structure around their wealth. Some think a family needs $100 million before it makes sense to develop one, others set the mark around $30 million. “For me, it’s a strategic way of managing family assets,” says Henry Hirzel, head of UBS Family Advisory, a global function, in Zurich. “It’s not only a group of professionals sitting together and doing investments. It goes beyond the pure financial investments and looks at the overall family business, the philanthropic ventures of the family, and the development of human capital – the next generation who can take over to run the family business.”

And that constituency, in Asia, is growing fast. It has long been an established, discrete group of capital in Europe, and for many years in the Middle East too, but it’s in Asia that the demographics are most clearly pointing towards the family office trend. Here, many private clients are the first generation in their family to have made significant money; in many cases, that generation is reaching the point where decisions need to be made about the next step – whether it stays in the family, who takes over, and what it will do next. That’s a natural time to consider formalizing structures and helping to create the right environment for a transfer of wealth.

“From what I understand, 80% of businesses in Asia are controlled, one way or another, by a family,” says Terry Farris, head of family office at DBS in Singapore. “The first generation entrepreneurs have been building their businesses for the last 30 to 40 years and might have only begun to bring the next generation into management in just the last five years. Over the next ten years we will see the largest transfer of wealth from one generation to another here in Asia. This transfer could have a significant impact on Asian business. “

Moreover, Asia is clearly where the wealth generation is. The Capgemini report, produced each year in association with Bank of America Merrill Lynch, keeps track of the growth in ultra-high net worth individual wealth around the world. (Capgemini sets the bar for this level at $30 million of assets, as do many private banks.) Its survey for 2010 said that the ultra-HNWI population grew 36.7% through the previous year alone, reaching 19,600 people. Although Capgemini doesn’t put a figure to their combined wealth, it is likely to be over US$2 trillion. Alongside has come an emerging sophistication of the people with the money. “What we usually see in Asia is that the starting point of a family office is within the finance division of the company, or one of the companies of the owners,” says Hirzel. “Slowly but surely, the functions get separated and become a standalone business.”

Seeing this, more and more institutions have been building dedicated family office divisions within their private banking arms, or bolstering existing commitments. In December Credit Suisse launched its first family office hub in Singapore. In January UBS launched a regional family services unit, also based in Singapore, and a few weeks later Citi launched a new business, called Global Family Office and Institutional, centred on family office clients.

Cynics say that this is little more than window dressing. “It’s more a marketing pitch than anything else really,” says one banker.

So why launch these businesses? Hirzel speaks of “a professionalization of the marketplace. Families are getting their act together, hiring investment professionals; and that calls on the other side, the banks and investment advisors, to be on the same level of knowledge at least.” UBS has been focusing on family offices for more than 10 years.

When Credit Suisse set up its Singapore platform, it hired Bernard Fung to run it, starting on January 3 this year. Fung had spent five years as the CEO of Innotech Advisers, the family office and investment vehicle of Lord Sainsbury of the famous British supermarket chain, considered one of the bigger and more sophisticated such operations in the country. What does family office, and a family office business, mean to him?

“I’ll say what it does not mean,” he begins. “We are not seeking to become the family office for our clients. We seek to help clients to create their own ability within themselves, rather than for us to take it in-house. We prefer to interact with smart money, and the only way to do that is to help families to thrive by formalizing what they’re trying to do for themselves.”

Advising this wealth is already a crowded field, and there is a notable focus on the emerging wealth rather than those who have already achieved it. “There is a well-banked segment of well-established family offices in Asia. My unit operates in the less-well established areas: families beginning to think about generational wealth,” says Fung. Similarly, Farris at DBS says clients will often look to the bank as “their first step into understanding how to begin establishing their family office. These families traditionally might not have shown up on the radar screen of other European private banks.”  Farris notes that some of the first family offices in Asia came as a consequence of the Asian financial crisis in the 90s, particularly families from Indonesia; it is largely a fairly recent development.

Consequently many banks talk about education – for an existing client base or a future one – as a key part of their offering. “Firstly, we want to educate people, the up and coming rich and famous, on how to set up a family office,” Tee says. “That is where we first thought of the idea of a hub, for what you might call a learning or incubation process. If you don’t have a family office, maybe you should try one: we’ll give you the hardware.”

Family office structures clearly involve investment advice, but are more frequently around areas like governance, risk and estate planning. Tee says that Fung told him: “Don’t talk to them about products. Get the governance right first, and if they see value in what you can bring to them in terms of education, then you can slowly talk to them about asset allocation and products.”

“We help them build their family offices from the point of view of the less interesting aspects like risk management, or simple reporting systems,” says Fung. “Reporting and managing $10 million of assets is very different from reporting and managing $100 million of assets, given that it is probably globally invested and with multiple banking relationships.”

Still, the people controlling the wealth in Asia are not always natural candidates for the rigour of a family office structure. “The entrepreneurs who have become very wealthy in the last 10 to 15 years generally haven’t become so wealthy by following any rulebook,” Fung says. “To talk about governance, and processes, to the wealth creator who is probably 60 or 70 years old, is a tough discussion.” They tend to need the right circumstances in order to see the merit of it. “The situations where I’ve actually had good progress are where the entrepreneur realizes that times are changing; children are coming back into the business and have been exposed to other parts of the world, and they are talking about the time when dad isn’t around and the need for the family to think about their investments collectively.”

“This generation [the older, entrepreneurial one] created its wealth by unfettered instinct: the newer generation realizes things are getting more complex.”

