Article

Bringing a wealth structuring mind-set to the Philippines


Added on 28/03/2017

A gathering of 15 business leaders from the country’s wealth management sector – co-hosted by Peter Golovsky of Amicorp, Martin Wong of JLT and Hubbis – highlights why a sharper focus and more structured approach is essential, to drive needs-based conversations with clients in order to deliver much-needed succession, tax and insurance planning solutions, reports Hubbis.

The Philippines, similar to many countries across Asia, continues to experience rapid growth in the number of wealthy individuals and families.

What comes with this, however, are a wider and more complex set of needs in managing their business and personal assets – both for today and in the long-term.

As a result, the scope for more comprehensive planning, support and education is clear.

Many clients are increasingly aware of the dynamics and challenges they face. Plus, the focus on transparency at local, regional and global levels in relation to tax and other affairs has left them with little doubt about the need to do something quickly in order to plan for the future.

For wealth managers and third-party professional services firms, too, there is a clear need to work with new and existing clients to help tackle the issues now confronting them.

And as more wealth either stays onshore in the Philippines or gradually finds its way back home, facilitating a smooth wealth transfer to the next generation is becoming more pressing.

This all assumes that there can be further clarity around the regulatory environment, including the agenda and timeframe for the Common Reporting Standard (CRS) in particular. And also that the individual bankers have access to – and embrace – the required training and education in the tools and understanding of the issues in play.

Without these two components, the ability for wealth managers to have the types of needs-based conversations required, to advise and guide clients in the right direction, remains limited.

These were among the key take-aways from a recent roundtable in Manila, co-hosted by Hubbis along with Peter Golovsky, managing director and global head of institutional sales at Amicorp Group, and Martin Wong, chief executive officer, private client services at Jardine Lloyd Thompson PCS (JLT).

The discussion involved 15 business leaders from banks with platforms serving HNW clients and professional services firms in the Philippines.

In need of solutions

The drivers for wealth planning in the country are changing. There is a shift in the understanding and acceptance among industry practitioners as well as end-clients from tax minimisation to tax planning.

The expected tax reforms on the agenda in the shape of CRS make this unavoidable.

With or without a tax amnesty of the type which Indonesia implemented in 2016, for example, there is no escaping the need for proper planning, says Golovsky at Amicorp.

Clients need to understand, for example, that estate planning is way beyond a simple will or having a family holding company, he explains.

For the time being, the use of a trust, both locally and offshore, is very limited among Filipino clients. Most of them, say practitioners, don’t really appreciate the use of a trust for the purposes of protection and inter-generational planning; their appreciation of this tool is more for investments, as an asset allocation vehicle.

The more forward-looking institutions in the Philippines realise these shortcomings, as they do the inevitability of change via initiatives like CRS.

They know this will start to apply sooner rather than later, so need to be able to start the process of getting prepared, according to Dicky Fong, head of institutional sales for Amicorp in North Asia.

There are already implications for Filipino families that might have US connections, given existing regulations like FATCA. “These clients need to be made aware of the options available, such as foreign grantor trusts, US domestic trusts, and others,” explains Fong.

For banks and other service providers, therefore, key to them becoming a more relevant and embedded part of their client’s lives is the way they can differentiate their offerings and, in turn, win new clients.

The types of solutions they can bring to market will be a key determinant of this.

There is a need, for example, for proper planning around asset protection and succession issues.

At the same time, solutions for clients in the Philippines need to be developed that straddle both onshore and offshore, particularly given the likely changes in the regulatory and tax environments.

Further, solutions need to transparent, priced appropriately, and complemented by careful communication to clients about their purpose, relevance and value. This all relies on the right education, too, of bankers and clients alike.

In short, it comes down to early planning and the development of suitable solutions tailored to the needs of the local market, adds Golovsky.

Growing role for insurance

The use of insurance combined with trusts is expected to be more important going forward in the Philippines.

This mirrors an important trend across Asia more broadly. The strong wealth creation around the region has led many wealth planning and insurance specialist to estimate that universal life (UL) policies – jumbo life insurance plans for HNW and UHNW clients – will continue to generate double-digit growth per annum in the coming years., says Wong at JLT.

This is alongside the potential for much greater take-up of other legacy and estate planning instruments to facilitate wealth transfer to the next generation.

Further, a survey by Transamerica Life (Bermuda) Ltd and Asian Private Banker in 2016 found that only 5% to 10% of private bank clients have purchased UL policies.

Over the next 24 months, according to the findings, 56% of private bankers expect UL policies to show the fastest increase in popularity compared with other life insurance products.

Younger HNW clients, aged 31 to 50, were also found to be more inclined to purchase UL than those who are older than 51 – as well as view these policies as a way to create wealth and also a financial planning tool.

Client education essential

Meanwhile, the current knowledge among clients about protecting themselves and transferring wealth is quite diverse, according to practitioners.

At the more sophisticated end of the spectrum are those (relatively few) individuals who believe they understand the issues and what’s required, and can do it themselves without the help of professionals. Yet even they are now starting to realise this is unrealistic.

