Asia’s growing private wealth is providing an increasing amount of work for offshore law firms.
It is no secret that Asia now is now home to wealthy individuals who have benefitted enormously from the region’s rapid economic growth.
Thus the issue at hand is not just how to make money, but to preserve and grow existing wealth. With that in mind, more and more wealthy individuals and cash-rich companies throughout Asia are turning to offshore law firms.
According to a report by Boston Consulting Group (BCG), private wealth in the Asia-Pacific, including Japan, is expected to surpass North America by 2019 and will hit $77.8 trillion by 2021. And even with that deep pool already built in, the amount of wealth in the region is growing faster than anywhere else, with robust annual increases that are just shy of double digits. We expect the sizable growth to continue.
And these Asian investors are now the largest source of global offshore wealth. According to BCG, Asian investors placed $2.9 trillion in offshore booking centers in 2016.
As expected, China is leading the charge. “In the past decade, the number of high net-worth individuals and the level of concentration in China has seen a surge,” says Fiona Chan, a partner with Appleby.
“And in recent years, we have seen rapid growth in other Asian developing countries as well, for example India. Compared to the uncertainties in the U.S., which is undergoing some sudden changes of national policies promulgated by the President Trump, and Europe, where saw refugee issues emerging, terrorist attacks and huge economic and political change brought by Brexit… the growing strength of private wealth in Asia is rather remarkable.”
India also posted double-digit growth (11 percent) in the past year amid a climate of government reforms, breaking the $2 trillion mark in private wealth, with most of the expansion stemming from new household savings. Significant growth in wealth is projected to continue in India.
THE RICH MIDDLE KINGDOM
China is pumping out high-net-worth individuals at a torrid pace. The country possesses the largest amount of private wealth in the region and the second largest globally. It has seen wealth expand the most in both relative terms (13 percent year-on-year) and absolute terms as government efforts to transform the economy showed positive results.
China’s private wealth has swelled to 165 trillion yuan ($24 trillion), more than six times its level in 2006, according to the fifth China Private Wealth Report, developed by consultants Bain & Company in collaboration with China Merchants Bank.
The main reason most individuals give for such snowballing private wealth in China is the country’s rapid economic growth over the past couple of decades. However, this does not paint the whole picture.
“It is a massive market. The growth has really gone in accordance with the economic growth and population. It is also combined with entrepreneurs, innovation and Chinese returnees from overseas,” says Kristy Calvert, partner and chief representative of Harneys.
“Over the past five years, more and more Chinese entrepreneurs who lead private companies are investing globally. They want to expand and have a global footprint. Private wealth is generated by them,” said Calvert. “Probably their names are not as familiar to us as Baidu, Fosun or Alibaba, but there are currently thousands of entrepreneurs running successful private business and operating in different industries, for example medical technology, renewable energy, real estate, and all kinds of sectors. The owners of those business are where those high-net-wealth-individuals and private wealth coming from.”
The number of Chinese with at least 10 million yuan (about US$1.5 million) in investable assets increased from approximately 180,000 in 2006 to nearly 1.6 million in 2016, representing a more than eightfold expansion within a decade, according to the report. The number of Chinese with at least 100 million yuan ($15 million) in investable assets has grown at an even faster rate. There are now about 116,000 of these ultra-high-net-worth individuals, compared with 7,000 in 2006.
While the increases are astonishing, figures are not the only thing that has changed over the years. Mindsets among wealthy Chinese have evolved, as they have grown more discerning about how, and with whom, they invest that money.
Older wealthy individuals in China, who rode the wave of the country’s opening-up and reform policies in 1980s and developed businesses from scratch themselves, were usually depicted as inclining to manage their money on their own; but the situation has changed.
“The first generation of entrepreneurs, who grew their own businesses back then, usually have their own ideas about managing wealth. They see it more or less like running their own business, which they have proved that they are good at,” says Calvert. “But the next generation is more inclined to use advisors, because they now understand they need to have different structure to protect their assets and carry out succession planning. This includes trust structures in offshore jurisdictions.”