Farris has a similar experience. “There has to be good communication. You can have the best structures in the world, but if the family is unable to communicate together, the structures will fail,” he says. “Traditionally, the patriarch will keep things very close and not enlighten any of the family of his wishes, causing discontent and distrust throughout the whole family.”

A large part of the challenge for a private banker has nothing to do with investment, but encouraging families to overcome those natural barriers. “I share with families that they have got to create trust today. The foundation they set today will have a direct impact for generations to come.” Farris tries to combine this trust with good governance, suggesting a family charter that can provide guidelines for the interaction of the family, outlining how the next two, three or even four generations should work together.

Once convinced of the merits of communication and governance, one of the first challenges a family may look for help on is the sheer complexity of their operation. Fung recalls his time with the Sainsbury trust. “The office I took responsibility for had been in existence since the mid-80s. And what had happened was that it had become bigger and more complex as time went on, organically. These things take on a life of their own.” That’s a lesson he has retained as an advisor. “A billionaire, or a person worth a lot in Asia, may not know where everything is. Just knowing that, and being fully aware of the performance, and risks you are taking, can stand a family office in good stead. You can prepare for a nuclear winter in the markets if you know where you are, and you can move quickly.”

He recalls many clients in Asia who have said: “We have reporting systems. It’s our Excel spreadsheet.”

It’s perhaps for these reasons of patriarchal independence that change can come slowly to clients. In governance, there is a disconnect between realizing that it’s important, and following through in practice. UBS surveyed 120 families about wealth protection; 75% said they were very concerned about it, but only 25% had structured wealth protection plans in place. “75% think it’s important. 25% are doing something about it,” says Hirzel.

One way that banks have sought to differentiate is by pulling in the resources from other parts of the overall parent. Tee Fong Seng, vice chairman and head of ultra high net worth for private banking Asia Pacific at Credit Suisse, makes part of his pitch the premise of what he calls an “integrated one-bank proposition”, bringing the various abilities of the overall bank from investment banking and asset management to private banking clients (groups like Citi, UBS and Deutsche take a similar approach).

Locally, this is also the approach at DBS. When Farris describes the services DBS offers family office clients, many of them are more about growing the family business that made them wealthy in the first place. “At DBS, we have been providing banking services for entrepreneurs since the late 1960’s,” he says. The family office team will provide advice on succession planning and governance to bring the next generation of the family into the business, but will also seek to advise on the expansion of the business itself through DBS’s capital market, global transaction and M&A teams. He says that one area family businesses often need advice, for example, is private equity, where they can co-invest with other family offices.

Some, such as the pure-play Swiss banks, take a different model in which investment banking services, or the offering of any home-grown products, is not considered appropriate. “I see a number of banks setting up these family office platforms, attempting to represent that they are there to advise a family on how to set up a family office,” says one private banker. “If a family came to me and said: can you advise me how to set up a family office, I’d say you would have to be completely nuts to take my advice. There’s a major conflict of interest in approaching a services platform [which will seek to sell it product] for advice on how to structure a family office.”

Interestingly, some counsel against family office structures for those who don’t need them. “When you are setting up a family office, just be really clear about why you are setting it up,” says Fung. “Do you really need one? And if you do, be clear about what its objectives are, and stick to them as much as you can. Things can grow out of control; don’t create complexity where it should not exist.”

“You would be surprised at the number of wealthy people who set up a family office just to be trendy,” he adds. “In the 1980s it was: talk to my secretary and mine will talk to yours. Today it’s: my family office will talk to your family office. It’s important not to be faddish about these things.” Family offices only make sense, he says, when wealth has grown to a point where it is no longer possible for an entrepreneur and advisor to keep track of it and manage it.

But with wealth growing, the momentum for family office structures, and the people who serve them, is only growing to grow. “There are new billionaires every other week,” says Tee. “Every new coal mine or palm oil agro IPO creates a few more.”

BOX: Family Trusts

While not everyone is well suited to a formal family office, there is a trend towards more formal structures around wealth, and this is nowhere more apparent than in estate planning. Again, this has grown in importance because of the pivotal demographic point upon which so much of Asia sits: consistent wealth generation, with a patriarch typically at the point of passing wealth on. Mark Smallwood, head of wealth management solutions at Deutsche Bank Private Wealth Management Asia Pacific, says it has been estimated that 80% of Asian wealth is due to pass to the next generation in the next 15 years. And Michael Troth, managing director and regional head for Citi Trust Asia Pacific, refers to “that critical stage of this inter-generational wealth transfer.”

The need for proper structures around estate planning has perhaps been amplified by high-profile cases such as Stanley Ho, who earlier this year sued five of his children, two of his wives and his banker over the holding company that controls his wealth. Few families have situations as convoluted as that of the Ho family, but there is a general lack of preparation in Asia. “There is undoubtedly a huge number of families who just haven’t prepared at all,” says Smallwood. “I see some very wealthy families who haven’t even drawn up wills.”

Formal arrangements around wealth transfer can start with something as simple as a well-drafted will. For the wealthy, it’s not considered ideal, though; firstly, when the individual dies, their estate is frozen until a grant of probate is executed by a court, which can take years in some circumstances, and rarely less than three months. Moreover, probate is public: anyone can appeal to a court to see a will, so there is no privacy around the wealth and how it will be divided. Correspondingly, high net worth advisors recommend a family trust structure for liquid and bankable assets; this can also include shares in operating companies, or real estate. “The family’s privacy is maintained and the disposition of the assets to beneficiaries is kept from public scrutiny,” says Smallwood. There’s no probate, and wealth can be protected from other creditors.

