Generation gap grows among ultra-wealthy
WHEN JPMORGAN PRIVATE Bank anonymously polled a group of clients and their children at a global seminar held in London in June, it unearthed an interesting anomaly. Seventy per cent of ultra-wealthy parents thought they had done a great job in communicating issues surrounding the family wealth. A mere 20 per cent of their offspring agreed.
'Right there in those answers you can tell that there is a huge gap between the generations,' says Maria Elena Lagomasino, the bank's chairman and chief executive. 'I know it sounds a little insensitive, but the truth is wealth brings with it a series of responsibilities and burdens and knowledge. It is incredibly important that the existing generation teach the next generation what has to be done. They need to prepare for succession exactly the same way the CEO of a company would.'
Admittedly, JPMorgan's clients are a cut above the rest. The bank targets the top 1 per cent of the wealth market population that, according to the World Wealth Report from Merrill Lynch/Cap Gemini Ernst & Young, controls 52 per cent of the world's wealth.
'We take a look at clients who have a net worth of at least US$25 million and above,' Ms Lagomasino says. 'Typically, that will translate to liquidity in at least the US$10 million range.'
This ultra-high net-worth market differs from that of the merely affluent. Typically, at least 25 per cent of their money is tied up in real estate and the same amount in their own private company or business.
'Affluent people actually might have a lot more liquidity because they are corporate executives who are paid salaries and make money over time. It is a totally different mix. When we work with [ultra-high net-worths] we also need to understand their businesses, their real estate, their art collections - whatever it is,' she says.
'That level of client might have a considerable amount of wealth tied up in non-traditional assets.'
Affluent people, who typically make the private banking grade with US$1 million in investible assets, also tend to be concerned with issues of this lifetime - they worry about having enough to retire, about sending their children to college. The top tier needs to think about wealth that will outlive them, and take a multi-generational approach. For them, money has the added dimension of power and control.
In Asia, transferring wealth is fast becoming an issue as new money is only now starting to move from the first generation who created it to those who will inherit it, according to Michael Fung, chief executive and managing director of the bank's Asian division. In the United States, and even more so in Europe, the process has been going on for generations.
Five years ago, there was no dialogue between Asian parents and their children about the family fortune, says Mr Fung. These days, the issue is beginning to be discussed when the children reach adulthood. And in a culture dominated by the older generation, people are beginning to talk about succession and the details of tax planning, insurance, wills and trusts.
The shift coincides with challenging markets that have made obvious the virtues of diversifying assets. According to Mr Fung, wealthy Asians in the past have either taken a very conservative approach and stashed their money away in secret Swiss bank accounts, or been aggressive investors in the market.
Before the 1997 crisis, Asians also believed they could make more money at home while today, more than 90 per cent of JPMorgan's clients in the region invest in a global sense.
'There has been an evolution of private banking in Asia,' Mr Fung says. 'In the 1970s . . . the first phase was all about service. In the 1980s to the late 1990s, there was a big boom and people wanted to talk about chasing performance. Now, we need to talk about solutions.'
Despite plunging stock markets, JPMorgan's private banking clients have in the past 12 months benefited from some innovative investments. These range from the purchase of US government agency range notes and emerging market debt to hedge funds with short-selling strategies. Another successful tactic has been converting US stock portfolios amassed in the high-flying 1990s to provide bond-like income streams by selling call options.
Most high net-worth individuals are keeping the bulk of their assets in US dollars, although the bank has encouraged a shift to Swiss francs as a safe-haven currency. US commercial real estate has brought in 8 to 9 per cent yields this year, while gold has brought strong returns as commodity investments have returned to the limelight. In addition, there has been a massive shift from the public to the private markets, with high net-worth investors putting cash into private equity funds that will take a number of years to bear fruit.
But according to Ms Lagomasino, even the best investment programme will not be the right solution for her clients if it does not bring family harmony.
'If I went to a client five years from now and asked if we had been helpful, part of that success would be that we preserved his wealth, that he paid less taxes,' she says.
'But there is also a series of human issues that will be there. Some are philanthropically oriented, some worry about leaving their money to their children because it will be counter-productive. Their family businesses provide them with a living but also a place for other members of the family to grow, to provide jobs, status in society . . . At the end of the day, wealth is a means to an end for these clients.'