THE NEXT WAVE
It is these second generation and third generation entrepreneurs, often the sons and daughters of first-generation company founders, who are driving the need for private wealth advisors. Armed with an overseas education, many of them are taking wealth management more seriously from a very early stage, and have a more sophisticated approach to the subject.
“The second generation has a very different risk appetite. They tend to pay more attention to preserving the wealth their parents built up, in order to pass it on to the next generation, instead of simply focusing on accumulating more wealth. As a result, they are more willing to look at new ventures and new structures,” Calvert says.
Chan of Appleby echoes the idea, says that clients are additionally more keen to interact with law firms directly, unlike a generation ago.
“The older generation of Asia who sought professional advice would often approach their trusted advisers or service providers, such as accountants and bankers,” Chan said. “Now we see more Asian clients coming to us directly. In Mainland China, in particular, the trend is for family offices to consult us on various offshore structure. Such offices usually start with serving for one particular single family and with reputation and credibility built up, serving multiple families.”
Chan adds that client queries have also changed in a major way.
“Most of the requests we received in the past tended to related to compliance with the law and relevant regulation whilst preserving their asset,” said Chan. “Now, their questions are more specific on the flexibility of the offshore structure. They know exactly of what they want, and we can skip some pre-education part, which makes the whole consulting process more efficient.”
The rapid growth of private wealth in Asia, added to increased willingness to consult professional advisers, offers tremendous opportunities for offshore law firms, who can fine-tune their offerings using the benefits provided by offshore centres in order to cater to the needs of individuals.
“Offshore structures are more flexible. For example, we operate in eight different jurisdictions, including BVI and Cayman Island and each has its own regulatory characteristics can fit in different kind of trust structure and satisfy various requirements the clients demanded,” says Chan. “For example, Bermuda is well known as an offshore center for insurance products.”
GROWING TRUST
To tap into the rapid growth of Asian private wealth, lawyers see the need to build long-term relationships based on trust.
“You need to patient and build a trusted relationship with these high-net-worth individuals. As I mentioned, different generations have different mindsets. For example, the first generation can be quite rigid when it comes to their values and principles, as they have been pretty successful in their own business,” said Calvert. “On a lot of occasions, our relationship began not through advice related to private wealth, but actually as offshore legal advisers on cross-border transactions. And once the trust was established, and they began looking at asset planning, did we offer our services for private wealth.”
Chan agrees, saying that for the new generation of Asia’s wealthy as well, it can sometimes require a similar approach. For example, fintech or other innovative technology startups might look to law firms for legal advice when it comes to offshore structures, but may not immediately have a need for wealth advice.
“Although we may not have substantial private wealth management business with these start-ups right now, but it is a good approach to serve them from the beginning so that we can understand the new industry, their asset structure and their particular legal needs and thus a solid ground is laid for further cooperation,” says Chan.
Furthermore, designing a structure that fits an individual client’s specific need is another key quality that offshore lawyers should have.
“You need to be flexible with what they want to do,” Calvert says. “It does not make sense if you are just trying to sell a particular offshore trust product. I like to work with long-term objective in mind, as to how to be their trust adviser. For example, if they have some business in the U.S., and it might make more sense for them to have a US trust, I would look out for the best interests of the client, and give advice on how to structure in a reasonable way,” Calvert adds.
Looking forward, lawyers believe that along with the continuous economic growth, as well as the overseas ventures of entrepreneurs overseas, there is still great potential in Asia for the private wealth management business of offshore law firms. To cope with that demand, lawyers with a more commercial mindset are needed.
“A good lawyer is not just strong technically. You also have to be very commercial- minded, and understand the local cultural. That way you can come up with solutions that people need,” says Calvert. “Additionally, you have to be able to adapt to market trends. So you need to be able to continuously look at new areas of business, for example the fintech industry, and see how legal solutions can help these new areas.”