In Asia, there is a tendency to build numerous British Virgin Islands firms to hold assets; one lawyer recalls a client who had more than 200 of them. While there’s nothing inherently wrong with BVI structures, some people do tend to fail to account for them when considering estate planning. If some assets lead to BVI or other tax-neutral companies, it’s important to ensure that the transfer of shares in those companies is addressed well in advance. It often is not.

So you’ve made your first million; then thirty times that. Your business has expanded and involved generations of your family. You’ve grown from what you know, the business that made you rich, into a host of investments to preserve and increase your wealth – and you realize you can no longer keep track of where the money is or what it’s doing. It is time to set up a family office.

The family office has no strict definition, but in essence it refers to families who have imposed a systematic structure around their wealth. Some think a family needs $100 million before it makes sense to develop one, others set the mark around $30 million. “For me, it’s a strategic way of managing family assets,” says Henry Hirzel, head of UBS Family Advisory, a global function, in Zurich. “It’s not only a group of professionals sitting together and doing investments. It goes beyond the pure financial investments and looks at the overall family business, the philanthropic ventures of the family, and the development of human capital – the next generation who can take over to run the family business.”

And that constituency, in Asia, is growing fast. It has long been an established, discrete group of capital in Europe, and for many years in the Middle East too, but it’s in Asia that the demographics are most clearly pointing towards the family office trend. Here, many private clients are the first generation in their family to have made significant money; in many cases, that generation is reaching the point where decisions need to be made about the next step – whether it stays in the family, who takes over, and what it will do next. That’s a natural time to consider formalizing structures and helping to create the right environment for a transfer of wealth.

“From what I understand, 80% of businesses in Asia are controlled, one way or another, by a family,” says Terry Farris, head of family office at DBS in Singapore. “The first generation entrepreneurs have been building their businesses for the last 30 to 40 years and might have only begun to bring the next generation into management in just the last five years. Over the next ten years we will see the largest transfer of wealth from one generation to another here in Asia. This transfer could have a significant impact on Asian business. “

Moreover, Asia is clearly where the wealth generation is. The Capgemini report, produced each year in association with Bank of America Merrill Lynch, keeps track of the growth in ultra-high net worth individual wealth around the world. (Capgemini sets the bar for this level at $30 million of assets, as do many private banks.) Its survey for 2010 said that the ultra-HNWI population grew 36.7% through the previous year alone, reaching 19,600 people. Although Capgemini doesn’t put a figure to their combined wealth, it is likely to be over US$2 trillion. Alongside has come an emerging sophistication of the people with the money. “What we usually see in Asia is that the starting point of a family office is within the finance division of the company, or one of the companies of the owners,” says Hirzel. “Slowly but surely, the functions get separated and become a standalone business.”

Seeing this, more and more institutions have been building dedicated family office divisions within their private banking arms, or bolstering existing commitments. In December Credit Suisse launched its first family office hub in Singapore. In January UBS launched a regional family services unit, also based in Singapore, and a few weeks later Citi launched a new business, called Global Family Office and Institutional, centred on family office clients.

Cynics say that this is little more than window dressing. “It’s more a marketing pitch than anything else really,” says one banker.

So why launch these businesses? Hirzel speaks of “a professionalization of the marketplace. Families are getting their act together, hiring investment professionals; and that calls on the other side, the banks and investment advisors, to be on the same level of knowledge at least.” UBS has been focusing on family offices for more than 10 years.

When Credit Suisse set up its Singapore platform, it hired Bernard Fung to run it, starting on January 3 this year. Fung had spent five years as the CEO of Innotech Advisers, the family office and investment vehicle of Lord Sainsbury of the famous British supermarket chain, considered one of the bigger and more sophisticated such operations in the country. What does family office, and a family office business, mean to him?

“I’ll say what it does not mean,” he begins. “We are not seeking to become the family office for our clients. We seek to help clients to create their own ability within themselves, rather than for us to take it in-house. We prefer to interact with smart money, and the only way to do that is to help families to thrive by formalizing what they’re trying to do for themselves.”

Advising this wealth is already a crowded field, and there is a notable focus on the emerging wealth rather than those who have already achieved it. “There is a well-banked segment of well-established family offices in Asia. My unit operates in the less-well established areas: families beginning to think about generational wealth,” says Fung. Similarly, Farris at DBS says clients will often look to the bank as “their first step into understanding how to begin establishing their family office. These families traditionally might not have shown up on the radar screen of other European private banks.”  Farris notes that some of the first family offices in Asia came as a consequence of the Asian financial crisis in the 90s, particularly families from Indonesia; it is largely a fairly recent development.

Consequently many banks talk about education – for an existing client base or a future one – as a key part of their offering. “Firstly, we want to educate people, the up and coming rich and famous, on how to set up a family office,” Tee says. “That is where we first thought of the idea of a hub, for what you might call a learning or incubation process. If you don’t have a family office, maybe you should try one: we’ll give you the hardware.”

Family office structures clearly involve investment advice, but are more frequently around areas like governance, risk and estate planning. Tee says that Fung told him: “Don’t talk to them about products. Get the governance right first, and if they see value in what you can bring to them in terms of education, then you can slowly talk to them about asset allocation and products.”

