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Volume 3: Risk, Return and Reward
In co-operation with the Economist Intelligence Unit
Barclays Wealth Insights
Barclays Wealth, the UK's leading wealth manager with £126.8 billion client assets globally at 30 June 2007, serves affluent,
high net worth and intermediary clients worldwide. It provides international and private banking, fiduciary services, investment
management and brokerage. Barclays Wealth was voted Global Investor’s Wealth Manager of the Year for 2007.
Thomas L. Kalaris, the Chief Executive of Barclays Wealth, joined the business at the start of 2006.
Barclays Wealth is part of the Barclays Group, a major global financial services provider engaged in retail and commercial banking,
credit cards, investment banking, wealth management and investment management services with an extensive international
presence in Europe, the USA, Africa and Asia. It is one of the largest financial services companies in the world by market
capitalisation. With over 300 years of history and expertise in banking, Barclays operates in over 50 countries and employs over
127,000 people. Barclays moves, lends, invests and protects money for over 27 million customers and clients worldwide.
For further information about Barclays Wealth, please visit our website www.barclayswealth.com
About Barclays Wealth
For information or permission to reprint, please contact Barclays Wealth at:
Barclays Wealth Insights, Barclays Wealth, 1 Churchill Place, London, E14 5HP
Telephone +44 (0)800 851 851 or visit www.barclayswealth.com
Written by the Economist Intelligence Unit on behalf of Barclays Wealth, this third volume of Barclays Wealth Insights examines how
wealthy individuals grow and preserve their wealth.
It is based on three main strands of research. First, the Economist Intelligence Unit conducted a survey of 790 mass affluent
(with at least $100,000 in investable assets), high net worth (with at least $1 million in investable assets) and ultra high net worth
individuals (with in excess of $3 million in investable assets). Respondents were spread across a number of key international
markets, with the highest numbers of respondents from the United States, United Arab Emirates, Singapore, Hong Kong, United
Kingdom, Spain and Switzerland. The survey took place between January and September 2007. This was supplemented with a
series of in depth interviews with experts on wealth; and a number of case studies of family businesses. Our thanks are due to the
survey respondents and interviewees for their time and insight.
About this report
Barclays Wealth aims to provide clients with the means to manage their wealth successfully. For this reason, we are committed to
investing in research that will enable us to better understand and forecast the opportunities for wealth creation now and in the future.
Barclays Wealth Insights is a series of research reports created in partnership with the Economist Intelligence Unit. In this, the third,
volume of Barclays Wealth Insights we focus on how wealthy individuals consider ‘Risk, Return and Reward’ throughout their lives and
the role that each plays in their approach to investment and planning their legacy.
We have worked with a panel of experts, drawn from academia, industry and financial circles, to provide unique insights into the
attitudes of men and women on a broad range of wealth matters. The series of surveys of wealthy individuals from around the world,
seeks to create a definitive picture of what being wealthy means in the 21st century.
We hope you find "Barclays Wealth Insights: Risk, Return and Reward" an interesting read and we invite you to look out for future
publications in the months ahead.
Thomas L. Kalaris
Chief Executive
Barclays Wealth
Foreword
1
Appetite for risk is an important
factor in wealth creation.• The wealthier the individual, the more likely they are to agree
that a high appetite for risk, or a willingness to take risks, has
influenced their ability to generate wealth through business
endeavours. Some 60 per cent of high net worth individuals
agreed with this statement, compared with 36 per cent who
had investable assets below $1 million. When it comes to
investments, however, individuals irrespective of investable
assets tend to have similar appetites for risk. Interviewees
questioned for the report corroborate this, saying that many
wealthy individuals often become more risk averse after they
have realised their wealth. (See page 5)
The reason investors behave
as they do is becoming more
widely understood.• At the intersection between finance and behaviour,
considerable work is being undertaken to understand the
behaviour and personality of investors. This goes beyond
simple discussions of risk to take in broader concepts
including composure, financial expertise and even irrational
biases. Taken together, these characteristics make up an
individual’s “financial personality”. (See page 8)
Wealthy individuals have a
growing appetite for less
traditional asset classes but
may lack knowledge to
understand them.• Asset classes such as hedge funds, private equity and
derivatives are filtering down from the institutional to the
retail space, with growing numbers of high-net worth
individuals seeing them as an important part of their asset
allocation. Despite this appetite for more alternative asset
classes, there is a large knowledge gap, with only around
one-third of respondents questioned for the survey professing
confidence in their knowledge and understanding of them.
More generally, less than half are confident in their knowledge
of more mainstream aspects of personal finance, such as
estate planning or retirement planning. (See page 10)
Leaving wealth to dependents
is seen as important... • Just under 60 per cent of respondents agree that they want to
make sure they can pass money to the next generation.
Ensuring financial security for children is also seen as an
important motivation for amassing and protecting wealth.
Filtering the results for only those respondents who have
children, it is the third most important motivation after
financial security in retirement and a better personal lifestyle.
