The prospects for global wealth management have improved tremendously over the years. Malaysia can potentially be the global hub for Islamic wealth management due to its available infrastructure and market-friendly incentives for the investors. With the introduction of new regulations in the financial market, the ever-changing client behavior, the competitiveness of emerging markets and the highly liquid Malaysian market, there is a demand for foreign investors as well as domestic institutional investors to invest in Malaysia. HAJI MOHD RASHEED KHAN MOHD IDRIS and GIFFIN LEE WEON LI examine the Malaysian private banking and wealth management industry.
IFD report 2014
According to the Islamic Finance Development (IFD) Report 2014, Malaysia performed relatively above average as the top player against 91 other countries. Malaysia ranked top for knowledge and quantitative development, and second for governance and awareness.
For example, the establishment of the Labuan International Business and Financial Center (Labuan IBFC), is complementary to the objective of the Securities Commission Malaysia to be the global hub for Islamic wealth management.
The private wealth landscape continues to diverge according to the market behavior. For organizations with rapid growth, certain measures and considerations need to be taken into account especially organizations that grew out of a family business. To ensure perpetuity and longevity of the family business, proper business succession planning is essential. Wealth managers and private bankers also play an important role in ensuring that the business is run with proper management and funding.
Asia-Pacific Wealth Report 2014
The Asia-Pacific Wealth Report 2014 by Capgemini and RBC Wealth Management showed that the high-net-worth individuals (HNWI) in Malaysia prefer to seek advice on family wealth (34.0%) than on personal wealth (21.7%). Contrary to the global trend, the HNWIs in Asia-Pacific (40.7%) (excluding Japan) were more focused on wealth growth than preservation (31%).
This showed that the HNWIs need a more comprehensive succession plan than just having a will or a trust for their legacy. As for those HNWIs with a family business and an intention of running the business for generations, the transition controls in the family business, succession planning for the ageing business founders, the spinout of a family office or the managing of the company assets can be complex.
As individuals now are better informed with digital technology means, it allowed individuals to create their wills (Wasiat) online without going to lawyers or estate planners. Moreover, individuals can even purchase unit trusts or open bank accounts or get limitless access to the market information from the internet. Continuous global wealth creation and wealth distribution have led to the increase in percentage of the HNWIs. More often than not, these HNWIs do not generally have a proper succession plan that can allow the beneficiaries to inherit their legacy without hassle. A good plan puts in place structures that will secure the legacy for them. This can be done by creating a family charter and structuring a long-term plan for the family members. The family charter should adopt a more formal governance structure and implement a more institutional risk management program, provide proper controls and adopt an advance technology platform in all levels of the family charter.
As the saying goes: “Most of the family business cannot sustain more than three generations.” The first generation makes the business, the second sustains it and the third expands it. Unfortunately, Asian family businesses are at a critical stage of management succession where next generation training and development is imperative. This involves appointment of trusted non-family management and/or advisors who have the adequate knowledge in facilitating these family business transitions. A study shows that the majority of family business owners would like to see their business transferred to the next generation. However, it is estimated that 70% will not survive into the second generation and 90% will not make it to the third generation.
A reason why business founders will only step down from management control at a later stage of their lives is a lack of talent inventory and readiness among the young generation to lead the business. To achieve effective business succession, the business founder should consult and lay down proper motives for business succession when he or she is still in control to get the optimal guidance in a timely manner. Getting the next generation involved in business earlier allows generic knowledge and business skills to be acquired and to be implemented in the future. That is to say, incorporate the succession plan in writing, together with the existing instrument that can be found in the market. Creating a foundation or a family charter can ensure the right person fits the right position thereby optimizing the management succession control in the family business.
It is, however, worth pointing out that the process of making a succession plan could be more significant than executing the plan itself. Devising a succession plan for a family-owned business allows the business founder to identify and deal with the many emotional issues at hand and provide solutions in managing a family business.
Operationalizing the succession plan during the lifetime of the business founder will become a model to ensure that the business will run through generations and put the family members in harmony as required under the family charter. Even though major Chinese enterprises have successfully implemented business succession plans, the concept of the family charter and succession planning is only slowly picking up with the Malaysian Muslim business community.
With the implementation of the new Islamic Financial Services Act 2013 in Malaysia, private bankers, financial planners and wealth managers must be able to grasp the new regulations to unlock the opportunities derived from the financial markets and to develop the succession planning market for the Malaysian Muslim community.
Haji Mohd Rasheed Khan Mohd Idris is the senior counsel and Giffin Lee Weon Li is the associate at law firm Azmi & Associates. They can be contacted at [email protected] and [email protected] respectively.