“We help them build their family offices from the point of view of the less interesting aspects like risk management, or simple reporting systems,” says Fung. “Reporting and managing $10 million of assets is very different from reporting and managing $100 million of assets, given that it is probably globally invested and with multiple banking relationships.”

Still, the people controlling the wealth in Asia are not always natural candidates for the rigour of a family office structure. “The entrepreneurs who have become very wealthy in the last 10 to 15 years generally haven’t become so wealthy by following any rulebook,” Fung says. “To talk about governance, and processes, to the wealth creator who is probably 60 or 70 years old, is a tough discussion.” They tend to need the right circumstances in order to see the merit of it. “The situations where I’ve actually had good progress are where the entrepreneur realizes that times are changing; children are coming back into the business and have been exposed to other parts of the world, and they are talking about the time when dad isn’t around and the need for the family to think about their investments collectively.”

“This generation [the older, entrepreneurial one] created its wealth by unfettered instinct: the newer generation realizes things are getting more complex.”

Farris has a similar experience. “There has to be good communication. You can have the best structures in the world, but if the family is unable to communicate together, the structures will fail,” he says. “Traditionally, the patriarch will keep things very close and not enlighten any of the family of his wishes, causing discontent and distrust throughout the whole family.”

A large part of the challenge for a private banker has nothing to do with investment, but encouraging families to overcome those natural barriers. “I share with families that they have got to create trust today. The foundation they set today will have a direct impact for generations to come.” Farris tries to combine this trust with good governance, suggesting a family charter that can provide guidelines for the interaction of the family, outlining how the next two, three or even four generations should work together.

Once convinced of the merits of communication and governance, one of the first challenges a family may look for help on is the sheer complexity of their operation. Fung recalls his time with the Sainsbury trust. “The office I took responsibility for had been in existence since the mid-80s. And what had happened was that it had become bigger and more complex as time went on, organically. These things take on a life of their own.” That’s a lesson he has retained as an advisor. “A billionaire, or a person worth a lot in Asia, may not know where everything is. Just knowing that, and being fully aware of the performance, and risks you are taking, can stand a family office in good stead. You can prepare for a nuclear winter in the markets if you know where you are, and you can move quickly.”

He recalls many clients in Asia who have said: “We have reporting systems. It’s our Excel spreadsheet.”

It’s perhaps for these reasons of patriarchal independence that change can come slowly to clients. In governance, there is a disconnect between realizing that it’s important, and following through in practice. UBS surveyed 120 families about wealth protection; 75% said they were very concerned about it, but only 25% had structured wealth protection plans in place. “75% think it’s important. 25% are doing something about it,” says Hirzel.

One way that banks have sought to differentiate is by pulling in the resources from other parts of the overall parent. Tee Fong Seng, vice chairman and head of ultra high net worth for private banking Asia Pacific at Credit Suisse, makes part of his pitch the premise of what he calls an “integrated one-bank proposition”, bringing the various abilities of the overall bank from investment banking and asset management to private banking clients (groups like Citi, UBS and Deutsche take a similar approach).

Locally, this is also the approach at DBS. When Farris describes the services DBS offers family office clients, many of them are more about growing the family business that made them wealthy in the first place. “At DBS, we have been providing banking services for entrepreneurs since the late 1960’s,” he says. The family office team will provide advice on succession planning and governance to bring the next generation of the family into the business, but will also seek to advise on the expansion of the business itself through DBS’s capital market, global transaction and M&A teams. He says that one area family businesses often need advice, for example, is private equity, where they can co-invest with other family offices.

Some, such as the pure-play Swiss banks, take a different model in which investment banking services, or the offering of any home-grown products, is not considered appropriate. “I see a number of banks setting up these family office platforms, attempting to represent that they are there to advise a family on how to set up a family office,” says one private banker. “If a family came to me and said: can you advise me how to set up a family office, I’d say you would have to be completely nuts to take my advice. There’s a major conflict of interest in approaching a services platform [which will seek to sell it product] for advice on how to structure a family office.”

Interestingly, some counsel against family office structures for those who don’t need them. “When you are setting up a family office, just be really clear about why you are setting it up,” says Fung. “Do you really need one? And if you do, be clear about what its objectives are, and stick to them as much as you can. Things can grow out of control; don’t create complexity where it should not exist.”

“You would be surprised at the number of wealthy people who set up a family office just to be trendy,” he adds. “In the 1980s it was: talk to my secretary and mine will talk to yours. Today it’s: my family office will talk to your family office. It’s important not to be faddish about these things.” Family offices only make sense, he says, when wealth has grown to a point where it is no longer possible for an entrepreneur and advisor to keep track of it and manage it.

But with wealth growing, the momentum for family office structures, and the people who serve them, is only growing to grow. “There are new billionaires every other week,” says Tee. “Every new coal mine or palm oil agro IPO creates a few more.”

BOX: Family Trusts

While not everyone is well suited to a formal family office, there is a trend towards more formal structures around wealth, and this is nowhere more apparent than in estate planning. Again, this has grown in importance because of the pivotal demographic point upon which so much of Asia sits: consistent wealth generation, with a patriarch typically at the point of passing wealth on. Mark Smallwood, head of wealth management solutions at Deutsche Bank Private Wealth Management Asia Pacific, says it has been estimated that 80% of Asian wealth is due to pass to the next generation in the next 15 years. And Michael Troth, managing director and regional head for Citi Trust Asia Pacific, refers to “that critical stage of this inter-generational wealth transfer.”

