Succession planning: Family unity key to establishing who will follow the leader

“We treat our fish well,” says Maya Prabhu, managing director of the Coutts Institute, with a broad smile on her face, as she strolls past the crystal clear waters of the ornamental pond in the atrium of the bank’s recently-refurbished headquarters in London’s Strand. “If I came back to earth as a Koi Carp, I would want to be living here at Coutts.”

While the bank has yet to master the technique of re-incarnation for its clients, it is working on the next best thing – making sure the next generation is as well cared for as its current crop of entrepreneurial clients.

It is Ms Prabhu’s job to advise Coutts’ clients and their families on developing the roles and skills of the next generation, putting in place succession planning for both the business and the wealth assets and drawing up agendas for family governance and philanthropy projects.

With only 13 per cent of family businesses making it to the third generation, according to Coutts, it is imperative for the conversation about wealth transfer to start as soon as a client is onboarded by the bank. “We will say ‘let’s look at your wealth, including the operating business and cash’ and ask: ‘what is the purpose of this for your family and what are your financial aims?’”

Managing the client’s business and financial portfolio and the process of passing on this wealth to close relatives or confidantes go “hand in hand”, believes Ms Prabhu. 

“Some of our competitors just work on managing a portfolio of assets, but we have been successful as a [succession planning] team for more than 10 years.”

While many entrepreneurs put the often thorny questions of family dynamics and a succession plan to the back of their minds, this can sap their energy and creativity, says Ms Prabhu.

“It often keeps them awake at night and stops them making money during the day,” she says, describing how a “super determined, super-driven” business leader can be weighed down or distracted by problems relating to his “wife, mistress and favourite child”.

Entrepreneurs, she says, often need to be persuaded to recognise the skills and abilities of all branches of their family, including the next generation, which may not share the same qualities as the business founder, but generally have abilities of their own.

“Many of these clients believe their children cannot do as good a job as them,” says Ms Prabhu sadly. “Tradition might dictate the son should have a prominent role in the business, while in reality, the daughter is more confident, though her husband might not be favoured by the family.”

The key challenge, she says, is to make these deliberations and discuss them with all concerned in such as way that maintains family unity. 

Ms Prabhu says: “Many are thinking, how can we have the conversation in a way as not to destroy family relationships and to preserve our life’s work?”

Coutts has identified five options that wealthy families typically look at when it comes to succession planning:

• Do nothing, as it is too difficult to make provisions for succession. But an unprepared family can leave chaos in its wake.

• Pass on ownership of assets to other family members.

• A transfer of ownership to family members, with business professionals brought in to run the firm.

• Pass on the business to trusted staff, who have loyally served the owners for many years.

• Sell the business, if none of the above are viable.

But the next generation is just as nervous about its role in the business as the patriarch is distrusting or disparaging about the entrepreneurial abilities of his offspring.

“The younger people are asking themselves plenty of questions,” she says. “How will I work and I am right for this role? Will the employees respect me? Will mum and dad eventually step away from the business and how will I get on with my cousins? Often the next generation are in their 40s and 50s, but their parents are in their 70s and 80s, still working away and exercising control. It’s very hard to let go of your life’s work, however much you love your children.”

Structuring a succession plan often involves setting up a trust to tie up the shares. But the details must be communicated to and agreed by all concerned, in order to avoid the type of bitter, prolonged, often high-profile succession battles that have torn apart families such as Asia’s Kwok clan, scrapping over ownership of the Sun Hung Kai Properties empire.

“In many families, particularly in Asia, they are not talking to [the offspring] to the extent they should. They jump very quickly to the structure of the trust and how the shares are distributed,” says Ms Prabhu. The result is that a son or daughter, believing another sibling has been unfairly favoured, feels humiliated, verbally poisoned by senior company staff and then disputes any succession plan in court.

“Succession planning should really be a non-event, because you have spent years talking to the family” about the impending transition, she says. “If everyone is involved in the decision to choose the next leader, they are less likely to challenge it.”

