Contributed By Dentons China
In China, legal services in the fields of family (business) and private wealth management (hereinafter referred to as the “family wealth management field”) have received more attention from legal institutions and professionals. The leading law offices have basically all entered the field, and some have already preliminarily completed the market layout. In addition, a certain number of law offices and professional teams focusing on this field have emerged. Legal services in family wealth management have become a new "point".
It is a necessary lesson for legal service institutions to observe and grasp the development trend of family wealth management, including changes in the industry and market, service providers, customers, service technology and tools.
Development Trend of Family Wealth Management Industry and Market
It is an indisputable fact that the family wealth management market has become more and more mature, and has become active at home and abroad at the same time. It is particularly noteworthy that there has been a breakthrough in the domestic market since 2018, when the number of high net worth individuals in China (entrepreneurs are the main body of high net worth individuals in China) reached 1.67 million and the family wealth management market reached RMB39 trillion. It is expected that the number of high net worth individuals in China will reach 2.41 million by 2023, and the family wealth management market will reach RMB82 trillion.
There are more and more active family wealth management institutions, as banks, trust companies, securities companies, insurance companies, family offices and third-party financial institutions have entered the field. For example, the repositioning of the brokerage business of securities companies as wealth management business makes for a remarkable dynamic. There are many examples of securities companies providing family office services based on investment banking business.
The family wealth management service eco systems have become the competitive market subject. Institutions with strong financial or wealth management capability still focus on their advantages of financial services in family wealth management business but are lacking in related capabilities, such as top-level structure design and overall improvement of "family power", which means the power of a family’s sustainable survival, the power of a family’s sustainable development, and the power of the core social value of a family's faith. It can be seen that institutions that build family wealth management service eco systems with a combination of external professional resources and excellent third-party service institutions (law, taxation) can form advantages in the fiercely competitive market. The market is no longer the competition between single institutions but the competition between service eco systems.
Standardised services coexist with customised services. Relying on standardised services, family wealth management institutions have gradually evolved to provide customised services for specific customers according to their service demands, forming two service levels (standardised services and customised services) to meet the service demands of customers at different levels.
The value of legal services (including taxation) in family wealth management has gradually become prominent. In the family wealth management service eco system, as well as in specific wealth management matters, legal services have become an issue of differential competition. Legal service institutions have unprecedented enthusiasm for services in the field, with some positioning wealth management business as new strategic business.
There is a "return" trend in market and industry. There has been product-oriented market logic behind the flourishing development of family wealth management market in the past few years. Simple products and services promoted by practitioners for performance or quick turnover can not only solve the problems of family customers, but can also bring huge risks and losses. With the deterioration of the market environment and frequent risk incidents in 2018, these problems and drawbacks have been exposed more thoroughly. Short-sighted pursuit of interests has seriously overdrawn the trust given by customers, and customer trust is the fundamental foundation for all wealth management practitioners. The whole industry has examined its own conscience, and practitioners have re-recognised the nature of the industry and begun to pay attention to the core issues of family wealth management, such as nature, logic, position and fundamental objectives – for example, the whole industry has paid attention to the "family position".
But there are also some institutions in the market and industry that have crossed the bottom line. Under the banner of "innovation", they design various "traps" in the service with asymmetric information of family customers in the professional field, but with the institutions’ own business interests as the core purpose. They serve as "thieves" rather than guardians of family wealth. How to solve the "conflict of interest" between wealth management practitioners and family customers? On the one hand, everyone in the industry has to adhere to the bottom line; on the other hand, relevant laws and regulations should be promulgated to monitor and correct the behaviour of professional institutions. There is still a long way to go to achieve the goal of healthy and sustainable development of the wealth management industry.
Development Trend of Family Wealth Management Service Providers
With more and more attention paid by various institutions to family wealth management, more and more institutions and professionals are participating in the field. The overall service capacity and level have been greatly improved, but homogeneity is still prominent and how to find the entrance to the differential competition is a more challenging issue.
Service institutions have become more and more professional. Since 2018, service institutions have not only greatly strengthened the training of internal professionals, but also re-positioned services at different levels. For example, some institutions are positioned to serve "family customers at the entrepreneur level" and mobilise all resources within the institution to meet the needs of entrepreneur customers, showing a difference to their peers and maximising customer loyalty; for example, 68 licensed trust companies in China focused on commercial trusts and have basically been transformed to family trust businesses in the new regulatory environment. However, most trust companies lack practical experience and staffing in the family trust field, so many started to set up internal legal, risk control and financial teams for family trust business last year, and have become more and more professional in family trust matters through external professional support and internal training.