(See page 18)
...but many worry about the
effect that sudden wealth
might have.• The desire to pass wealth to the next generation is sometimes
tempered by concerns that leaving too much money could cause
problems for the benefactors. Increasingly, wealthy individuals are
keen to ensure that their dependents receive financial education
to prepare them for wealth and, in some cases, are adding
stipulations to their wills, such as the requirement that a
university education is to be completed. (See page 20)
2 3
Our Insights Panel Key findings
Jeremy Arnold, Head of Barclays Wealth’s Advisory business
Fergal Byrne, Author of Barclays Wealth Insights Report
Professor Randel S Carlock, Ph.D, Senior Affiliate Professor of Entrepreneurship and Family Enterprise at INSEAD in France
Professor Teodoro Cocca, Chair for Wealth and Asset Management at the Johannes Kepler University of Linz, Austria
Professor John Davis, Senior Lecturer in Business Administration at Harvard Business School
Grant Gordon, Director General of the Institute of Family Business
Lisa Gray, Founder of Gray Matter Strategies and author of The New Family Office
Kevin Lecocq, Chief Investment Officer, Barclays Wealth
Russ Prince, President of Prince & Associates
Michael Sonnenfeldt, Founder of TIGER 21
Catherine Tillotson, Partner of Scorpio Partnership
Didier von Daeniken, Head of Barclays Wealth in Asia
Felix Wenger, Banking Partner at McKinsey
54
The economist Milton Friedman often noted that there is no
such thing as a free lunch. In the world of investment, this
means that if an investor wants to generate a higher investment
return, they will need to take on more risk and expect to invest
over longer periods of time; and if they want to take less risk
they need to settle for lower returns. How much risk wealthy
individuals feel comfortable bearing and how they feel about risk
can determine, therefore, the financial results that they can
expect to achieve through investment.
The survey shows that wealthy individuals do indeed have an
appetite for risk. Some 60 per cent of those with assets over
US$1 million said that a high appetite for risk had been an
important influence in their wealth creation in comparison with
36 per cent of those with assets under US$1 million. This
finding suggests a clear correlation between levels of wealth and
willingness to take risk.
“Willingness to take risk has always been an important factor in
the success of the wealthy, particularly the ultra wealthy,” says
Russ Prince, President of Prince & Associates, a market research
firm specialising in private wealth. “Quite simply, you need to
take high risks to generate high returns. At the same time, you
need to bear in mind that what constitutes risk for an
entrepreneur, who has a deep understanding of his business, is
different from the risk one takes with investment.”
“You need to bear in mind that
what constitutes risk for an entrepreneur,
who has a deep understanding of his
business, is different from the risk one
takes with investment.”
Investmentsand risk
Over the years, experienced investors have become used to cycles in the
financial markets and come to recognise that it is essential to prepare for
both good times and bad. A benign climate can turn into a financial storm
and back again, and to weather these sudden changes in the environment
requires sound planning, expert advice and good navigation skills.
Just as market conditions change over time, so do the financial objectives
and motivations of investors. An entrepreneur in the wealth accumulation
phase of their life may have a very different consideration of risk, return
and reward in comparison to someone who has already made their
money, and a different consideration again to a retired individual
considering their financial legacy.
This report examines how risk, return and reward can be applied as
investors make the journey through life, from the early wealth
accumulation phase through to the decisions they make about passing
wealth down the generations. It also explores the challenge of matching
financial advice with changing personal circumstances, the role that risk
and behaviour play in our approach to investment, and the key
considerations when planning a legacy for dependents.
Introduction
The link between risk and wealth
This is in line with the Economist Intelligence Unit survey, which
finds that there is a broadly similar appetite for high-risk
investments among investors with assets in excess of US$1
million as there is among those with assets below that threshold.
In other words, while high appetite for risk is seen as an
important influence on the wealth of those at the upper end of
the asset spectrum, those same individuals do not necessarily
take more risks in their investments once they are wealthy.
Kevin Lecocq, Chief Investment Officer at Barclays Wealth,
points to different risk attitudes that he has observed between
newly wealthy entrepreneurs and second or third-generation
wealthy. “The second and third generations tend to be more
familiar with market risk, and have seen markets go up and
down over long periods of time. Newly monetised
entrepreneurs, on the other hand, tend to be less familiar with
the idea of market risk, and tend to have a preference for more
absolute-type returns, which aren’t dependent on directional
movements in financial markets” he says.
The survey also reveals some interesting differences between
particular countries with regard to their willingness to take risks.
For example, respondents living in South Africa are most likely to
agree that a high appetite for risk has been an important factor
helping them achieve the wealth that they now hold. This may
well reflect some of the social and economic problems the
country has faced in its development, as well as the burgeoning
entrepreneurial culture that is now becoming established there.
More developed countries, such as the US, Canada and the UK
appear towards the bottom of the list. One reason for this may
be that these countries have more established market cultures
where a greater proportion of people acquire wealth through
less risky paths, such as income from a job, inheritance or
marriage, in addition to the entrepreneurial route.
76
Managing
riskCatherine Tillotson, a partner at wealth consultancy firm Scorpio Partnership,
agrees that business appetite for risk can be very different to investment
appetite for risk. “We often see attitudes to risk change after people have
realised their wealth, through the sale of a business, for example. Wealthy
individuals tend to become more risk averse than they have been in the
wealth creation phase of their life.”
Appetite for risk – an international comparison
84%South Africa
58%Dubai
52%Hong Kong
56%France
54%Switzerland
52%Spain
36%US/Canada
63%Singapore
Portugal80%
UK25%
63%Italy
Perceptions of risk also vary according to culture. For example,
Professor Teodoro Cocca, Chair for Wealth and Asset Management
at the Johannes Kepler University of Linz in Austria, notes that
Swiss investors are heavily weighted towards Swiss equities, which
they tend to see as lower risk than US government bonds, even
though, in principle, they should be higher risk. In this case, as with
many other examples that depend on cultural differences, it is the
perception of risk that is different.