The need for proper structures around estate planning has perhaps been amplified by high-profile cases such as Stanley Ho, who earlier this year sued five of his children, two of his wives and his banker over the holding company that controls his wealth. Few families have situations as convoluted as that of the Ho family, but there is a general lack of preparation in Asia. “There is undoubtedly a huge number of families who just haven’t prepared at all,” says Smallwood. “I see some very wealthy families who haven’t even drawn up wills.”

Formal arrangements around wealth transfer can start with something as simple as a well-drafted will. For the wealthy, it’s not considered ideal, though; firstly, when the individual dies, their estate is frozen until a grant of probate is executed by a court, which can take years in some circumstances, and rarely less than three months. Moreover, probate is public: anyone can appeal to a court to see a will, so there is no privacy around the wealth and how it will be divided. Correspondingly, high net worth advisors recommend a family trust structure for liquid and bankable assets; this can also include shares in operating companies, or real estate. “The family’s privacy is maintained and the disposition of the assets to beneficiaries is kept from public scrutiny,” says Smallwood. There’s no probate, and wealth can be protected from other creditors.

In Asia, there is a tendency to build numerous British Virgin Islands firms to hold assets; one lawyer recalls a client who had more than 200 of them. While there’s nothing inherently wrong with BVI structures, some people do tend to fail to account for them when considering estate planning. If some assets lead to BVI or other tax-neutral companies, it’s important to ensure that the transfer of shares in those companies is addressed well in advance. It often is not.

Earlier this year the people of Hong Kong and Macau looked on with fascination as Stanley Ho sued five of his children, two of his wives and his banker over the holding company that controlled his fortune.

While few families have circumstances much like the Ho’s, it was a welcome reminder of the importance of estate planning. “There is undoubtedly a huge number of families who just haven’t prepared at all,” says Mark Smallwood, head of wealth management solutions at Deutsche Bank Private Wealth Management Asia Pacific. “It’s really surprising. I see some very wealthy families who haven’t even drawn up wills.”

Yet the circumstances of wealth are more complex than ever: one lawyer refers to a client with 220 British Virgin Island companies holdings his family’s wealth. And Asia is at a pivotal moment for wealth transition. It has been estimated that 80% of Asian wealth is due to pass to the next generation in the next 15 years. “In Asia we’re at that critical stage of this inter-generational wealth transfer,” says Michael Troth, managing director and regional head for Citi Trust Asia Pacific. “Some families have planned very well, wealth has been transferred successfully and you don’t read about it. But families where perhaps things are not in harmony – really they ought to be planning for that.”

The most straightforward advice bankers have is to do something. “If you haven’t done any planning, do some,” says Troth. “Give certainty to what you want to happen. And if you know there is going to be a problem, deal with it, and make sure your structure is robust enough to deal with the challenges.” As Smallwood says: “If you fail to plan your succession, then the state in its wisdom will do it for you.”

First step is a will: a clinically clear will, drafted by a lawyer, spelling out exactly what the drafter wants to happen and taking into account assets in multiple jurisdictions (which might require more than one will). But that’s only a start. “The will is an essential tool, but there are some drawbacks in relying solely on the will, in particular for high net worth families,” says Smallwood. First, where a will is in place, when the individual dies their estate is frozen until a grant of probate is executed by a court, which can take between three months and several years, he says. “Until it has been completed, the assets are frozen, liquidity is not there and possibly important decisions cannot be executed.” On top of that, probate is a public exercise, making the will available from the court – not something everybody wants to happen.

Both Smallwood and Troth recommend a family trust to hold liquid and bankable assets, and if necessary shares in operating companies or real estate, for example. “The trust has many features and attractions, particularly for families in Asia,” Smallwood says. For a start, a trust is a private contract between settlor and trustee, meaning there is no public record of the terms of trust. “The family’s privacy is maintained and the disposition of the assets to beneficiaries is kept from public scrutiny,” he says. There’s also no probate process and the individual can clearly instruct the trustee about what should happen if the individual dies or becomes mentally incapacitated, or if children are still minors at the time. It can also protect family wealth from future creditors.

In Ho’s case, there was no shortage of structuring involved; the furore included two British Virgin Islands (BVI) firms, Action Winner and Ranillo Investments, as defendants, since those two firms had control of Lanceford, which is the holding company containing most of Ho’s wealth. This is a common complexity. “Everyone walks around today flashing their Gucci bags,” says one banker, “but in the 90s in Hong Kong everyone was flashing their BVI companies. It was almost a status symbol to have a lot of BVIs.” Typically in Asia the family business has a holding company – sometimes domestic, sometimes tax-neutral offshore – with a range of shareholders, with the matriarch or patriarch often keeping the shares in their own name until they die and not passing them on to the kids until the very end. But what is often overlooked is that many of these asset may lead to BVI or other tax-neutral companies, and the transfer of shares in those companies to the next generation may not have been addressed. This ties in to the growing international nature of family assets. “As the second generation is getting involved, people are diversifying assets out of core holdings in the family business, and spinning them off into bankable accounts, private equity and real estate and so on in London, the US, Switzerland and Singapore,” says Smallwood. “Often the various holdings do not flow into an organised structure so it’s susceptible to problems when they die.”

The nature of families themselves adds to the challenge. “Families are much more global, both in terms of where the beneficiaries and family members are and where they are investing,” says Troth. “If all you did was invest in your own country, and all your beneficiaries and heirs were there, that would be simple. Once you’ve got family members with a passport or PR or residency somewhere else, or international investments, that’s where you’ve got the dimension of other countries’ tax and legal systems.”

