Wealthy Asians may be relatively unsophisticated investors compared to their Western counterparts, but the growing emergence of family offices is a sign that the situation is changing, say private bankers and consultants. This trend will also assist with the intra-generational transfer of wealth.
"Family offices are well placed to be involved in the generational shift of wealth in Asia that will take place over the next decade," says Song Chi-Ho, Singapore-based managing director at Cambridge Associates, an investment-consulting firm headquartered in Boston, Massachusetts.
"The shift hasn't fully taken place, as it has in more mature markets such as Europe or the US, where the idea of the family office is more broadly accepted as an outsourced wealth-management solution," he adds. In Asia, the trend is still developing, but it has enormous potential, as families have benefited from the region's growth story, says Song. Family offices are a logical next step to provide a more structured long-term solution to managing Asian family wealth.
There are, though, various challenges to setting up a family office. "Family offices take many guises, and the mistake many families make is to focus purely on utilising the family office primarily for the investment process for investable assets," says Mark Smallwood, Asia-Pacific head of wealth management solutions at Deutsche Bank Private Wealth Management (PWM).
The real value of a family office is when it forms the basis for the governance of the broader family wealth, from operating businesses to real estate investments, art and collectibles, private equity and, of course, bankable investment assets, adds Smallwood.
By centralising the control of the family enterprise into a corporate format, it enables the first generation to provide a disciplined framework for educating the next generation to continue the family legacy, he says.
Such a framework is also one way of ensuring that high-net-worth families and individuals develop their investing experience and knowledge and pass it on
The first-generation -- that is, newly -- wealthy are, in some ways, a lot more conservative in their investment style than the second generation, Kwong Kin Mun, head of Southeast Asia at Deutsche Bank PWM in Singapore. They tend to be strongly controlled by a matriarch or patriarch and buy assets they are more familiar with, which may not necessarily be the right thing to do, says Kwong.
For example, in the 1980s and 1990s, high-net-worth clients in the real estate development business were more comfortable investing in property stocks in their equity portfolio, says Kwong. "It's good to go with what you know to an extent, but not over do it, as there is sector concentration risk."
Moreover, the newly wealthy -- particularly in North Asia -- are inclined to take on a lot more risk, as they are still in the phase of wealth creation, he adds.
Second-generation wealthy tend to be a lot more knowledgeable and sophisticated, more open to new ideas with regard to portfolio construction and diversification, says Kwong. That does not necessarily mean they have an aggressive investment style -- on the contrary, he says, they have very prudent values imbued in them by their parents (first-generation wealthy).
But while the newly wealthy in Asia are less sophisticated and more conservative in terms of investing, there is no lack of business and financial acumen.
Whereas most wealth in Asia is first-generation money generated in the past 20 years, most European wealth has been created before the past 20 years -- hence, there's not the same entrepreneurial spirit as in Asia, says Hanspeter Brunner, Singapore-based chief executive for Asia at Swiss private bank BSI, a relatively new, but fast growing entrant in the region.
"It's automatic that you're much more into understanding the field of finance as an entrepreneur," he adds. "You learn the hard way when you make a mistake, as it hits your pocket."