Demand for wealth planning

by Hansi Mehrotra

15th December 2013

There is an undisputed need – and opportunity – for wealth planning structuring in India for the ever-growing number of wealthy entrepreneurs, families, and other individuals. The challenge for wealth managers continues to be how to make the most of this new “once in a lifetime opportunity”.

There are numerous drivers for the increasing importance of wealth planning in India today. As Indian business families move from one generation to another, and given the size and scale that many of these businesses have achieved over the past couple of decades post liberalisation, the key challenge for these families is the sustainability and continued growth of these businesses beyond the current generation. Given cultural dynamics, families are keen to ensure continued ownership, but at times they struggle to groom their heirs for ongoing management of the family business.

Further, most Indian families are getting increasingly global in nature – be it in terms of businesses and assets they own or the residence and citizenship status of members of these families. This leads to opportunities to structure their wealth in a manner that achieves the long-term objectives from succession, strategy and tax perspectives.

The growing interest in estate and succession planning is also due to families realising the reality of the post-2008 scrutiny by regulators and tax authorities around the world. It is also due to their desire to avoid the time, cost and emotional strains of disputes relating to divorce, inheritance battles or other conflicts.

Add to this, India has seen the emergence of a whole new generation of first generation entrepreneurs in the last two decades. And the new generation is not wedded to the family lawyer or accountant for advice.

Wealth levels and complexity driving demand

In highlighting the dramatic and sustained growth in total numbers and overall wealth of both high net worth (HNW) and ultra high net worth (UHNW) individuals in India, various wealth surveys and reports point to inter-generational wealth transfer as one of the main opportunities for wealth management organisations of all types.

According to a global HNWI survey in the Capgemini RBC Asia Pacific Wealth Report 2013, higher proportions of HNWIs in India seek advice on family wealth (rather than personal wealth) and perceive their needs as being complex. Potential reasons driving this complexity are higher rates of business ownership, as well as increasing acceptance of family wealth and succession planning. This is especially the case when wealth exceedsUS$5 million.

Further the survey indicated that 51% of respondents indicated that they had a strong willingness to pay more for customized service for their complex family wealth requirements. The percentages were even higher for HNWIs in higher wealth bands, with 57% of HNWIs in India in the US$10 million to US$20 million wealth band.

The report suggested that the emphasis of HNWIs on comprehensive wealth planning that addresses business and family-related advice will require wealth management firms to develop strong expertise in meeting a variety of in-depth needs, such as estate and succession planning.

Leading private banks, Merrill Lynch Wealth Management and Kotak Wealth, started offering wealth planning services a few years ago, indicating their commitment to have deeper relationships with their clients. Atul Singh,managing director, head of wealth management, India, at Merrill Lynch says: “Every wealthy individual in the country will have to think about planning for succession of their wealth. An offering that helps these wealthy individuals transfer their wealth to the next generation in a structured manner is critical to complete the full bouquet of wealth management products.”

RBS launched its service in 2012 though it works with external service providers. Shiv Gupta, managing director of RBS Private Banking in India, says: “Whilst still at a nascent stage, we recognise the importance for wealth planning in India where we are seeing the twin phenomena of significant wealth creation alongside a rising trend of intergenerational wealth transfers.”

Cultural dynamics

Views on wealth transfer, and succession planning, are partly influenced by values, which in turn, the current generation of wealthy individuals have inherited from their parents. Indeed, in India, the wealthy not only follow their parents’ values, but believe it’s important to follow in their parents’ footsteps and take over the family business, according to research included in the Barclays Wealth Insight 2012 report.

This is explained by the fact that in the Indian culture, there is deep respect for parents and tradition, and that individuals believe in a calling, or dharma, that is very influenced by the nature of one’s family and one’s obligation to them.

An unfortunate drawback of wealth is the ability to cause conflict. The Barclays/Ledbury research highlighted that 40% of high net worth individuals experienced some conflicts due to family wealth. Conflicts range from individuals who feel that they haven’t received their fair share of the wealth to children who feel they weren’t adequately rewarded for caring responsibilities preceding the death of a parent. There are disputes with spouses who feel they had contributed to the success of the other.

All conflicts are usually aggravated by emotions, which are kept under check while the patriarch or matriarch is alive, but surface after their death.