Smallwood says there is “nothing at all wrong with using an offshore tax neutral structure”, provided there’s a clear mechanism in place for the transfer of wealth. “A lot of families have a BVI and sign a share transfer but leave it undated, and leave the name they’re transferring it to blank, because they don’t want to pay for a simple trust. That piece of paper becomes a bearer share and whoever controls it can potentially control very significant assets. There’s a tremendous opportunity for fraud and family disputes.”

Troth adds: “The BVI is a great jurisdiction. It crops up more because there are more companies incorporated there than anywhere else, but regardless of which jurisdiction and structure you use, the ground rules are the same: set it up properly, for legitimate purposes, with robust structures and good corporate governance. The old days of trying to hide some money – that’s gone, the world has changed.”

Historically, one challenge has been that private banking in Asia has been seen more as a source of investment advice than estate planning. One banker grumbles: “In Asia people don’t want to pay for service, and that is the problem with succession planning: it requires people to sit down with qualified lawyers and bankers to formulate the plan and the various mechanisms within it.” But there is a sense of changing attitudes. “In the families I deal with, I’m seeing people much more willing to get engaged in a discussion about succession planning,” says Troth. “There’s been a sea change, in fact.”

In essence, estate planning is an attempt to bring order to the unpredictable. “It’s not just a simple of matter of: when I die, it all moves to so and so,” says Smallwood. “There are a lot of what ifs: the first is you don’t know when you’re going to die, and all sorts of things can happen between now and then.” In particular, families themselves get more complicated, and run to more generations: the main controlling group of India’s Tata conglomerate, for example, is now in its fifth generation of stewardship and is understood to involve more than 110 companies and subsidiaries and at least 40 different family members or groups. “But most of the wealth in Asia has been created in the last 30 or 40 years,” says Smallwood. “That first generation are now in their 70s and 80s and they are passing on. So we are at the take-off level of a J curve, where there is going to be this enormous transfer of wealth. Families need to be prepared for it.”

Asiamoney.com

Private wealth managers across Asia breathed a sigh of relief late last week when the G7 nations followed Japan’s finance ministry and central bank in intervening to drive down the value of the yen.

Let’s be charitable and imagine that some of this relief stemmed from the real matter at hand: the fact that selling the yen, after its appreciation to a record of 76.25 against the US dollar, would help Japan in its recovery from the terrible events it had endured in the previous week. A soaring yen was going to wreck exports at exactly the worst time for the country; right now it needs everything it has going for it, not more hurdles. The actions of the G7 nations – and there are expected to be more – were primarily an expression of solidarity with Japan when it needs it, as well as a natural desire to maintain stability in world financial markets.

But there’s another reason the private bankers were cheered. They had spent much of the week taking calls from clients deeply troubled by the climbing yen.

Remember the yen carry trade? Before the financial crisis it was all the rage, for its peerless simplicity. Borrow in yen, with a next-to-zero interest rate; invest the proceeds elsewhere to earn a greater return. If you want to keep it relatively risk averse, just put it in Australian dollar government bonds or an Aussie bank account; a 6% risk-free differential, even prior to the financial crisis. New Zealand and, for a time, South Africa were other recipients of this trade. It works a treat – provided the currencies stay stable, or more specifically, provided the yen doesn’t start climbing dramatically and wipe out the gains.

Several years ago there was widespread concern as the yen did start moving and the high-yield currencies like the Australian dollar went into decline. The carry trade started to unwind and there was a great deal of concern about the impact this would have on global financial stability. The world didn’t end; currencies like the Aussie dollar, underpinned by emerging market demand for local commodities, swiftly went most of the way back to where they started from. People stopped talking about the yen carry trade. But it’s back. In fact, it’s been back for a couple of years now.

Hence the alarm when, post the earthquake and tsunami, the yen counter-intuitively leapt to record strengths – based on the theory that Japanese businesses would repatriate overseas capital home where it was needed. Suddenly a lot of clients found their trade unraveling. Getting six percentage points of yield differential from Japan to Australia is all well and good, but not if the yen is going to appreciate by 10 per cent and make it a losing trade.

In truth, the yen carry trade has evolved somewhat over the years, because these days it applies to so many other currencies beyond the yen. You can borrow in US dollars for almost nothing and invest the proceeds elsewhere. You can borrow in sterling, in euros. The gap between major currencies and second-tier commodity currencies, in terms of the interest rates you can earn in these currencies, is bigger than ever. So really, the important cross-rate for private banking clients is not so much the yen versus the dollar – there’s no point borrowing in yen to invest in dollar assets – but the yen against whatever currency you put your assets in, which is a slightly different story.

But the whole experience has underlined the fact that, for all the probity and caution that came with the financial crisis, people do continue to expose themselves to trades that are vulnerable to sharp movement. Asiamoney spoke to three client-facing staff at three different private banks – two multinational, one Swiss private – and they all spoke of the drama of the week and the fear that clients had for a sharp climb in the yen. Which begs the question: has anything really changed in the way the wealthy invest, and are advised to invest?

Private banking clients are always the first individuals to get into new asset classes. Whether it’s commodities, emerging market debt or wine, private clients will always get exposure to it well before retail ever do: they expect. And right now, they’re asking their bankers how to get involved in the burgeoning offshore RMB market.

