Private banking assists orderly wealth transfer

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KUALA LUMPUR: The issue of passing on the wealth from one generation to the next is becoming more urgent as more entrepreneurs who ushered in Malaysia’s ‘era of prosperity’ reach their twilight years, thus facing the tough challenge of decision-making in transferring power and wealth to the next generation.

Into this picture, steps in the private banker who specialises in dealing with the wealthy; preserving and enhancing their millions or billions, including the use of a myriad of tools to help implement succession plans for an orderly transfer of familiy wealth.

Private banking is a term for banking, investment and other financial services provided by banks to private individuals investing sizeable assets. It is much more than traditional banking services like deposits and loans.

It is about providing personalised one-to-one service that is preferred after one has attained a certain level of wealth.

Head of CIMB Private Banking, Carolyn Leng, says that there are serious issues that private businesses must resolve if the ‘era of prosperity’ is to last and that is the issue of succession.

In discussing about wealth management in Malaysia, she says that that most private businesses in the country are ‘founder-centric’ and with passage of time handing over the reins to the next generation can be fraught with difficulty.

Leng attributes this to the fact that the founders have been running the business single-handedly and the successors are not privy to many of the earlier business decisions as they had been run in patriarchal fashion.

Founders are also reticent to talk about succession and when the time comes for them to bow out, they try to be fair to their children by giving them equal share of the business.

This poses several problems. The business now being fragmented, with different entities in different hands, is not likely to enjoy the synergistic benefits that it once did.

While many businesses have taken the necessary precautions of avoiding wealth erosion by listing their entities, there are many private businesses that will have to deal with the issue of enhancing wealth.

The Chinese have a saying ‘fu bu guo san dai’ which means ‘wealth never survives three generations’ and therefore private banking may the solution for many in dealing with the endemic problems threatening the survival of private businesses.

Leng says that private bankers can act as prudent outside arbitrators to trigger sensitive discussions on succession and this can be followed by the choice of suitable siblings to run the business.

While it is natural for families to choose the eldest son to take the business into the next generation, talents and interest might dictate otherwise.

Increasingly families are getting more sophisticated in thinking as to how family members can get involved in the business in different ways.

Leng says private banking would be a boon for private businesses as the ‘one-stop financial house’ approach provides a spectrum of wealth management services that deals with problem of wealth creation, enhancement, protection and distribution.

For the survival of family business, she believes that creating a family holding structure with a succession plan is the key.

“When family run-business continues to grow and there are many family members who are shareholders of the business, there just will be too many hands that can spoil the broth.

“They are bound to be different expectations of the family members, relatives who are silent partners and will only be concerned with their own interests, and certain relatives who might not share the same sentiment of the business and wish to cash out,” she adds.

As such, using trust as a family holding structure ensures that business and wealth is intact and is passed own to the next generation in an orderly manner aside from protecting against family members that may lack the acumen to succeed the founder, Leng says.

“It is imperative that successful succession planning can take years to form and founders need to set in place plan and parameters that they have chosen to groom the successor and also monitor the performance of the successor.

“When a suitable leader is chosen, openness and communication between the founder, the successor and family members is important and this includes understanding their needs and weighing the family needs against that of the business that they represent.” Asians are still reticent about allowing professionals to run their business unlike their European counterparts but it can be a solution to keep the family members away from day to day operations as their participation can lead to disputes.

There are numerous examples of how businesses using trust as family holding structure as survived well beyond three generations.

The Rockefeller family is a well known example of the survival of family wealth going beyond three generations.

The complicated chain of business if not for the visions and plans that are put in place by the founders would have dissipated as the family grows into multiple branches of the founding fathers.

The structure has preserved the family wealth over the last 140 years or six generations, governed by powerful trust committee of decision makers who oversees the wealth of the Rockefeller family.

“Asian businesses can emulate the likes of the Rockefeller family, putting in place professionals to run the business as offered in private banking.

This in turn can dispel the myth that wealth will only last three generations,” says Leng. — Bernama