The research also highlighted that 50% of Indians surveyed thought wealth inheritance placed a burden, higher than the average 29% of all wealth individuals surveyed. In spite of this, Indians believed they needed to pass on the wealth to the next generation, with only 1% believing they didn’t need to, compared with the 4% global average.
Rohit Sarin of Client Associates echoes the same sentiment: “The biggest concern is around the readiness of the next generation to handle the responsibility of owning the family legacy as and when it happens. This has got accentuated essentially on account of growth in the scale of private wealth which could last a few generations and therefore a need for its continuity and protection for the benefit of future generations.”

He continues: “The second big concern is around the legacy of the family becoming a source of potential discord within the family thus leading to the downfall of the family. While the first one is a recent phenomenon in India in case of the second one there are several examples in India wherein once leading business families have got disintegrated and lost their ability to keep pace with the growing times.”

According to Adrish Ghosh ,head of wealth advisory, India, at Barclays Wealth and Investment Management: “as Indian business families move from one generation to another, and given the size scale that many of these businesses have achieved over the past couple of decades post liberalisation, the key challenge for these families is the sustainability and continued growth of these businesses beyond the current generation. Further, most Indian families are getting increasingly global in nature be it in terms of businesses and assets that they own or the residence and citizenship status of members of these families. This leads to opportunities to structure their wealth holistically (comprising business and non-business assets) in a manner that achieves the long-term objectives from succession, strategy and tax perspectives.”

Need for more discussion

In India, the discussions on wealth planning have only just started. According to experts, there are two main reasons on why there isn’t more activity – the sensitive nature of the topic and the lack of urgency.
Pranav Sayta of EY says: “There is a general reluctance to pick up this topic and discuss it within the family. There is fear of even starting a discussion around this topic. The need, urgency and the realisation of what could happen if it is not dealt with openly, frankly, transparently, needs to be very clearly brought out and understood and appreciated.”

Shah also feels that people prefer to talk about making money rather than giving it away, even if it is to their own family. “Planning for an eventuality like death is not an interesting subject and at times families don’t like to discuss this subject in a forum or with independent experts. However, with time this belief is changing and people are now much more open to discuss the dynamics of the family, the relationship between family members, potential for disputes, etc with independent experts and seek their guidance and advice.”

The other reason could be the sheer complexity of the affairs. Sayta says: “Structures that presently exist are very complex, there are cross holdings between extended families. People have perception that these situations cannot be surmounted.”
According to Ghosh of Barclays, the “primary driver of wealth planning is that most families associate themselves with their businesses. In the social world, they are known for their business, their social stature is related to the business. Hence, they want that business brand to continue as long as possible.” He believes issues like asset protection are secondary; clients agree these are important only after the wealth manager raises them.

People are disinclined to deal with or think about issues around the passing of assets to future generations. Some may also believe that a member of the family will step forward and organise affairs when the time is right.

Another reason may simply come down to human nature of procrastination and the fact that individuals are very busy – especially within families which are active in growing or developing their businesses – and therefore focus on the short term instead. “Families recognise the importance of the subject but don’t feel the urgency to act upon the same,”
says Shah.

 

Proper planning required

Ask any wealth planning specialist, whether at a private bank, a law firm, a trust company or a family office, and they will tell you the same thing: the starting point for getting wealth structuring right is planning.

The cost of not planning or failing to implement a succession plan is potentially huge. Doing so not only potentially threatens the value of an individual’s wealth but also the source and happiness of the family’s identity.

There are examples in the newspapers of people ending up in disputes with family members because there is either uncertainty or fear that one branch of the family is going to inherit more control or wealth than another. And as values increase all the time, the amounts at stake are worth fighting for.

Shailesh Haribhakti ,chairman, DH Consultants Pvt Ltd and managing partner, Haribhakti & Co, says if people care about getting their wishes fulfilled, they need to plan. They need to think about ”what is a fair way to pass on what one has accumulated in one’s lifetime? And how much of it should go to family, how much to charity, and how much to close associates.”

Haribhakti also stresses that people need to document what one wishes to see happen in a will. He added that this is something that does not come naturally to Indians as yet because of either a lack of awareness, knowledge, or help – or a lack of sourcing such help. If the situation is complicated, there may be a case for setting up structures like trusts, but that comes later in the thinking process.

Further, adds Haribhakti, is that if one wants to direct one’s life work and therefore the accumulated assets out of that work to specific purposes or events, then one should know how to do that. He gave examples of objectives such as wanting to make sure that one’s grandchildren are well educated, in the case of marriage or creation of fresh assets.

In his view, after thinking about how their wishes could be fulfilled, people need to think about how the current and anticipated tax consequences are taken care of. And lastly, he suggests, thinking about making sure that all of these services are executed at the right time by competent people.