Scorpio’s Ms. Tillotson argues that many different aspects of an
individual’s life and personality influence their attitude to risk. “You
need to think about where people are in their life and the wealth
cycle,” she says. “You also need to take into account a variety of
personal and emotional issues. Just looking at risk is pretty old-
fashioned. We are now seeing some cutting-edge research in
behavioural finance to understand different dimensions of what
some people call an investor’s ‘financial personality’.”
Until recently, the intersection between finance and behaviour
was rarely explored, but new research is now being undertaken
to look at a broad range of psychological influences on financial
decisions. By taking into account more irrational approaches to
decision-making, researchers have been able to develop a
nuanced analysis of an investor’s financial personality. This goes
beyond traditional risk models, which often made unrealistic
assumptions about people’s attitudes to risk.
In addition to an assessment of how much risk an individual
may be willing to bear, a financial personality profile also
includes other aspects, including composure (how nervous or
comfortable people are with their investments); perceived
financial expertise; and willingness to delegate financial
management of their affairs.
“You need to think about where people
are in their life and the wealth cycle.”
98
Behaviouralapproaches to risk
Any discussion of risk needs to bear in mind that there are many anomalies in
the way people generally think about risk. Studies suggest, for example, that
losses loom larger in people’s minds than gains; that people are not good at
understanding what happens when you add risks together; and that people
tend to be systematically overconfident in their financial abilities.
1110
Each individual’s investment preferences and future investment
plans are personal, but collectively, these preferences reveal some
interesting trends. The survey compared the assets in which
respondents had invested over the past three years with their
planned investment over the next three.
Two trends stand out. First, there is a move away from equities.
Second, respondents expressed a desire to increase their
exposure towards less traditional asset classes, such as hedge
funds, private equity, structured products and derivatives. Taken
together, these results suggest a preference by some wealthy
investors to reduce exposure to market returns, which depend on
general directional movements within financial markets, towards
a more stable return profile.
While 48 per cent of respondents say that they planned to invest
in stocks over the next three years, this is much lower than the
64 per cent who had invested in this asset class in the previous
three years. This finding is corroborated by other research. The
members of TIGER 21, for example, reduced their equity
investments from 37 per cent of their portfolio in 2005 to 30 per
cent in early 2007.
An appetite for alternatives
Table 1: Investment over time – asset classes of choice
In which of the following vehicles have you invested inthe past three years and, in which of the following doyou plan to invest in the next three years?
Bonds 26 20
Individual stocks and shares 64 48
Property 41 35
Personal pension 42 35
Investment trusts 20 19
Tracker funds 23 20
Private equity/co-investing 11 15
Hedge funds 20 21
Commodities (eg, gold) 17 18
Derivatives (futures, options, CFDs etc) 10 11
Currency 11 10
Alternative assets (fine wine, antiques, art etc) 12 11
Structured products 8 9
Gilts 9 8
Credit/leveraging 7 5
Past three
years %
Next three
years %
The increase in the number and accessibility of different types
of assets is transforming the world of investment and the
possibilities available to wealthy investors are now greater than
ever before. In recent years, investors have been able to take
advantage of a growing number of asset classes, with hedge
funds, private equity funds and derivatives all becoming more
accessible to retail investors.
Wealthy investors are now better able to spread risk more widely
by adding different types of assets to their portfolios. By giving
themselves exposure to a wide range of assets, investors aim to
achieve greater levels of diversification and obtain the same level
of return for a lower level of downside risk.
Experts say that wealthy individuals often have a good
understanding of the benefits of diversification, but have more
difficulty putting it into practice. “I would argue that most
wealthy people are certainly aware of the general concept of
diversification and its benefits,” says Felix Wenger, Banking
Partner at McKinsey management consultants in Zurich, “but
are often uncomfortable with how to apply it or do not know
what the exact implications are.”
Michael Sonnenfeldt, Founder of TIGER 21, a New York-based
high net worth group with more than US$8 billion in total
assets, points out that diversification can be a difficult concept
to grasp. “You have to understand what you are trying to
diversify,” he explains. “For example, some investors may think
they are diversifying when they buy ten stocks, rather than one.
But, if all the stocks are driven by the same fundamental factors,
they won’t actually achieve any diversification.”
“You have to understand what you are
trying to diversify.”
Experts agree that part of the challenge is that people are not
naturally good at assessing mathematical relationships, or
correlation, between different assets. They find it difficult to see
the big picture and understand the impact of combining many
small investments.
With this in mind, the next section examines the extent to
which investors are diversifying their portfolios, and looks at
some of the asset classes they are considering to help them
achieve the right mix.
In pursuit of diversificationNotwithstanding volatility at the time of writing, the past few years have
seen a dramatic increase in the scale and distribution of wealth. Buoyant
financial markets, the ongoing process of globalisation and greater
accessibility to investment tools have all contributed to a strengthening
investor culture around the world.
The only assets in which respondents expect to increase their
investments are private equity, hedge funds, derivatives, structured
products and commodities. Indeed, these are areas where wealthier
individuals have already made significant investments in recent
years. Respondents with assets in excess of US$1 million are more
likely to have invested in hedge funds, derivatives and private equity
in the past three years than those with assets below that threshold.
Respondents with assets over US$3 million were even more likely to
have invested in these vehicles. One reason for this is structural –
most of these investments carry a minimum investment that is
sufficiently high to restrict them to the top wealth brackets.
“Investors in Asia have strong appetites
for many of the more exotic investment
vehicles, such as structured products.”
