The development of wealth-management services in China is at a very early stage, but already providers in offshore financial centres, including Singapore and Hong Kong, are trying to access the promising market that Chinese family-owned businesses represent.1
Consequences of the one-child policy
The one-child policy has been formative for today’s China; the family office model, as a measure to organise a big, dispersing family, is of no use to a Chinese family. Generally, in small nuclear Chinese families, there is no succession planning as the only heir takes over the family-owned business. However, the only child may be unwilling to take on this responsibility, instead wanting to invest the family wealth and ‘run the money’. The establishment of a family office to manage the family-owned business ensures continuation of the business without the need for the heir’s involvement. A family office could also be established to run the business when the second generation is deemed ill-suited to the task. The handling of the family wealth and running of the business can easily be professionalised and outsourced through the family office.
Generations of entrepreneurs
The typical Chinese family office client is young by western standards, between around 30 and 40 years old. Privatisation of the Chinese economy began in 1979 and so it would be reasonable to assume there would be older Chinese family office clients. However, the majority of the first entrepreneurs who had the chance to build privately owned businesses took over former state-owned assets. They were, and some still are, closely linked with government agencies and would never pass the compliance requirements set by offshore financial centres. This first wave of entrepreneurs was influenced by the history of a closed China and had little or no foreign exposure, let alone English language skills; it can be assumed they never attempted to expand globally or bring wealth out of the country. The Chinese entrepreneurs in the current cohort – the ones under examination here – are the first with the means, measures and needs to contemplate international expansion of their family-owned businesses and wealth preservation in an offshore location.
The typical Chinese office client is still influenced by the opening up of China’s economy, and thinks about the protection of their family and the education of their children. This generation of entrepreneurs has a western education and a global mindset. They are very active in their operating business and concentrate on increasing their wealth. In offshore locations, they are looking for wealth protection, global investment opportunities and the internationalisation of their business. They are currently discovering family office services and need further information about the value these services can add to their business.
The offering clients need
Parallels can be drawn between the characteristics and needs of the Chinese family office client and those of south-east Asian clients. What makes the situation in China unique is the current power and economic shift in the world away from the US and Europe towards Asia, particularly China. Furthermore, the Chinese language and culture are alien to western observers: they generally don’t know how to cope with or approach it. Adding to the hype surrounding China are the sheer dimensions of the country, its population, its growth rates and the speed of wealth creation.
Possible providers and locations
There are a number of different options available to a prospective Chinese family office client.
Of the different options, an international private bank’s offering is probably the first one to consider. These providers of family office services have the financial means to undertake marketing in China and to offer a wide range of stepping-stone and entry services, such as investment or corporate banking. Global private banks have the resources available to develop a long-term client relationship, which is necessary in the Chinese context. Furthermore, they have an international reputation and sport a brand and image that help to promote their services. Chinese clients who are about to embark on wealth-management services and are not well-versed in the offshore landscape represent opportunities for the banks to simplify client acquisition and maximise client retention. Development of a boutique family office can be anticipated.
Chinese clients are only now coming into contact with the wealth-management and family office concepts. Clients will first have to be educated about the family office concept, gain their own experiences working with such offices, and may only then come to embrace the advantages of an independent multi-family office. For a highly knowledgeable south-east Asian client, independent multi-family offices may be the most desirable option, but, for a Chinese family office client, it is perhaps still too early to embrace this model.
The trend towards hybrid and platform models (hybrid forms combine characteristics of the single family office and multi-family office, according to the client’s needs; the platform model relies on external expert service providers to offer the scope of family office services the client needs) visible in Europe and the US matches the direction of Asian development. Asia is moving from a transactional to a comprehensive family office model and so the individual client’s circumstances and needs require a custom-made setting of a hybrid and platform family office. In the modern family office world, various external service providers have to work together to best serve the client.
In the Chinese context, single-family offices really only make sense for some ultra-high-net-worth individuals (UHNWIs). For most Chinese family office clients, single-family offices will not be relevant or affordable. In accordance with international trends in this area, it can be assumed that future Chinese single-family offices will outsource parts of their activities to external service providers.
Onshore private banking and family office services provided by international banks and service providers require long-term stability in the country. For the time being, offshore financial centres in Hong Kong and Singapore will remain the target of Chinese offshore wealth. A consideration that is often overlooked in the literature is the fact that most Chinese clients will not bring their money to Hong Kong because it is considered too close to China. Chinese family office clients looking for a jurisdiction within their comfort zone will most probably choose Singapore.
All the interviewees agreed that the Chinese clients visible in Hong Kong and Singapore are only the tip of the iceberg. The influx of more UHNWIs from China is highly likely and spurs the optimism of private banks, multi-family offices and related service providers.
Market and client segmentation will be necessary in the future to adapt the family office service providers’ offerings to the specific Chinese clients’ needs. Localisation of the offering to this highly fragmented market will become crucial.
Besides an IPO, the legal ways to export money from China will become an obstacle for future offshore family office services, since the money of the affluent middle-class and high-net-worth individuals is still tied up in non-bankable assets. This will also raise issues of due diligence.
Entry strategies with a long incubation period of six to eight years must be expected for the acquisition of Chinese clients, mainly due to issues around trust. This will require patience and discipline from family office service providers and favours international private banks, as they have the means to bridge this period. Investment in a long-term relationship is the only way to combat the much highlighted ‘disloyalty’ and build a prosperous client relationship.
Offering needed by the Chinese family office client
- Entry services
- Investment banking
- Corporate banking
- Education and networking events
- Philanthropy services and events
Services needed now
- Investment advice and execution
- Wealth protection
IPO, internationalisation of family-owned business
- Plain vanilla trusts
- Life insurance
- Emigration of family
- Education for children
- Real estate investment
Services needed in the future (10-20 years)
- Succession planning
- Family governance
- Tax planning
- Accounting and reporting
- Estate planning
- Portfolio consolidation
- Complex trust structures
- Education of future owner generation
- Concierge services
- Private jet management
- Residence management
Movement from the ‘transactional family office’ (services needed now) to ‘comprehensive family office’ (services needed in the future)
While the American family office model is transactional and focuses on creating different pools of money, the Swiss/German model provides a more holistic set of services, e.g. providing investment services but also coordinating external specialists, performing due diligence, organising family meetings, etc. The Swiss/German model in practice provides the housekeeping for a family, and will be of interest to Chinese clients as an umbrella to coordinate their globally dispersed family office business and the family wealth in the future. Asian clients enter the family office service industry through transactional services, which are clear-cut and paid for according to use, and then move towards a more comprehensive model.
- 1This article is based on the author’s dissertation, The family office in China – the Chinese family office client and this designated offering. Information used in this dissertation comes from the literature available on family offices in Asia and China, and was combined with existing academic research on Chinese families and family-owned businesses in south-east Asia. Semi-structured in-depth interviews with family office practitioners in Singapore and Hong Kong who have Chinese clients from south-east Asia and China were chosen as the most suitable research method.
The content displayed here is subject to our disclaimer. Read more