Nishith Desai, founder and managing partner of Nishith Desai Associates, agrees: “Wealth planning raises several issues such as those in relation to distribution of assets amongst the heirs – whether it is to be done equally or equitably, the need for reconciliation of emotional thinking with rational thinking, the difficulty of being able to find a prudent trustee, structuring or restructuring the business for smooth inheritance and minimization of tax implications, etc.
“Families get more heterogeneous and the sophistication needed to serve them increases,”
says Armando Roselli, executive director, head of tax and wealth structuring (TWS), RBS Wealth Division, touching upon the need for a more organised approach.

So why doesn’t everyone make a plan for succession? For some people, the cost and apparent loss of control, which might arise from the process, might be a disincentive.

Even among internationally-mobile HNW individuals – those people who live, work, or spend more than half their time outside their country of birth, and have investable assets of at least US$1 million – a lack of formal estate planning is observable.

This is according to a report released in December 2012 by RBC Wealth Management and The Economist Intelligence Unit (EIU). The research showed that while 41% of such individuals who were born in Asia Pacific plan to leave all of their wealth to their family, compared with 24% of their counterparts in Europe and 14% in North America, in general over one-third (37%) do not have a will in place. Only 36% have a trust; and just 9% have a foundation. Meanwhile, 34% of respondents admitted to not fully understanding the tax regimes that their assets are subject to.

As a result, advisers need to help families focus on the benefits of effective planning in relation to estate and succession needs and objectives – rather than allowing this to be perceived as a cost. These include financial and non-financial benefits, such as family harmony, and knowledge about the nature of the family business and how it operates.

Even in India, the divorce rates are rising. Hence, people are more concerned about potential break-ups in their marriage or, more often, their children’s marriages.“Families want to ensure that their wealth does not go out of the family in case of divorce or death,” adds Tariq Aboobaker managing director, Amicorp Trustees (India) Pvt Ltd.
It is critical to plan as far in advance as possible; it’s never too early. “ Estate and succession planning takes time,” says Gautami Gavankar, senior vice president and principal advisor – estate planning at Kotak, “as families need to sit together and deliberate on various important aspects of business or wealth succession, deciding whether the mode of succession is through a will or through a trust, if through a trust then the type of trust, who will be the beneficiaries of the trust and when will the trust dissolve, who from the family will control the management of the trust, etc.”
A particularly important aspect of this, in light of the industry’s increasing regulatory and compliance requirements, is for advisers to ask their clients as many questions as possible, so that clients are aware of the range of potential issues involved.

Such questions should focus on, for example, a client’s children and where they are being educated. Not only is it important to get to know the family better, but it can help identify tax and visa implications, depending on the jurisdiction.
In terms of commercial drivers, before businesses get listed, there is a need to ensure continuity in terms of the ownership and management of the organisation. People want to be able to make sure that their wealth gets passed to the right people at the time they want.

Although creating a plan in any of these situations is the first step, that isn’t enough on its own. Advisers need to follow through and make sure the client is implementing it.

There are various triggers for families to consider estate planning, ranging from large families with complex holdings to dispute management, to separation of management and control of family businesses.

Aboobaker of Amicorp believes there are a lot of large families who have had to consider estate planning for the first time as the complexity has grown beyond recognition. He says: “Estate planning can add value to individuals with a larger family because a lot of times there are cross holdings of assets. One does not know what belongs to him or her because expenses were taken care of by business house. Over a period of time, as generations go by, one may look at to setting up something of one’s own or looking to move out of the family business. At that point of time, you really don’t know what’s yours. It’s difficult to bifurcate within the family, which business belongs to which brother.”

Adds Sayta from EY: “A significantly large percentage of the Indian businesses are organised as Family businesses sometimes spanning over several generations. Succession of the business could pose a challenge especially if the businesses are set up as complex, multi-tiered cross-holding structures with no distinction being made between personal and business wealth. In addition, the successive generations may have varied interest or may choose a path different from the family business. This makes succession planning a complex but relevant task for the Family patriarch.”.

One of the main reasons people think of estate planning is family disputes, says Marylou Bilawala from Wadia Gandhy. The HNI survey included in the Kotak/CRISIL Top of the Pyramid Report shows that a wide variety of responses when asked about their understanding of estate planning.
The benefits of planning, therefore, should not be under-estimated.

Role of wealth managers as trusted advisers

A good place to start the estate planning process has traditionally been the client’s lawyer, as they know the individual and their families well. As families in India grow in net worth and size, and even physical distance as business becomes more global, these are fertile grounds for family disputes. Hence, families usually reach out to their lawyers with their concerns, usually with requests for mediation and consensus based approaches rather than litigation.

