This article was first published in Spears Wealth Management Asia magazine.
A "perfect storm" of factors such as the remarkable economic growth in Asia, the sub-prime crisis and the decline of traditional banking jurisdictions in Europe, have come together to produce a thriving wealth management industry in Singapore and Hong Kong serving the successful HNWIs of Asia as a whole.
So, what support are these self-made individuals currently demanding of their wealth managers and lawyers, and how adequate are the solutions currently on offer?
As well as the value in their operating businesses, Asian entrepreneurs have often amassed and inherited significant and complex additional assets. While appreciating the succession planning advantages of transferring assets into a trust structure, retention of control is still one of the most popular dishes on the menu, as is price sensitivity.
In recent years, the private banking-led solution in Asia has been for bank trustees to hold the financial assets and for a standardised private trust company (PTC) structure to be rolled out to the family for the riskier assets (such as large stakes in listed companies, private company shares and toys).
A PTC is a company established solely for the purpose of acting as trustee of a limited number of trusts for the benefit of a single family.
This is a "win, win" situation on paper in that the banks escape the fiduciary risk of holding the more complex assets and the clients can seemingly "have their cake and eat it too" by keeping control of the, often more emotive, assets while still receiving all of the estate planning benefits.
On closer inspection of this model, however, it is clear that there are some significant areas for improvement...
1. A MORE TAILORED APPROACH
Unfortunately, the number of trust and fiduciary professionals in Asia has not followed the same trajectory as the economy. With professional trust advisers being historically few and far between, the PTC for Asian clients has, more often than not, had to take the form of an off-the-shelf "product" as opposed to being a bespoke solution built to fit the client's particular circumstances.
For example, we have rarely seen a Foundation owning the shares in a PTC for Asian clients. This may well be because Foundations are unavailable in, say, Singapore, and there has been insufficient expertise on the ground locally to advise on Foundations from traditional offshore centres such as Jersey. That does, however, appear to be changing so it is hoped that the advantages offered by Foundations (such as being an orphan structure and perpetuity/ longevity) can be made more readily available to Asian clients.
In addition, a PTC can often be run in tandem with a Family Office and/or other advisory team. Again, it is less common for this to be taken up by Asian clients but hopefully this will also change with the expansion of the Asian trust industry.
With retention of control still high on the agenda for Asian clients, there has often been a failure to build in appropriate checks and balances within PTC structures in order to ensure the integrity of the structure and its robustness in the face of a challenge.
Unlike other jurisdictions, there is commonly a family-only PTC board for Asian clients, so no trust professional on the board to provide the relevant trust knowledge and experience or to provide an objective view.
In addition to a family-only board, there is frequently no enforcer to ensure that the trustees are performing their duties correctly. Again the absence of these external checks and balances can seriously undermine the robustness of the structure to attack - often clients are unaware of this.
Compliance is also a key area for improvement. Although the legal and regulatory environment has improved locally so that AML/CFT compliance is outsourced to licensed trustees for PTCs, there are still failures to truly engage with, or relinquish any meaningful control to, professional trustees.
As such, without the benefit of professional advice before entering the PTC, clients have, all too frequently, (i) become bogged down in trying to run a compliant structure at the expense of their prized business; or (ii) failed to ensure that their structure runs within the appropriate legal and regulatory framework.
THE WAY FORWARD...
With price sensitivity still one of the primary drivers for Asian clients, it is a significant challenge to get clients to buy into the very real advantages of bespoke PTCs which are often multi-jurisdictional and can be more expensive to administer.
The more sophisticated clients have seen that a properly designed structure, coupled with the discipline of appropriate family governance practices, can lead to improved borrowing rates and those savings will often be significantly more than the fees of designing and implementing the PTC.
For some clients, of course, a PTC will always be disproportionately expensive and advisers must undertake a proper cost/benefit analysis early on. With more trust professionals coming to the region, it is hoped that clients will also be presented with a range of succession planning alternatives such as simpler, cheaper, third-party trust structures.
Clients can relinquish a meaningful level of control but still retain choice. If you can still choose to eat your cake without always "having" it - is that really so bad?
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.