There are many factors involved in the structuring of the wealth, including the preferred jurisdiction for family members to live in. Those based in the UK often prefer to structure trusts either in the Channel Islands or a European onshore jurisdiction. “My personal view is that when decisions are made purely for tax reasons, it doesn’t work,” says Ms Prabhu. “More and more families are thinking that tax planning is not the most important factor.”

Those banks tempted to give tax advice are straying into dangerous territory, believes Heinrich Adami, head of private clients in Pictet’s London office. 

“Certain banks like to get into succession planning as an offering, but as a bank, you shouldn’t give tax advice,” he says. “But you need to be an educated counterparty and be able to understand the situation in which your clients find themselves in the context of their investments.

“We can’t tell a client to come to us and we’ll give you tax advice, as it’s not a service that’s on our list. We can say that we think this is an investment that will impact your tax position in a particular way, but you have to check it first with your tax adviser and lawyer.”

For many clients, a pre-occupation with passing assets to the next generation often overshadows the core private banking activity of actually managing their portfolio, suggests Alex Scott, founder of the Sandaire private investment office. While not all families have succession issues, they all want their wealth to endure, often through philanthropic initiatives, he says. 

But institutions often fail to deliver their promises on succession planning, believes Seb Dovey, founder of wealth think-tank Scorpio Partnership. He blames the spread of hysteria around succession planning on banks, who suggest a “tsunami” of wealth transfers to the next generation has not been adequately planned for.

“This conversation has been going on since the 1990s, so it is not as much of a tsunami as the banks claim,” says Mr Dovey, who believes many wealth managers are terrified of the new generation of clients voting with their feet once wealth has been passed onto them.

In order to hold onto the business, once the account falls under the control of a younger family member, private banks must install multi-generational teams that can relate better to their clientele, he says.

“The industry has a labour problem regarding the quality and quantity of relationship mangers, but they are trying to solve this by installing more mechanical processes through digitalisation and moving upstream to wealthier customers,” says Mr Dovey. “Banks are failing to look at the key issues: they don’t have enough people in the right place to meet the switch to the next generation.”

While the average entrepreneurial client of a private bank is now aged around 38 or 39, down from 45 five years ago, the age of the typical private banker servicing them has fallen only marginally, from 45 to 43. “They are not in step with the market,” he says. “Most private banking CEOs don’t really think about this, but they should, as they need to support their capacity.”

When it comes to having the conversation with clients about succession plans, the industry does an excellent job of this, says Mr Dovey, drawing on his firm’s research of wealthy individuals using private banks.  “But it does a terrible job of recording it. Every time the client wants to discuss these issues, it’s Groundhog Day. The psychiatrist is not making the notes. The ability to draw out answers is there, but the ability to record them is not. It is an opportunity lost.”

In order to address these issues, the industry must make sure it has a pipeline of new, younger talent to reset the systems as well as relate to younger clients.

“The biggest question is how prepared is the industry itself in its own succession planning? Do the likes of [UBS boss] Juerg Zeltner or [Julius Baer’s] Boris Collardi have a successor lined up or at least a plan? I’m not sure they do,” says Mr Dovey.  

Boots Camps

Private banks and investment offices are agreed that the key to succession planning is financial education of younger family members. At Coutts, the discussion often starts with a talk about savings and business objectives, but philanthropy is the biggest draw of all when it comes to engaging the next generation.

“Philanthropy is about how we can work with the world around us,” says Maya Prabhu, managing director of the Coutts Institute. “Young people come in here for philanthropy workshops from an early age.”

The youngest pupil to have attended these seminars was just eight years old, but most typically start coming during their early teens. The youngsters eventually graduate to a Future Leaders’ bootcamp, now in its sixth year, structured as a week-long programme for 18 to 25-year-olds, where they study personal development, entrepreneurship and family business issues.

Pictet also holds classes for younger family members, but focuses mainly on portfolio management. “We want to be known for investment, not tax advice,” confirms the bank’s head of London private client business Heinrich Adami.

While private investment office Sandaire does not have enough clients to organise a formal bootcamp, around 20 children of customers have completed internships with the firm, based in London’s West End. “They come in, do a job and build awareness of the vocabulary, opportunities and challenges of wealth management,” says the firm’s founder Alex Scott.