The traditional concept of a family office dates to the sixth century when a king’s steward was responsible for managing royal wealth. The establishment of Open-Door policy for trade in the 1900s and development of private wealth management in the late 1980s paved way for the evolution of the modern-day family office.
Family offices are arguably the fastest-growing investment vehicle in the world today, driven by the sheer concentration and growth of wealth held by the ultra-high net worth families. Family wealth among the global richest 1% grew from $12tn in 1970 to $92tn in 2015 (not adjusted for inflation) – a near eightfold increase in overall wealth.
As wealth grows, so will the concerns surrounding wealth preservation and succession planning. There is a famous saying in China that “wealth does not pass three generations”, 富不过三代. But it’s not unique to just China, the same sentiment can be expressed across multiple cultures such as Japan “rice paddies to rice paddies in three generations”, to Scotland “the father buys, the son builds and the grandchild begs” and the US “shirtsleeves to shirtsleeves in three generations.” With many of the original founders and creators of wealth in their 50s and 60s, wealth succession, inter-generational financial literacy and the transmission family values is a key issue.
China is a leader in creating personal and family wealth growth, in 2019 the number of wealthy Chinese families has overtaken the number of rich Americans for the first time2. There are now 100 Million Chinese families among the world’s top 10% compared to 99 Million in the US. But it’s not just the wealthy, China is undergoing a consumer revolution driven by an emerging demographic of ‘mass affluent’ households, typically those with around USD$1 million of investable assets. These dynamics are rapidly changing wealth management in China, including the creation of new family offices to manage family wealth.
Asia-Pacific, and China in particular, is a leader in creating new family offices, with 39% created since 2010 alone, according to the UBS Global Family Office Report 20193.
When creating any family office many families make their initial focus on investment management, business operations, tax and so forth. But increasingly the focus for family offices in Asia-Pacific is ensuring that nest-generation transition occurs seamlessly and that family values transmit through time. As noted below (Figure 2), family wealth transition occurs in Asian families much younger than in Europe or North America and therefore careful attention needs to be paid to education and training. A well-constructed family office can play an important role in preparing the next generation.
Family office creation is occuring rapidly in China and we believe that paying attention to multi-generational wealth transfer makes sense from day one, not as an after-thought!
1. EY Family Office Guide (https://assets.ey.com/content/dam/ey-sites/ey-com/en_us/topics/tax/ey-family-office-guide-2016.pdf)
2. Credit Suisse Global Wealth Report (https://www.credit-suisse.com/about-us/en/reports-research/global-wealth-report.html)
3. UBS Global Family Office Report 2019 (https://www.ubs.com/global/en/wealth-management/uhnw/global-family-office-report/global-family-office-report-2019.html)