The internal service system of wealth management service institutions is becoming more perfect. Leading service providers build different service systems according to different customer sources as well as layered service systems based on different customer levels, as new family office service systems gradually take shape and the business network of wealth management institutions becomes more perfect. For example, the family office of a Chinese private bank has constructed a comprehensive service system to meet the needs of its ultra-high net worth customers (with family assets of more than RMB3 billion), including full-powered portfolio management, family trust at home and abroad, family business governance and legal consultation, real estate management and charity management and tax planning.
The service risks of family wealth management institutions are increasing. Many institutions and professionals rush into business areas they are not specialised in or even familiar with to provide corresponding services, which not only increases the risk to customer wealth management due to their irresponsibility, but also brings huge service risks to themselves. For example, there are huge service risks in the cross-border tax service area. Many family customers have realised a global distribution of assets, business, identity and even structure, while a large number of active professionals only plan for the perspective of their relatively familiar tax-related areas, which will inevitably bring not only additional tax risks to customers but also service risks to themselves due to lack of overall planning.
Development Trend of Family Wealth Management Service Customers
The proportion of customers with a demand for family wealth management has increased significantly, including large families as well as typical middle class families. Against the background of transformation and upgrading, the alteration of generations, ownership changes and comprehensive compliance, especially the global economic slowdown, the collapse of financial markets, the implementation of CRS and the reform of personal tax in 2018, many family customers have shifted from the previous wait-and-see tactic to the implementation of comprehensive wealth management solutions in terms of demand for wealth management. According to a survey, 74% of high net worth individuals regard wealth security and preservation as their primary goal, and nearly half of all high net worth individuals have considered or will consider wealth inheritance within three years.
Family wealth management customers are more inclined to seek overall solutions, including large families and middle class families. Obviously, there is no way out for wealth management services with one single product – even single-objective services need to be considered in the context of overall solutions, and mature customers are selecting family wealth management services with high standards.
In family wealth management, the demand for synchronous planning at home and abroad has been thoroughly stimulated against the background of global comprehensive compliance. For example, the demand for wealth management with "USA-related" elements is very urgent, which poses greater challenges to professional ability and cross-border service ability. The market of "foreign-related" family wealth management needs to be focused on in the future, and the explosive force of the market will be amazing.
The level of demand has increased significantly. Family wealth management has transited from private wealth management to top-level structure design of family enterprises. Many families are paying attention to family power "practically". For example, the demands for family regulations and family constitutions have increased greatly since 2018.
Customers’ ability for selection has been improved. Customers already have the ability to apply family wisdom to select the most professional (rather than well-known) institutions and teams to provide services, which, as a symbol of market maturity, has become an increasingly obvious trend. Professionalism is essential for professional institutions and professionals.
Development Trend of Family Wealth Management Service Techniques and Tools
The ability for the comprehensive use of tools has been improved. With the comprehensive use of structural tools, financial instruments, identity allocation, willingness arrangements and family agreements as a trend, the family wealth management institutions have improved technical capabilities as a whole.
The core value of structural tools has been recognised, with structural tools (family trust, private trust company, family holding company and family limited partnership) attracting more and more attention among family wealth management institutions and customers, and becoming core tools of family wealth management.
Customisation logic is generally accepted. As technology logic for family wealth management develops from simple to perfect, more and more institutions and professionals have accepted "customisation" logic, designing products and provided services accordingly, which is the most noteworthy trend.
Service techniques are becoming more and more difficult. Customisation puts forward new requirements for service techniques, and cross-border services also make techniques more difficult. For example, the current systematic "USA-related" services put forward new requirements and challenges for techniques and capabilities.
Promoted by insurance trusts and charity trusts, family trusts and other tools have been officially recognised in China. However, the authority's understanding of the core value of family trusts (there are negative concerns that wealth can be transferred overseas through family trusts) needs to be further clarified and guided.
Since 2018, family wealth management services in China have developed rapidly, and will be further accelerated due to the development of the industry and the market, the maturity of tools, techniques, methods and logic, and the matching of customer demands and service systems.
Although the legal value in family wealth management has gradually become prominent, how to fully realise the service value of law offices and professionals to better serve the Chinese family still needs to be explored and practised for a long time.