Hong Kong has become the world’s top UHNW city, but how is this growing wealth being protected?
The release of the 2018 World Ultra Wealth Report made international headlines last month for revealing Hong Kong to have surpassed New York City as home to the world’s largest cluster of ultra-high-net-worth individuals (UHNWIs). Notably NYC had held the top spot since Wealth-X first started ranking cities in 2011.
The report reveals that the world’s overall ultra-wealthy population (i.e. those with $30m or more in net worth) rose by 12.9% in 2017 to a total of 255,810 individuals. Meanwhile, the number of UHNWIs residing in Hong Kong increased by almost a third to 10,010. The study credits this Hong Kong surge primarily to enhanced trade and investment links with mainland China.
Naturally, with greater wealth comes a greater need for wealth management and fiduciary services, however in Hong Kong this has not been as straightforward a progression as it may sound. Here I take a look at the use of trusts and fiduciary professionals among Hong Kong’s ultra-wealthy, the challenges faced by service providers, and how things are improving in this space.
Use of trusts in Hong Kong
Trusts have been available to Hong Kong residents for over a century and there is increasing awareness of the benefits they offer, including long-term protection, tax efficiency, and the facilitation of effective estate and succession planning. That said, close attention has not always been paid to the quality and effective administration of these structures.
Looking back over recent decades, there have been periods where interest in trusts has spiked; for example, as part of pre-emigration planning for those departing Hong Kong in advance of the 1997 handover, and in the limitation of inheritance tax before estate duty was abolished in Hong Kong in 2006. In these instances, basic trusts were provided by banks and certain other financial service providers as a “wrapper” for the client’s investments but nothing more than that, with limited regard frequently being paid to the fiduciary obligations of trustees.
With the advent of a wave of trusts being attacked by creditors and ex-spouses through the Hong Kong courts – not to mention the world’s increasing complexity from a tax and regulatory perspective – the requirement for well-run trusts has become more crucial than ever before.
A history of privacy and a continuing lack of belief
Through our previous STEP Journal and Hubbis roundtable sessions, we have already discussed at length the fact that, due to the relative newness of wealth creation in Asia, the idea of seeking third party advice and support remains something of a novel concept. The same applies specifically to Hong Kong. Not long ago, the idea of discussing business openly with an outsider was quite alien, and it has been estimated that a significant percentage of Asian entrepreneurs are still operating without third party guidance. However, as the more globally minded younger generations make their fortunes or take the helm of family businesses, as assets are diversified across different classes and geographic regions, and as the international push for transparency intensifies, we are seeing a much greater willingness to accept professional support on wealth structuring and succession planning.
Reluctance to take professional advice also unfortunately stems from an undercurrent of mistrust of service providers across all industries but particularly financial services. Indeed, a survey by the CFA Institute from earlier this year found that only 35% of Hong Kong investors completely trust the financial services industry, making them the most sceptical in Asia. Further, only 7% believe financial advisers always put clients’ interests first – the smallest proportion out of all markets surveyed, and far lower than the 35% global average.
The reality: rising standards and client-centricity
The truth of the matter is that the private wealth industry in Hong Kong is on an exciting journey, with outmoded approaches to trust formation dying out and a greater global awareness among clients quickly emerging. With increased regulation, the Common Reporting Standard (CRS) and global mobility now firm realities, large and small firms throughout the industry are embracing the opportunity to mentor their clients through this pivotal period and drive the move towards well-run, professionally advised, tax compliant structures.
Further, independent providers such as First Names Group are free of the conflicts often associated with institution-owned trust companies, meaning we have complete freedom to choose the right legal/tax advisers, banks and investment houses to work with in line with our clients’ individual requirements.
As Hong Kong’s UHNWIs continue to grow their wealth and expand in number, it’s vital that they are educated on how trustees work, how trustees are regulated and how trusts should be administered, so that they can become comfortable with the services being provided. This will help clients learn to trust their selected professionals and ensure their wealth is sufficiently protected so that it can be passed safely to the next generation – and steer clear of the courtroom.
John McGale is an Associate Director in First Names Group's Hong Kong office. As well as driving business development in the region, John has considerable experience in the formation and administration of corporate and trust structures and has worked closely with numerous UHNW families and individuals.
This article has been issued by First Names Management Limited on behalf of certain companies that form part of First Names Group. The article has been prepared for general circulation to clients and intermediaries, and does not have regard to the particular circumstances or needs of any specific person who may read it. Nothing in this article constitutes legal, accounting, tax or investment advice.
The information contained in this article has been compiled by First Names Management Limited and/or its affiliates from sources believed to be reliable, but no representation or warranty, express or implied is made to its accuracy, completeness or correctness. All opinions and estimates contained in this report are judgements as of the date of publication, and are provided in good faith but without legal responsibility.