Didier von Daeniken, Head of Barclays Wealth in Asia, says that
Asia has very shrewd investors who have a tendency to be very
involved in investment decisions. "Investors in Asia have strong
appetites for many of the more exotic investment vehicles, such
as structured products," he says. "They also have a good
understanding of the way in which these instruments can help
them to actively manage risk."
Rising levels of wealth in Asia have fuelled demand for banking
services, and the sophistication of local investors means that
levels of service offered must be high. "Private banks in Asia need
to ensure that bankers in the region have a good understanding
of the impact these instruments can have on an investment
portfolio," says Mr. von Daeniken.
“In the Middle East, research conducted
by the EIU has also revealed a growing
appetite for structured products,
derivatives and private equity among
the more sophisticated investors.”
In the Middle East, research conducted by the EIU has also
revealed a growing appetite for structured products, derivatives
and private equity among the more sophisticated investors. Of
particular interest in the Middle East are products that are
Shariah-compliant. The region has seen huge development in the
Islamic finance sector in recent years and this is rapidly filtering
through to the asset management arena, where considerable
product development is now taking place.
1312
The search for diversification is another factor that is contributing
to the popularity of these assets. Adding some private equity,
hedge fund or derivative exposure to a portfolio can help to
reduce overall levels of risk by spreading it across a wider range of
assets. More interestingly, these specific financial instruments can
deliver financial returns that are not so closely aligned with the
behaviour of markets as a whole. Instead, they aim to generate a
specific rate of return regardless of what the market is doing.
The extent to which investors have appetite for absolute and
market returns portfolios varies. “Intuitively, absolute returns
make a lot of sense and we see that more wealthy individuals are
thinking in those terms,” says Lecocq. “Assets like hedge funds,
which are an early example of an absolute return investment,
derivatives and structured financial products, can all be used to
manage risk, reduce volatility and stabilise results.”
Table 2: Past investments – a comparison by wealth
In which of the following vehicles have you investedin the past three years?
Bonds 20 29 36
Individual stocks and shares 55 68 77
Property 42 38 48
Personal pension 52 36 40
Investment trusts 14 23 27
Tracker funds 24 22 23
Private equity/co-investing 5 13 21
Hedge funds 19 21 25
Commodities (e.g, gold) 11 20 23
Derivatives (futures, options, CFDs etc) 4 12 19
Currency 9 11 14
Alternative assets (fine wine, antiques, art etc) 10 13 15
Structured products 5 8 16
Gilts 5 12 12
Credit/leveraging 7 7 7
Assets under
US$1m %
Assets betweenUS$1m andUS$3m %
Assets over
US$3m %
“Assets like hedge funds, which are an early example of an absolute return
investment, derivatives and structured financial products, can all be used to
manage risk, reduce volatility and stabilise results.”
1514
“Willingness to take risk has always been an
important factor in the success of the wealthy,
particularly the ultra wealthy.”
Russ Prince, President of Prince & Associates
1716
Interestingly, the survey suggests that both older and wealthier
affluent individuals tend to be more knowledgeable. This
corresponds to experts’ views that the financial sophistication of
investors tends to increase with wealth. Part of the reason for
this is that, as they grow wealthier, they are more likely to be in
contact with personal advisers and private bankers.
Financial education has historically been an integral part of the
service that private bankers provide for the wealthy. In this new
and more complex environment, the educational role has
become even more important. Today, it can include everything
from the regular communications on market developments and
products, to more tailor-made and specific workshops on
particular financial assets, such as private equity or derivatives,
with presentations given by key players in these markets.
According to research from McKinsey, knowledgeable and
sophisticated investors also tend to take more responsibility for
the management of their financial assets and delegate less. Mr.
Wenger makes a distinction, however, between perceived and
actual levels of financial knowledge. “You find that some people
who say they do not understand enough have high levels of
financial knowledge and vice versa,” he says. “Interestingly,
delegation behaviour is driven by perceived sophistication.”
One area where some private banks are getting increasingly
involved is in educating the offspring of the wealthy. Some,
particularly in the US, organise so-called “wealth bootcamps”,
where teenage and older sons and daughters convene with their
peers to learn about their financial responsibilities. Some argue,
however, that the most important work needs to be done at a
much earlier age, and that an appreciation of money needs to be
instilled during childhood. As they start to tackle the challenge of
passing wealth down the generations, this is just one of the
considerations that the wealthy must take into account.
With the pace of financial innovation continuing to accelerate, decisions about
portfolio allocation can seem extremely complex, even for an experienced
business person. “There really is an enormous range of investment
possibilities,” says Mr. Sonnenfeldt of TIGER 21. “It’s hard to be on top of
everything, no matter how smart you are. We see former entrepreneurs, who
don’t understand derivatives and people coming from Wall Street, who might
be world-class traders, but don’t understand private equity.”
Knowledgeand understanding
of finance
Fewer than half of the respondents questioned for the survey are
confident in their knowledge and understanding of key aspects of
personal finance – the least understood are private equity and
venture capital (36 per cent), bonds (34 per cent) and hedge funds
(27 per cent). With private equity and hedge funds attracting
growing interest from sophisticated investors, it is clear that, in
many cases, knowledge has not yet caught up with appetite.
It is easy to understand why many wealthy investors are
confused about hedge funds. There are about 10,000 hedge
funds currently operating worldwide. Hedge fund assets have
risen almost threefold in the past five years to US$1.75 trillion,
according to consultancy firm Hedge Fund Research. Originally,
the concept behind hedge funds was that they aimed to
generate positive results whether the market went up or down.
