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Is Asia's Great Wealth Transfer the rise of a new 'inheritance economy'?
Over the next 10 years, trillions of dollars will be passed down to the next generation as succession plans are realised across Asia, potentially transforming the landscape for investment and wealth management across the region.
About 70,000 high-net-worth individuals from Asia are set to pass on around USD 2.5 trillion over the next decade1, more than the combined gross domestic products (GDPs) of South Korea and Taiwan2. Globally, by 2030, USD 18.3 trillion of collective wealth will be transferred by those with USD 5 million or more in net worth3. How families and businesses handle this transition will help define the investment climate in the decades to come.
The succession process begins with the resolution of intrafamily issues – here, communication is an essential factor to get right. In Asia this can be particularly challenging, with death and succession being highly sensitive subjects in the region. Many Asian families, even those who work together in their family enterprises and family offices, do not have a routine for formal meetings or any formal structure for communication. Succession and legacy structures are typically driven by decisions of patriarchs and matriarchs, without consultation or communication with their next generation family members. It is often perceived as disrespectful for junior members of families to air differences with their elders, so concerns are often left unaddressed.
Succession is an emotive subject. The issue of inheritance can frame the perception of heirs of their place in the family – depending on how the matter is handled, this perception can be either positive or negative. Decisions regarding ownership and management succession, if not properly discussed, explained and understood, risk causing resentment that may be expressed by disgruntled heirs through hostile and public legal battles.
In terms of succession planning, protecting generational business ethics and the direction of a business may be more important than protecting familial ego or ties. This could lead to initial turbulence in the family dynamics, but could ultimately minimise portfolio disruption through the transition.
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Ethics will define the transfer of wealth
However, the current transfer of wealth is taking place amid a period of considerable change both in terms of the investment climate and the socio-economic environment. Climate change, food shortages and decarbonisation, for example, are serious global issues and are rightfully attracting attention and investment.
Meanwhile, Covid-19 continues to have an impact through the innovations in technology and social investing that were sparked during the pandemic. These issues raise the tantalising question – to what extent will there be a transfer of ethics between generations?
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Sustainable investment set to benefit
Although the issues considered important by different generations have always differed, this is being exacerbated by the drive for sustainable investing and environmental, social, and governance (ESG) considerations, which are already transforming the investment landscape. For example, investment in art, wine or jewellery may gradually be usurped by a desire for investments with a more positive and tangible impact on society, such as in developing new food systems and healthcare options.
Philanthropy may also feature more strongly. For example, younger generations may direct a larger proportion of their wealth towards philanthropy, or have a stronger focus on outcomes and impact.
Capital markets are adapting to reflect shifting priorities
Capital markets are already adapting to include green bonds and other sustainable investment strategies, but such tools are still in their infancy and much more work needs to be done to convince would-be investors of their merit. Part of this is the need to better showcase the correlation between investment returns and sustainability impact. But the trend is clear, and the inheritors of wealth can play an important role in developing these markets for their own and future generations.
Wealth management industry needs to build on existing trust
The wealth management industry has also evolved over the past 30 years, as investment choices have changed and new technologies have become available. However, the next generation may not value the same services or approach demanded by their predecessors.
Importantly, it is not a given that a transfer of wealth brings with it a transfer of trust, and so wealth managers will need to build on existing relationships to convince and retain the next generation. Successful relationships with the next generation are not guaranteed, however, and the ramifications for the industry could be huge.
The next generation are more sophisticated, socially conscious and well-informed. They expect their wealth managers not only to exhibit strong advisory capabilities but also to understand their world view. In Asia, where a sales and product culture is generally more prevalent, in the face of a barrage of investment hypotheses and pitches, trust is likely to be the determining factor as to whose advice the next generation choose to follow.
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Digitalisation will transform relationships
The next generation will embrace technology to an extent not yet seen, with a surge in digitalisation, particularly since Covid-19, having an impact on shifting asset allocations across wealth portfolios and reshaping future investment strategies. Digital technologies will also redefine many aspects of the wealth transfer process, such as improving real-time investment monitoring or facilitating more immediate remote communications between geographically-separated family members and their professional advisors4.
Wealth managers will therefore need to be nimbler in adapting to clients' needs, including listening to new ideas, communicating solutions, and delivering services that meet clients' potentially faster time horizons.
The Great Wealth Transfer will be impacted by a confluence of issues, including the drive for sustainable investing (particularly post-Covid); the fast evolution of social and other technology; healthcare concerns and lifestyle differences between generations. Amid this fog of issues, there are a myriad of human decisions to be made, by a generation that almost certainly views the world through a different lens than their predecessors.
1 Preservation and Succession: Family Wealth Transfer 2021 – Wealth X. Available here.
2 Trading Economics – Asia GDP. Available here.
3 Preservation and Succession: Family Wealth Transfer 2021 – Wealth X. Available here.
4 Preservation and Succession: Family Wealth Transfer 2021 – Wealth X. Available here.
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