The announcement in July of the memorandum of co-operation between the Hong Kong Monetary Authority and the People’s Bank of China, opening up the options for what can be done with renminbi circulated outside of China, had a host of knock-on effects. It triggered the launch of a vibrant new bond market, for dim sum bonds; it created a new structure for offshore trading of RMB, including an inter-bank market; it created a whole new US$/RMB foreign exchange market; and it revolutionised trade finance for those dealing with the mainland. Along the way, it led to a vast increase in RMB deposits outside China, which now stands at RMB314 billion. And that, inevitably, means an investment industry will have to grow to accommodate it.

“Many wealth management firms in Hong Kong have enjoyed seeing their share of the RMB deposit base increase, and are now sitting on considerable volumes of those deposits,” says Scott Wehl, head of banking products for Asia Pacific at UBS Wealth Management. “The issue these banks now face is what to do with the deposits. On the one hand, there is almost a land grab mentality going on, whereby some banks are offering very attractive rates simply to attract new money and claim as much CNH market share as possible.” CNH refers to offshore RMB. “On the other, there are limited avenues – in terms of availability of investment products – to further deploy these funds.”

While the deposit base in Hong Kong is partly a retail development, private clients are believed to be a disproportionately large part of it. “Private clients are among the major contributors to the rapid growth of offshore RMB deposits in Hong Kong,” says Rocky Cheung, head of the investment team for private banking at DBS Bank in Hong Kong. Part of the reason for this is that individuals are subject to a RMB20,000 daily limit for transfers, which inhibits investment; “many private banking clients had the ability to open BVI companies in order to accumulate RMB” and thus get around the restriction, Cheung says.

For some, deposits represent a perfectly good solution. “We are recommending our clients take exposure to deposits,” says John Woods, chief Asia strategist for Citi Private Bank. “The reason being, RMB deposits have a higher yield than Hong Kong dollar deposits, so not only do you get a higher yield than you would with your cash in a Hong Kong dollar account, but for those investors who believe the RMB is subject to appreciation you have a capital appreciation upside.” Woods’s own view is that the RMB will appreciate 3% in the first half of the year and 5% overall in 2011 – not a bad outcome from cash. “So Citi absolutely recommends its private clients take their exposure to the RMB through deposits – I think it is by far the most attractive way.”

But deposits are not for everyone: many clients want more. “We have a lot of investors who want access to real assets in China,” says Woods. For them, the obvious answer is the dim sum bond market.

It’s hard to think of a parallel for a market that has grown so quickly, not just in volume terms but in range and sophistication. From a more or less standing start in the middle of last year, the market already had RMB66 billion outstanding by the end of 2010, with more than RMB6 billion more in bonds and CDs having followed in 2011 at the time of writing. From the finance ministry and Chinese state lenders, the issuer base has broadened steadily: first foreign multinationals like McDonald’s and Caterpillar; then unrated, high yield names like casino operator Galaxy; distant emerging markets institutions with no link to China, such as VTB Capital; and most recently a host of names issuing bonds synthetically with settlement in US dollars. “There are very few products for clients to choose from, and dim sum bonds are the only possible candidates right now,” says Edward Chan, global head of fixed income within HSBC Private Bank. “So they are a hot ticket for investors. Every new deal is several times oversubscribed and investors have to chase in the secondary market to get their intended holdings” – not that there is much of a secondary market, since few people who have bought the bonds want to sell them without something else to invest in first.

Issuers like these can tap the market because of the huge demand for paper: some transactions are being oversubscribed as much as 50 times over. And this is giving some bankers pause about whether putting clients into these bonds is necessarily giving them such a great deal. “Yields offered on the CNH bonds, when compared with the onshore bonds, are generally lower and this is primarily a function of the huge demand for the bonds from offshore investors,” says Wehl. The yields are higher than the deposit rates offered by the banks – which is why they are so popular – but are they sufficiently higher to make it a sensible risk-return tradeoff?

“We find dim sum bonds to be, on average, expensive,” says Anurag Mahesh, managing director and head of global investment solutions for Asia Pacific in Deutsche’s private wealth management division. He says this obviously varies from issue to issue, but “in any market where there is such a huge wall of money waiting, that will always happen: credits will get away with smarter coupons than they would otherwise need to pay.” Investing in dim sum bonds is, he says, “a valuation discussion.”

For Mahesh, the fervour about these bonds, and offshore RMB generally, has masked a fundamental point that investors are tending to miss. “Offshore RMB or onshore RMB are essentially just the RMB story. You’ve got to figure out the best way to play that.” And that, he says, should be “two separate decision points”, one for the currency and one for the product. “There is no reason the two should be co-mingled. We tell our clients to have a credit decision, or an equity or a commodity investment decision, completely divorced from the RMB. Then overlay a foreign exchange position on top of that.” Moreover, he’s reticent to recommend longer-dated RMB bonds in what is likely to be an inflationary environment in China. “When rates go higher, you don’t want long-dated bonds in our portfolio,” he says. “Three years is as long as we would look to go – that’s another reason you want to be cautious.”

Enthusiasm for the RMB had been creating some odd pricing behaviour even before the offshore market got going. Prior to that, the way to get exposure was through non-deliverable forwards. “Every client wanted so much to get into NDFs that they were at a negative discount – meaning that the effective interest rate for one year was minus 2 per cent,” Mahesh says. When something is as heavily in demand as this, it can cease being a sensible thing to be exposed to.