They achieved this largely by offsetting risk, or hedging, against
market falls. Over time, however, hedge funds have become
increasingly specialised with many different trading strategies.
“You can’t really look at hedge funds as an asset class per se,”
says Mr. Prince. “You have to look through to the underlying
investments and strategy in each fund. Financial education can
play a key role here. The better and more financially educated
the investor, the more likely he or she is to include hedge funds
and alternative asset classes in their portfolio.”
Table 3: Revealing the knowledge gap
How confident do you feel in your knowledge
and understanding of the following?
Tax planning 39
Retirement planning 49
Estate planning 47
Funds and other collective investments 45
Stock market 40
Investing in hedge funds 27
Capabilities of private banks 39
Investing in private equity and venture capital 36
Bond/debt market 34
% who are
confident
19
familyWealth and the
18
Filtering these results for respondents who have children, the
motivation of financial security for dependents becomes a
higher priority. Almost two-thirds of respondents (66 per cent)
consider it to be an important motivation, ranked behind only
financial security in retirement and a better personal lifestyle.
“I often ask financial advisers to the wealthy: ‘What do you think
is the most important goal for wealthy people?’,” says Mr.
Prince. “Most advisers say diversification. Well, diversification is
certainly important but, in my experience, the central
preoccupation for most wealthy people is their families.
Transferring wealth to their family has always been one of their
most important concerns. And it probably always will be.”
“Many wealthy people are doing a less
than good job at transferring wealth in
an efficient way.”
Important it may be, but Mr. Prince believes that often the wealthy
are not dealing with this issue well. “Many wealthy people are
doing a less than good job at transferring wealth in an efficient
way,” he says. “You have to remember that talking about death
and dying causes discomfort to a lot of people. So the tendency is
to avoid the question. Plans aren’t updated enough to take into
account changes to the law, tax or lifestyle. And, of course, by
definition very few people know if their plans were any good.”
Experts say that it is important to first build a good
communication process and focus on the family’s goals. “We find
a lot of people focusing on the vehicle, such as a trust, to transfer
the wealth when they really should be focusing on defining the
family goals,” says Lisa Gray, Founder of Gray Matter Strategies, a
US wealth consultancy. “The first priority should be to put in place
the right governance structure – to make sure that they have the
right process to communicate and set goals for the family. If that’s
done properly, then finding the right legal and financial vehicle to
transfer wealth becomes much more straightforward.”
Keeping it in the familyAlmost three-fifths of respondents agree that having enough money to
leave to the next generation is a key motivation for securing their wealth.
Table 4: Wealth creation – the motivations
What are the main motivations for you
to amass and protect your wealth?
Financial security for children 56
Financial security in retirement 82
A better personal lifestyle 78
Ability to enjoy the finer things in life 66
Being able to travel extensively 60
Enjoyment of making money 48
Ability to retire early 54
Being able to afford a large property in a good area 53
Private education for children 51
Being able to afford more than one property 36
Being able to help others (eg. through philanthropy) 47
Status 45
% who think
important
How does one prepare dependents for sudden wealth at a
young age, and does this course of action preclude benefactors
from making their own way in life? Is it perhaps a better idea to
leave the bulk of a fortune to philanthropic causes? These are
issues that the wealthy must grapple with as they consider their
responsibilities to the next generation, and they form the basis
of the remainder of this report.
In an era in which entrepreneurship and enterprise are becoming
increasingly well-trodden routes to wealth, and in which
ultra-wealthy individuals such as Warren Buffett and Bill Gates
have stated their intention to leave the vast majority of their estate
to philanthropic causes, it is tempting to conclude that the desire
to amass and protect wealth for the next generation is becoming
less prominent. Our survey would suggest, however, that the
motivation to ensure financial security for children is still important,
although there is a recognition among some survey respondents
that it is not a good idea to leave large sums of money to
dependents. High profile cases aside, philanthropy seems to be
only a moderate motivation for amassing and protecting wealth.
Wealthy individuals have always sought to pass wealth down the generations,
but it is nevertheless an area that is fraught with difficulties.
Some experts believe that only one in ten family fortunes make
it to the third generation. A recent American adage captures this
insight: “From shirtsleeves to shirtsleeves in three generations.”
One key reason is that inheriting great wealth can cause
problems for the recipients.
The survey reveals that some wealthy individuals are increasingly
aware of the potential problems of leaving their children great
wealth and suggests that they no longer automatically assume
that their children should be their prime inheritors. More than
one-third (34 per cent) of those surveyed agree that it is not a
good idea to leave large sums of money to dependents.
The whole question of passing on wealth can be a fraught one,
argues Ms. Tillotson. “It’s a very difficult area,” she says. “Many
children just find it difficult to deal with inheriting great wealth.
It raises all kinds of questions. With wealth comes responsibility
and, unfortunately, it’s not easy to teach responsibility to young
people. We are definitely seeing an increased incidence of the
wealthy not leaving money to their children for this reason.”
Children in wealthy families can experience some common
problems, says Randel Carlock, Senior Affiliate Professor of
Entrepreneurship and Family Enterprise at INSEAD in France,
who has also worked as a consultant with family businesses.
“A feeling of unworthiness is common,” he says. “Children often
ask themselves: ‘How come I have so much money? What have
I done to deserve this?’ Children in wealthy families can also
suffer from low self-esteem if they feel that much of their
success is due to the wealth they have inherited, rather than
what they have achieved themselves.”
