While the future is never clear, HSBC advisers explain that heightened global risks call for a unique, diversified approach to protect wealthy families
Most people who build multinational businesses lead international lives: a week visiting clients in one part of the world before jetting off to be with family in another. But when Covid-19 cases spiked and lockdowns were mooted, the bubble of certainty burst. Flights were grounded and plans had to be changed.
‘The realisation that something so leftfield can occur and blow your plans completely off course was not something everyone has experienced,’ says Jeremy Franks, Head of Wealth Planning & Advisory for the UK and EMEA at HSBC Global Private Banking. Indeed, with more than half of all billionaires having been born after the World Wars, the pandemic had a marked effect on the world’s most affluent individuals.
For many, this realisation was a watershed moment – the jolt they needed to start structuring their wealth around their personal life, passions, and future ambitions. But where do you start such a project?
Guiding your wealth through geopolitical turbulence
The future is never clear, but the fog somehow seems denser than before. Governments around the world are dealing with the fallout of economic and geo-political shocks, while also attempting to curb climate change and fix a stuttering system of globalisation.
It would be easy for HNWs to balk at the scale of the unknowns, but the pandemic has provided a lesson in dealing with the unforeseen.
‘Everyone talks about investment and asset diversification, but “structure diversification” is as important,’ says Franks, who saw the pandemic hit clients with highly concentrated wealth profiles the hardest. ‘You often see people tying their family wealth up in a single structure or vehicle and leaving themselves vulnerable to major disruption,’ he says. ‘You can minimise this risk by spreading your wealth across different structures, and the pandemic has given us a usable test-case.’
Structural diversification can also keep wealth afloat in the wake of major geo-political events. ‘These are the periods when big political decisions get made,’ says Christo Scott, Managing Director at HSBC Global Private Banking. ‘For example, in this current scenario, some jurisdictions could answer the question of “who’s paying for Covid” with a wealth tax, which poses challenges to wealth concentrated in that jurisdiction.’
To execute this type of strategy you need a wealth manager that not only has deep regional knowledge, but can translate it into a language that addresses your personal situation. In Scott’s experience, this isn’t as simple as having a few analysts stationed around the world. Instead, he believes that a global partner needs vertical businesses in each region to fully understand the nuances and be able to translate them to principals in a way that seems familiar.
Striking this balance often draws wealth managers into a trap. As companies begin to sprawl across different jurisdictions they begin to throw up walls between regional business units, leading to internal competition and ultimately a lower standard of client service. ‘When HSBC ran into this issue they scrapped regional targets and organised everyone around clients’ objectives,’ says Scott, who believes that this has helped enhance the quality of service they’re able to provide.
‘What our product is and how we offer it isn’t really the point,’ he adds. ‘What matters is having a team of people who will work for you, because in five years the product you need is going to be completely different.’
By forcing HNWs to press pause on their businesses, the pandemic also allowed people to step back and look at their wealth in the wider context of their lives. ‘Since the pandemic we’ve seen greater awareness amongst clients that they need to bring the younger generations into family and business decisions to prepare them for the stewardship of wealth,’ says Nadine Vandenberghe, Senior Wealth Planner for HSBC Global Private Banking.
There are a number of ways to do this, continues Karina Challons, Managing Director in HSBC Global Private Banking’s Wealth Planning team, but an open conversation can help clarify the family’s core values. ‘If you were running a £100 million business, you would have a very clear brand; everyone working there would know what that businesses values are,’ explains Scott. ‘It should be exactly the same for a family with a similar amount of capital at their disposal.’
Disagreement is part of the process. ‘In fact, it should be encouraged’, says Challons, ‘because it gives the wealth generator a chance to see what family members are passionate about and where they could fit in the business.’
Pushing people into a role they aren’t interested in often leads to less-than-optimum results, something that is often cited as a factor in the ‘three generation rule’, which says that only one-in-ten family businesses will pass safely through two generations of children.
A different perspective
But this is looking at the issue the wrong way around. When you use the three generation rule to measure the survival rate of the broader business population, you can see that family businesses are extraordinarily resistant. A 2015 study of 25,000 public companies that traded between 1950 and 2009 found that their average life expectancy was just fifteen years – not even one generation.
And the family businesses that do manage to make it through three generations tend to go on for a very long time indeed. This longevity is buttressed by strong family relationships, and to cultivate this, members need to be able to air grievances and find solutions.
Poor interaction between family members is a strong predictor for the failure of a family business and as impartial observers, HSBC’s Global Private Banking team see this in many early-stage clients. ‘As soon as you walk in the room you can feel the tension,’ says Vandenberghe. (Professionals involved in succession planning will be able to visualise the scene.) ‘Everyone afraid of speaking and the patriarch or matriarch therefore thinks that nothing’s wrong.’
‘This can create serious problems down the line so families need to address it,’ she adds. ‘A trusted mediator is essential to this, ‘because the wealth generator may not have involved family members in decision making beforehand and will need guidance and a framework.
Here and now
As we peer into an unpredictable future it is easy to miss what is in front of our eyes. The pandemic was a humanitarian disaster on a scale the world hasn’t seen in decades, and the disruption it wrought on people’s lives was unimaginable. But by giving people time to step back and get back in touch with their family life, they were able to build stronger foundations for their wealth. These lessons should not be quickly forgotten.