The Top of the Pyramid Report by Kotak and Crisil confirms the heavy dependence on law firms with regards to estate planning among HNIs.

 
Rishabh Shroff, senior associate at Amarchand & Mangaldas, says: “Lawyers, as the quintessential trusted adviser, have a very important role to play in a family business. In relation to a family’s estate planning and wealth management structures, this role is even more crucial. As Indian family businesses become more complex and diverse, their lawyer will need to understand the family dynamics and pressure points, and offer insightful and bespoke solutions. He will often also need to be a skilled commercial lawyer, to also be able to advise the family business itself.”

Family offices like Client Associates, which have already established a long-term trusted relationship with clients, take on an educational role. “A family-oriented advisory firm like ours plays the role of a family CFO. As part of that mandate we educate the family about the need to have proper wealth planning in place. Once there is acceptance of the merits of the same we then facilitate the execution of the wealth planning process in coordination with specialists and the family members,” says Sarin.

With private bankers, the issue is that they are so focused on their revenue targets that they do not often engage their customers on these long-term issues, especially since the estate planning process stretches out over months and clients do not sign up that easily.

The industry has got used to selling investment products as the main way to interact with wealth management clients. However, it isn’t appropriate to “sell” trusts as part of wealth planning. They are complicated, technical and must be highly personalised. As a result, clients need to talk to bankers with some experience in these areas and who have dealt with other families in similar situations.

The first person a client speaks to should have enough expertise and experience with wealth planning to be able to help clients think about the questions to ask. They should also have some understanding of the existence of different tax systems and legal regimes in the different jurisdictions in which clients have assets.

Angelo Venardos from Heritage raises the difficult issues that advisers need to address with their Indian clients. “The 3 d’s – death, divorce and disputes. ‘What happens if I die?’ not if, it is when i die. The new generation is global, more educated and more vulnerable to divorce.Disputes are caused by more spouses, children, family members and international cultures. The wealthier the client, the more certain the 3 d’s will happen.”
Ghosh of Barclays says private banks can also play the role of trusted advisers. “If a clients’ trusted adviser for years represents a private bank, they are happy to look at a one-stop-shop, if available. However, clients still want flexibility to deal with change (both in terms of their own thought process as well as changes in service provider or their trusted adviser) and as long as that is provided for in the framework they are happy to proceed.”

An important aspect to consider in order to securing business from clients is focusing on the long term. Advisers must begin by asking the difficult questions about the long- term future. The best time to do this is often when starting a relationship.

However, the experience of the relationship manager is important. When asked about how RMs feel about bringing up sensitive issues with clients, Ghosh says: “It’s a mixed experience. Experienced RMs are fairly comfortable, and with the help of wealth planning experts, they can be very effective in providing long term planning solutions.” However, he admitted soft skills are very important as conflict situations, if not handled properly, can get further aggravated.

Merrill’s Singh says: “When you sit across the table and ask hard questions nobody likes it and nobody wants to think about these unpleasant questions but then you make them think about it. This is not an individual conversation, and you just can’t talk only to the promoter – you have to get the whole family involved in the process. Because of our experience in dealing with similar situations with many other business houses we can bring in all of that understanding to the table and help the family make critical decisions around their structure, objectives and milestones as they think planning for the next generation.”

Ultimately, discussions around wealth planning help RMs enhance their understanding of their clients. “Clients are ready to share willingly based on how strong the relationship is. Clients realize that long term planning cannot be postponed and when in place needs to be regularly,” says Roselli of RBS.

“Clients require a lot of help from specialists and it’s not just from banks, it could be lawyers, accountants etc. It is often about reconciling what is usually a conglomerate of things into something which is much more meaningful for long term planning,”
explains Roselli.

 

Educating and engaging the next generation

Being able to really engage and prepare the next generation is a further challenge – but one that, if done effectively, can drive more wealth planning-related business.

In Asia, it is often the case that children are not well-informed about the family wealth or business. Many families face difficulties in getting their children to understand not only the principles of finance, but also how inherited wealth will change their lives.

Organisations and advisers can facilitate this through conversations and activities that help children to understand the family’s values, goals and approach to money management. For example, all sorts of next-generation programmes have sprung up in recent years as private banks eye this as a foundation for client continuity, education and networking.
Plus, the fact that most of the younger generations have Western university education (not necessarily just from business schools), means that broaching these subjects and starting the process is easier now than say, 10 years ago, adds Venardos at Heritage.