“Many children just find it difficult to
deal with inheriting great wealth. It
raises all kinds of questions. With
wealth comes responsibility and,
unfortunately, it’s not easy to teach
responsibility to young people.”
2120
Inheritancenot always a good thing
Among the wide-ranging economic phenomena Adam Smith addressed in his
seminal book, An Inquiry into the Nature And Causes of the Wealth of Nations, is
the question of how to transfer wealth across generations. “Riches, in spite of the
most violent regulations of law to prevent their dissipation, very seldom remain
long in the same families,” he wrote. Despite the best of intentions, family
fortunes rarely survive across many generations.
23
This question of achievement through one’s own endeavours is
particularly important for the members of the TIGER 21 high net
worth group, who struggle with finding the “right” amount of
wealth to pass on to their children. “This is one of the things we
discuss most,” says Mr. Sonnenfeldt. “Our members are very
conscious of the potential to deprive their children of the
challenge and gratification of creating success if they leave them
too much money. Still, many members would like to share the
fruits of their own success with their children and grandchildren
to help cushion their financial future.” These comments echo
Warren Buffett’s view about how much money to leave to his
children: “Enough money so that they would feel they could do
anything, but not so much that they could do nothing.”
“Our members are very conscious of
the potential to deprive their children
of the challenge and gratification of
creating success if they leave them
too much money.”
One response to this question is to put stipulations in a will
defining the circumstances under which assets will be
transferred to the next generation. A recent survey by PNC
Wealth Management in the US suggests that wealthier people
are more likely to put stipulations in their will when it comes to
transferring their assets. Some 57 per cent of those surveyed
with US$10 million or more in assets attach conditions before
their heirs can inherit. For example, some say that their children
must complete a college education, hold down a job for a
particular amount of time or reach a certain age.
One option for wealthy individuals concerned about the impact
that sudden wealth will have on their offspring is to turn over
the bulk of their fortune to philanthropic causes. This is a course
of action that has recently received substantial press coverage
thanks to the actions of very wealthy, high-profile individuals
such as Bill Gates, Pierre Omidyar and Warren Buffett. In Asia,
billionaire philanthropist Li Ka Shing shared his hopes on this
subject at an awards ceremony last year. “In Asia, our traditional
values encourage and even demand that wealth and means
pass through lineage as an imperative duty,” he said. “I urge and
hope to persuade you, especially all of us in Asia, that if we are
in a position to do so, that we transcend this traditional belief.”
“In Asia, our traditional values
encourage and even demand that
wealth and means pass through
lineage as an imperative duty.”
Whether this highlights a trend towards greater philanthropic
activity is a contentious point. While the actions of Mr. Gates,
Mr. Buffett and others are certainly huge in scale, one should
not necessarily conclude that bequests to charitable causes are
becoming more frequent. Philanthropy has gone hand in hand
with wealth for centuries – consider, for example, the Victorian
entrepreneurs Andrew Carnegie, Joseph Rowntree or Jesse Boot,
all of whom considered the support of charitable causes to be
an essential responsibility of their wealth.
22
Some family members may not want to work in the business
and seek to sell their shares such as in the instance of the
Wates family (see the accompanying case study). In addition,
there will come a time when the family can no longer provide
suitable managers for the family business.
The emotional undercurrents in a family business can also be
very strong, says Professor Carlock. “Freud said that the two
important dimensions of a successful life are work and love.
We try to have important work relationships and important
relationships. In a family business, all your eggs are in one
basket, so it is much more intense. You are dealing with very
powerful human motivations and human needs and this should
be ignored at your peril,” he says.
“Families, by their nature, tend to be
hopeful institutions – they tend to have
faith that things are going to work out.”
Families need to recognise that some family members may be
unsuitable to manage the family business, or that they may have
other aspirations. “Families, by their nature, tend to be hopeful
institutions – they tend to have faith that things are going to
work out,” says Professor John Davis of Harvard Business School,
who also works as a family business consultant. “But parents
need to be realistic about their children and to consider who is
really capable of being in the business and who is not. I tell
families that it is unlikely that all their children will be
enthusiastic, capable and co-operative. More than likely at least
one will not want to be part of the family business.”
He adds that families tend not to plan for this issue. “It’s not
unusual to find that family businesses have 80 per cent or more
of their aggregated wealth totally tied up in their family
business. And most family businesses cannot be easily divided
or sold. Families need to think about building other assets
besides the family business. At the moment, this is not on the
radar of most families.”
Grant Gordon, of the Institute of Family Business, emphasises
the importance of stewardship in transferring a business
successfully. “It’s vitally important that the next generation has
a sense of responsibility in terms of ownership and that there is
an ethic of responsibility,” he says. “It’s one thing to have skills
that relate to financial management and accounting, but the
softer issues are also important, such as fostering emotional
ownership in the next generation. Without this sense of
stewardship, it’s hard to continue a journey together as a
business-owning family unit.”
Family Inc.Passing ownership and wealth down the generations in a family business
environment poses a distinct set of financial and management issues. “In our
experience, as ownership is passed from one generation to the next, family
shareholders proliferate and decision making can become more difficult,” says
Jeremy Arnold, Head of Barclays Wealth’s Advisory business.
“In our experience, as ownership is passed from one
generation to the next, family shareholders proliferate
and decision making can become more difficult.”