On top of that, it’s not all that easy to get exposure anyway. Lee Boon Keng is deputy chief investment officer at Julius Baer in Singapore. In theory, he prefers bonds to deposits. “You can always do the deposits, but the returns are simply not something I think are going to outperform you having access to the bond market.” But can he get direct access to these bonds from the underwriters? That’s another story. “It comes to us once in a while. But the amount you get is sometimes negligible, as it is usually so many times oversubscribed. The fund managers with volume usually get it first and you’re left with nothing. Sometimes it’s not even worth it and you’re better off just going with the fund managers.”

UBS came up with an innovative solution to this, though not one that’s going to be easy for everyone to replicate, by issuing a dim sum bond of its own: a RMB200 million, two-year issue in November. That’s one way to guarantee your clients exposure.

But for everyone else, Lee believes funds are the best way to play the RMB story. “There is limited supply and you really need to have someone who is able to get that supply,” he says. “And the people who can get access are usually professional managers.” But who is that? ICBC and Hang Seng have launched dim sum bond mutual funds, and for quality of access private bankers mention Schroders and BNP, for example, but it’s not a long list.

Julius Baer’s solution was to set up its own investment fund alongside DBS Asset Management. The private bank was given exclusive rights to engage its clients with the fund for 14 days, and in that time raised almost S$100 million. “We chose to work with DBS Asset Management: they are fairly deep rooted in the bond market, they have good connections and they can tap supply.”

The fund itself, called the DBSAM RMB bond fund, was launched in October; DBS says it adopts an absolute return strategy and invests primarily in a portfolio of RMB denominated certificates of deposit, fixed and floating rate bonds, convertibles, notes and money market funds issued outside of China. But despite the fund’s clear success in attracting capital, DBS has since opted not to go any further down that route. “We looked at developing an[other] offshore RMB bond fund but eventually dropped the offer,” Cheung says. “The current market situation is not the right moment: the market is not mature enough to offer this fund. There are too many deposits chasing too few high quality bonds.” Cheung has reached the same conclusion about weak available returns as others. “Last year the Ministry of Finance offered a bond, and within the first day of subscription people were willing to take 0.8%. This defeats the purpose. If you can put RMB deposits in the bank at 0.7%, why would you purchase that bond?” DBS has instead focused its efforts on QFII funds – using the allocations for domestic investment that China periodically allocates to foreign institutions – and has so far launched two. “There is a lot of demand for this.”

The fund world also gives access to the A-share market, another way of playing the China story without going through offshore RMB. According to Morningstar Research, there are seven funds authorised by the Hong Kong SFC that have more than 10% of their portfolio invested in A-shares: at the top of the pile is a product from Allianz, which is 89.42% in A-shares, then several from Hang Seng, one from Bank of China and the JF China Pioneer A-share fund launched by JP Morgan.

Private clients will also want to be well-positioned in RMB IPOs in Hong Kong as they come along. The first, a spin-off of Cheung Kong Holdings’ rental properties in China, is expected to raise around RMB10 billion in the first quarter through an RMB-denominated real estate investment trust issue led by BOC International, Citic Securities and HSBC. Many more are expected to follow. “I see that exploding,” says Woods, of RMB IPOs in Hong Kong generally. He wonders how shareholders’ rights will be addressed, with Hong Kong investors holding RMB equity in China. But he adds: “The underlying demand for these IPOs will be extraordinary.”

Various other structures are being put together. UBS, for example, offers not only fixed term deposits but foreign exchange, RMB-denominated investment funds and structured products, and RMB lending capabilities. DBS’s treasury department has developed a range of instruments including principle protected products which involve the purchase of digital options, with various underlyings such as foreign exchange rates, equity or interest rates, using the funding cost to buy the options. These pay out 2 to 2.5% and can also be structured as equity-linked notes, QFII notes or credit-linked instruments. All are available denominated in RMB, or synthetic products can be built using the RMB forward market to replicate higher yield notes or deposits. Elsewhere, HSBC made a significant step in February by starting to offer RMB deposits in Singapore; UBS says it is looking at options outside Hong Kong.

But it is a common refrain of bankers in this area that clients must remember what they’re really looking for. “We are telling our clients to believe in the Chinese story, and not just focus on the RMB alone,” says Lee at Julius Baer. “The Chinese story is a megatrend.”

Thinking like this leads to some interesting strategies. “An alternative is to buy H-shares, but that’s Hong Kong dollars,” he says. “But is that a bad thing? In our opinion that could be the best thing to do. We believe the RMB will become a reserve currency, and that the Hong Kong dollar will no longer be pegged to the US dollar but the RMB – and sooner rather than later. That allows investors who are holding Hong Kong dollars and investing in H shares not just to benefit from the China megatrend, but allows that one-off appreciation when the Hong Kong dollar is fixed to the RMB.” Clearly, he says, this requires “a long term outlook and the patience to ride out volatility and reap benefits when it ultimately happens.”

Another strategy is to look at CNY – that is, renminbi in its onshore form – rather than CNH. “There is a focus on getting assets to the onshore CNY bond market,” says Chan at HSBC. “This is a very interesting market, particularly because the yields onshore are higher than CNH bond yields. This will be a major area we will be focusing on.”

Bankers, clients, issuers and traders are all still positioning themselves in this new market, and it will take years for the various imbalances between supply and demand to iron themselves out. “We would expect to see the product suite diversify and increase,” says Woods. “This is just the start.”