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Succession Planning: The Concept of Succession Planning (Executive Summary Part 2)

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Research suggests that, by 2020, Asia – which today has the world’s largest HNW population – could be home to more than US$14.5 trillion in HNW wealth. Asian Private Banker’s ‘Succession Planning 2018: Perceptions and Opportunities for HNWIs’ report, sponsored by Transamerica Life Bermuda, explores the industry’s perception of succession planning, clients’ needs for effective wealth transfer and wealth preservation, and the role of HNW insurance solutions in succession planning.

Download your complimentary copy of the Succession Planning 2018: Perceptions and Opportunities for HNWIs executive summary today to read exclusive findings.

The need for a comprehensive and efficient succession plan has become more relevant as within the next 30 years, the total value of global UHNW wealth that will be transferred to the next generation is estimated to reach nearly US$16 trillion — the largest wealth transfer in history. Against this backdrop, private banks, IAMs, and family offices are seeking to capitalise on this intergenerational wealth shift by developing a value proposition relevant to the next generation of inheritors, as well as retain the loyalty and assets of their clients.

Frequently, the decision to launch the process of succession planning and wealth transfer follows a trigger event, and an overwhelming percentage of the sample population said “Retirement” (43%) and “Significant investment portfolio changes” (25%) were the two most significant trigger events that led them to consider succession planning.

Trigger events that led clients to start succession planning

In order to conceptualise and implement succession planning and wealth transfer, one needs to be able to respond to two very important questions: ‘when?’ and ‘how much?’

Based on the collected data, end-clients typically need 20-80% of their wealth to maintain their economic lifestyles. 77% of the respondents fall into this segment, and the remainder are almost equally divided between needing less than 20% and more than 80% for post-retirement lifestyle maintenance.

Interestingly, RMs tend to advise their clients to allocate a higher percentage (around 40%) of their wealth to succession planning, showing that end-clients tend to be less cautious and more confident in their own capabilities. This difference denotes the existence of biases such as the ‘Lake Wobegon effect’ and ‘hyperbolic discounting’, that lead end-clients to discount potential risks and allocate less for succession planning than RMs, who, as professionals, tend to be more aware of the possible risks in succession planning, thus suggesting a larger percentage of wealth to be allocated to such planning.

What percentage of wealth should be allocated to succession planning?

As for ‘when?’, 39% of our respondents — the majority of our sample population — believes the ideal age to start planning for succession is 50-59 years of age, while 28% and 22% believe the ideal age is 40-49 and 30-39 years old, respectively.

Ideal age to start succession planning

Meanwhile, a number of brokers and RMs take a more qualitative approach and suggest the ideal age and minimum amount of wealth vary, depending on the specifics of each case. For wealth allocation, one needs to take a number of parameters into consideration, such as the wealth structure and the descendants’ family status. Concerning the ideal age, respondents recommend that succession planning should begin once the next generation is ready to take responsibility or asks for the process to be initiated.

Overall, almost 60% of our survey respondents do not have a wealth transfer plan in place, and there is a distinctive trend among HNWIs that wealthier clients are more likely to have one. Less than 15% of emerging HNW respondents have a succession or wealth transfer plan in place, and this number doubles to 30% for mid-tier and upper mid-tier HNW segments. Further, over 75% of UHNWIs already have a succession plan or are currently in the process of planning their wealth transfer.

Do you currently have a succession/wealth transfer plan?

Our surveyed RMs also said their clients have shown more interest in succession planning, with 32% of RMs seeing a significant increase and 45% of RMs noticing a slight increase in interest.

Has your existing clients’ interest in succession planning and wealth transfer changed in the last two years?

Succession planning and wealth transfer are designed to ensure economic security to end-clients and their descendents, yet their success is often threatened by internal and/or external risks. Concerning external risks, regulatory, political/geopolitical, cross-border jurisdiction, and market risks top the choices of both RMs and end-clients. Meanwhile, RMs and end-clients identify the possible inability of beneficiaries to properly manage their inherited assets as the highest internal risk.

Top 3 external risks

Top 3 internal risks

Read Part 1 of the report, “Succession Planning: Life Insurance Market Landscape (Executive Summary Part 1)” published in November 2018.

Stay tuned for Part 3 of the Succession Planning 2018 executive summary in the coming weeks.

Download your complimentary copy of the Succession Planning 2018: Perceptions and Opportunities for HNWIs executive summary today to read exclusive findings.

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