Jeremy Arnold, Head of Barclays Wealth’s Advisory business
2524
Wahum Holdings is a third-generation Hong Kong family
business that manufactures consumer products, building
materials and corrugated cardboard packaging. Over the past
seven decades, the company has grown successfully, opening
up manufacturing sites in several African countries.
Mr. Chen judged that a family office structure would offer the
family more control over their assets. “My initial goals for setting
up a family office were primarily financial,” he says. “I wanted to
consolidate the different investments, centralise the information
and management of the assets and generally improve the asset
management side of the business. I also thought that a family
office could serve as a platform to facilitate and promote
communication and financial education among family members.”
He explored two alternatives: either setting up an independent
single-family office that would be dedicated to the needs of the
Chen family alone; or joining an existing multi-family office in
which a team worked on behalf of several families which had
placed financial assets within their custody.
The family dedicated a lot of time to discussing the plans and,
ultimately, decided to set up a single-family office, called
Legacy Advisors Ltd. “I could see the attractions of the multi-
family office - the idea of being able to share costs across more
families, achieve more weight with more assets,” explains Mr.
Chen. In the end, however, the family opted for a single-family
office, on the grounds that it would give them greater control
and that the professionals working for the office would always
be dedicated to the needs of the family.
The financial crisis that swept the Far East in 1997-98 offered
confirmation that the family had taken the right decision in
adopting the family office approach. While financial markets
around the region took a battering, Mr. Chen calculated that
Legacy Advisors’ risk-adjusted rate of return handsomely
outperformed the returns that would have been yielded
through the earlier, less efficient approach.
Over time, Legacy has gradually taken responsibility for a
widening range of family affairs. It now provides services for
family members including tax planning and reporting, trust
planning, corporate secretarial services and so-called concierge
services (bill paying, balancing chequebooks, travel bookings,
and so on). In 2003, Legacy also took over the administrative
and accounting support for the Chen Yet-Sen Family
Foundation, a philanthropic foundation that the family set up
named after Mr. Chen’s late father.
“If not managed carefully, a family
office can easily become bloated
and expensive.”
Mr. Chen is in no doubt that Legacy has been right for the Chen
family – particularly in financial terms. But, he argues, a family
office is not for everyone. “If not managed carefully, a family
office can easily become bloated and expensive. Also,
investment returns from family office mismanagement can
result in wealth destruction rather than wealth preservation,
particularly if you don’t have the best investment team.”
He concludes that the most important issue is family
consensus. “If a family does not have or cannot maintain
consensus to work together as a family, or if the family office
idea is forced on family members by the patriarch or matriarch
rather than through a consensual approach, it can be a
disaster. A family office is certainly not the solution for every
wealthy family and perhaps only relevant for the relatively few
‘healthy’ families in each society.”
This section is based on a case study developed by
Professor Randel Carlock at INSEAD.
2726
Legacy Advisors Ltd.Case study
In 1995, when James Chen joined the family business, Wahum
Group Holdings, he was on a mission. He wanted to transform
the way the family was looking after its wealth. Mr. Chen was
worried that if the family didn’t pay more attention to managing
its assets, their financial future could be at stake.
“Like many other Asian families, we had become so focused on
improving the efficiency of the business that we weren’t paying
enough attention to managing and preserving our wealth,” he
explains. “We had a very conservative, passive approach to
investing, simply dividing up the pie among several different private
banks, with only casual oversight. The situation was very inefficient.”
For the Chen family, a single family office provided control over their assets and a
more efficient approach to investment. And in the wake of the Asian financial crisis
of 1997, it also showed that it could offer good performance.
2928
The Wates family storyCase study
Just 10 per cent of family businesses make it to the third generation. For the
Wates Group, a UK-based construction firm, reaching the fourth has been
made possible by a combination of strong governance and a commitment
to the business.
Queen Victoria was celebrating her Diamond Jubilee and Bram
Stoker had just published Dracula when Arthur and Edward Wates
opened a furniture shop in Mitcham, England, in 1897. Today, 110
years later, Wates Group, as the business is now called, has a
turnover of more than $1.71 billion and employs 2000 people.
What began as a simple furniture shop has evolved into one of
the leading UK construction groups, a highly profitable business
in an industry renowned for low margins and high levels of
bankruptcy. Ownership of the business has remained within the
Wates family throughout this time and is now passing from the
third to the fourth generation of the family.
The odds of a family company surviving to the fourth generation
are not good. Estimates of the survival rates of family businesses
suggest that about 10 per cent make it to the third generation.
Recent research suggests that family businesses outperform
their rivals and achieve higher returns—in part due to the
longer-term management focus. But family businesses also face
particular challenges: dispersed ownership across generations,
which means that it can be difficult to get decisions made; the
desire of some shareholders to sell their shares; and questions
of succession and transfer of ownership, which can raise
emotional and financial issues.
Several years ago, the Wates family faced some of these
problems when Sir Christopher Wates, then CEO, was looking to
retire. Sir Christopher, together with other third-generation
family members, decided it was time to pass ownership to the
next generation. The problem was that not everyone was
interested in working for the business.
At the outset, the family needed to have some honest
discussions about different family members’ needs; what
existing shareholders wanted to do with their wealth, and the
aspirations of the next generation. “You have to be able to have
open discussions,” says Andrew Wates, Chairman of Wates
Family Holdings. “It’s really important to give everyone in the
family space to express what they really want, even if it’s not
always what you want to hear.”
The discussions also extended to the question of succession.