In line with this, the use of tools such as insurance to help them protect their wealth is becoming a bit more widespread in the Philippines.

Although insurance has typically been a bit taboo, regarded as a morbid topic that gets sold based on fearmongering, there are ways that wealth managers are increasingly finding to introduce certain products and solutions – and which don’t always involve the client having to die to benefit from it.

Yet this approach, as with any conversation with clients about their wealth structuring needs, requires a more proactive banker.

Given that the typical Filipino family consolidates most of their wealth with the decision maker, and aims to resolve questions about distribution of this wealth if something happens to one of the members of the family, their adviser can play more of an active role. This means driving the discussion and introducing tools to prevent disputes after the death of the patriarch or matriarch.

Industry leaders believe there needs to be a lot more effort to introduce such subjects as part of high school education in the Philippines.

Their rationale is that by planting the right seed and framing the mind-set at this stage of someone’s life will make them better prepared for the eventualities down the line.

Capacity building

Until there is a more formal and consistent effort to educate individuals, however, the current backdrop has led to financial institutions putting the need to increase their capability and capacity around wealth planning and structuring solutions as a priority.

The common scenario in conversations today between bankers and wealthy individuals is a focus on certain products – often investment-oriented.

On the other hand, there might be discussions between clients and insurance agents or bancassurance personnel – which are solely about insurance products.

The challenge in both cases, is that the institution won’t know the whole picture of the client’s assets or portfolio.

Yet the role of a relationship manager needs to change, urge industry leaders.

No longer can they be one-dimensional; instead, they need to understand the dynamics of the family and the various assets, to be able to hand-hold the client through the available products and how they can be applied for their specific situations.

With this in place, they have a chance to provide the right solutions, whether product comes from their institution or is sourced elsewhere.

As a step in the right direction – albeit limited to date – the family office concept is also gradually being more widely talked about in the Philippines.

Starting with a discussion involving an adviser and family members, this can uncover the extent of their portfolios, including companies and real estate, for instance. Then the conversation can evolve to more holistic topic like their goals and issues, as a pre-cursor to identifying estate and succession planning needs.

To complement this type of approach, some institutions say they are increasing the availability of tools for their advisers or account officers, so that they can more effectively engage the client at the different phases of their lifecycle. 

For example, although this commonly begins with investments, after winning their trust, it can quickly develop and broaden into all sorts of needs-based products.

Working together

What’s missing in achieving all this is the training that many bankers in the Philippines need to develop the required skills and knowledge.

Some of this can be addressed, it seems, by partnering with providers to educate the wealth managers as well as clients, says Golovsky.

“Partnership interaction is a key focus for us and an important part of our overall value proposition,” adds Wong. “Together with all market participants, we see many opportunities ahead in helping clients achieve their liquidity planning and wealth protection aspirations.”

Indeed, collaboration is one avenue for some financial institutions in addressing the needs of the local market.

This also highlights the need for teamwork when it comes to finding successful estate planning solutions for clients,

The traditional problem in the Philippines, for instance, in getting clients to focus on their broader needs, has stemmed from the close relationship the adviser has had with the customer directly. 

However, the evolution of the role into one which is more about support will lead to a better outcome overall for the client.

Offshore no more an advantage

CRS, in conjunction with other regulatory changes on the disclosure of financial information – plus some more which might come in the future – has resulted in little difference between wealthy Filipinos holding assets onshore or offshore; either way, they will be subject to a declaration of funds.

Industry leaders see a lot of potential onshore, given the fact that the Philippines represents a highly-untapped market. Further, many practitioners believe that what is invested offshore is really just excess money, yet onshore is where the clients have their businesses and where they build their wealth.

As a result, there is an urgency around advisers working with professional services firms to find the right structures for clients in anticipation of the imminent declaration of assets. Practitioners say that some clients are already clamouring for a structure to go into.

Yet it is important to also consider that onshore and offshore asset structuring may have different tax implications for Filipinos with beneficiaries residing at home or overseas (such as in the US).

Reshaping the future of fiduciary services

With so much wealth creation in the region, including in the Philippines, there is growing interest in instruments to facilitate wealth transfer to the next generation.

This is also a trend reflected in two recent pieces of thought-leadership: a ‘Future of Trust’ report, by Amicorp and Scorpio Partnership; and a White Paper, titled ‘Shaping the Future of Fiduciary Services in Global Wealth Management’, by Amicorp and Hubbis.

The research by Amicorp and Scorpio showed roughly 475,000 trust structures worldwide – but only 5% of the global HNW population have a fiduciary structure, suggesting significant upside, especially within Asia Pacific.

This was then further validated by 90 industry leaders across local and international wealth management institutions and advisory firms, at 9 roundtable discussions – hosted by Amicorp and Hubbis in Hong Kong, Singapore, Miami, New York, Mumbai, Zurich, London, Sao Paulo and Dubai in 2015 and early 2016.

With mounting uncertainty over the strategic positioning of their fiduciary services businesses within their broader wealth management offering, it ultimately comes down to what’s core versus what isn’t.

“Many banks around the world are at tipping point in their decision-making around whether to remain in the business of wealth structuring,” adds Golovsky.