The Wates family had provided leaders for the business since
the foundation of the company. Over the years, ownership and
succession had been interlinked, with ownership traditionally
passed to male family members working in the business.
“We began to distinguish between being owners and being
managers of the business,” says Mr. Wates. “This was a major
change in perspective. The focus changed to becoming great
owners, and developing the skills to do this. As far as
management is concerned, our principle is that family members
only get promoted to their level of competence.”
The Wates family also needed to develop a process to help
make decisions and decide priorities for the family itself. “Before
we could really deal with the transfer of ownership, we needed
to address the question of family governance,” says Mr. Wates.
“We had a strong board for the business and a good board
culture, but we didn’t have a vehicle to express the family’s
agenda, set priorities or make decisions as a family.”
This governance process now consists of a management
committee for the family and its interests, called Wates Family
Holdings. This incorporates a charter that covers the family
relationship with its trading activities and acts as a guideline for
the relationship between the family and the business. All the
Wates family shareholders, together with three non-executive
directors, sit on Wates Family Holdings, which meets monthly
and agrees a five-year strategy against which the Wates Group
directs its business. The Wates Group is currently led by Paul
Drechsler, a non-family member.
In 2003, Andrew Wates and his two brothers bought out the
members of the family who did not want to be involved in the
business. In addition, a separate, financially ring-fenced
investment pool has been set up to diversify the family’s assets,
although the bulk is still accounted for by the family business.
Mr. Wates says that the family’s values, particularly its
commitment to stewardship of the business, has been a crucial
factor in the success of this process. “We worked hard to make
sure that we had the buy-in and support from every member of
the family, that everyone was involved in the process, and that it
respected the family values of openness and transparency,” he
says. “We carried our non-executive and executive directors
through every stage in a process of complete transparency.”
Looking to the future, Mr. Wates expects to continue to build
upon the foundations the family has built in recent years. “This
is an ongoing process of family self-discovery,” he says. “We
have done the groundwork and are already seeing results. But
there are no quick fixes. We are at the beginning of a journey.”
This report was prepared by Barclays Wealth in co-operation
with the Economist Intelligence Unit. As part of the research,
the Economist Intelligence Unit conducted in-depth interviews
with a range of industry experts and analysed the findings.
31
Decisions about investment strategy and asset allocation will
depend on the circumstances of the investor. Considerable work
is being done to conceptualise this complex set of nuanced
characteristics, which has long since moved the argument
beyond straightforward notions such as appetite for risk.
Multiple dimensions are now taken into account, including
composure, financial expertise and even irrational biases.
Our survey suggests that financial security for children remains
a fairly important consideration for the wealthy, although there
is recognition that sudden wealth at an immature age can
cause problems. Many people are giving more thought to these
issues, for example by ensuring that wealthy benefactors
receive financial education, or setting stipulations in their will. It
is still all too common, however, for people to shy away from
making decisions about what happens after their death. This
can be a serious mistake.
As recent market turbulence has shown, the world of
investment is an unpredictable one. However, by ensuring that
they are well-educated and have access to the right expertise
and advice, investors can do a great deal to protect themselves
against the destruction of their wealth. While every investor is
different, and has his or her own unique “financial personality”,
the desire to preserve wealth for the future is universal.
30
ConclusionThe investment options available to wealthy individuals are broader than ever.
Globalisation and the emergence of new asset classes have enabled investment
professionals to construct highly diverse portfolios, while new investment
strategies focused on absolute, rather than market returns, provide reassurance
that wealth can be preserved whatever the market conditions.
AppendixAppendix 1 - The Economist Intelligence Unit
Written by the Economist Intelligence Unit (EIU) on behalf of
Barclays Wealth, the report examines wealthy individuals’
approach to risk and identifies how they prioritise around
wealth preservation and their major considerations for
passing it on to future generations.
It is based on three main strands of research: a global survey of
around 790 mass-affluent (with at least $100,000 in investable
assets); high net worth (with at least $1 million in investable
assets) and ultra high net worth individuals (with in excess of $3
million in investable assets); a series of in-depth interviews with
experts on wealth and family, and a number of case studies.
Please note that in some cases percentages used in the report
may not equal 100, as survey participants were asked to select
three choices.
The map on page 7 refers to the views of nationals living in
those countries.
Survey demographic
The 790 survey respondents were recruited from EIU databases
of individuals around the world. The survey was undertaken
between January and September 2007 by the EIU.
Geography: Hong Kong, Singapore, United Arab Emirates and
United States were each represented by 100 respondents.
France, Italy, Portugal, South Africa, Spain, Switzerland and the
UK were represented by between 30 and 50 respondents each.
An additional 116 respondents were generated from elsewhere
in the world.
Net worth: 20 per cent between $20,000 and $500,000 in liquid
assets; 20 per cent between $500,000 and $1 million; 30 per
cent between $1 million and $2 million; 20 per cent have more
than $2 million in liquid assets; 10 per cent have more than $3
million in liquid assets.
Appendix 2 - Methodology
This document is intended solely for informational purposes, and
is not intended to be a solicitation or offer, or recommendation to
acquire or dispose of any investment or to engage in any other
transaction, or to provide any investment advice or service.
Any information within the report pertaining to the Wates and
Chen families has been published with their express permission.
32
Whilst every effort has been taken to verify the accuracy of this
information, neither The Economist Intelligence Unit Ltd. nor
Barclays Wealth can accept any responsibility or liability for
reliance by any person on this report or any of the information,
opinions or conclusions set out in the report.
Legal note
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