Demographically, the Middle East may skew much younger than richer nations in other parts of the globe but wealth in the region is every bit as concentrated in those over the age of 65. As such, the issue of how best to capture the transfer of assets from one generation to the next is as important for wealth managers in Saudi Arabia and the UAE, for example, as it is for their counterparts across North America and Europe.
What is more, as James Pereira-Stubbs, chief client officer at Oxford Risk, asserts, this is not “a question for another day”. “The intergenerational transfer of wealth in the Middle East is happening now and we expect it to continue for the next 10 years or so,” he continues. “As you would expect, the younger generation is taking over the entire management of the family finances either because the older generation has retired or passed away.
“More and more commonly, however, we are seeing the older generation bringing their children into the relationship with their wealth manager or financial institution as a sort of apprenticeship, leading up to the complete transfer of responsibility. It is important that wealth managers recognise this trend and engage the next generation appropriately.”
One example of how this transition is manifesting is in a growing focus on impact investing and environmental, social and governance (ESG) considerations – as highlighted by Ocorian in its Family offices and the role of third-party service providers report, which resulted from canvassing more than 130 family office professionals responsible for some $62bn of assets under management, including 30 respondents based in the Middle East.
‘Exciting trends, new challenges’
“Younger family members are starting to take a different approach to parents and grandparents, with the switch to ESG investing the biggest change, along with a desire for family businesses to become advocates of ESG and sustainability in general,” says Lynda O’Mahoney, global head of business development – private client at the trust, administration and fiduciary services provider. “These new trends are very exciting but can also bring new challenges, such as ensuring investments are achieving target returns as well as the desired ESG credentials.”
According to Pereira-Stubbs, Middle East investors tend to be most interested in the environment aspect of ESG, with social elements second and the least amount of interest reserved for governance considerations. “To take this a level deeper we do not see a real differentiation in the United Nations’ sustainable development goals [SDGs],” he continues.
“Investors tend not to have a clear preference for any one SDG – rather individual investors express a variety of interests across all the SDGs. This makes the job of wealth managers and financial institutions more complicated as they need a robust assessment of what their investors care about, alongside the ability to match an investor to the right products within their portfolio.”
Domestic structuring
Another shift identified by Ocorian is a significant rise in the use of foundations for domestic structuring. Traditionally, family offices and high-net-worth individuals in the Middle East holding assets overseas have not structured these domestically but that is now changing, the firm argues, with more than 1,600 foundations set up in the UAE alone.
“The DIFC, ADGM and RAK ICC foundations regime allows for the transfer of the ownership of assets from ‘own name’, enabling the flow of wealth across generations and the continuity of family businesses,” says O’Mahoney. “This increase in domestic structuring highlights a growing awareness around the need for asset protection and financial security, as well as heightened sophistication around the governance of family offices.”
Overall, wealth managers are noticing important differences in the way younger generations wish to be served. Key among these include the idea that a digital offering is less a luxury than a necessity – with younger clients expecting to enjoy 24/7 access to their wealth management platform – and a greater focus on holistic wealth management.
“The parents have taught their children well, with the younger generation exposed to greater financial education opportunities,” says Pereira-Stubbs. “For wealth managers, this requires a much more robust portfolio construction covering all asset classes and a much better understanding of what the investors want, with more robust assessment tools.
“There is also more scepticism of active management and interest in private asset classes and, in general, the younger generation wants a greater alignment between their values and their investments. This places two requirements onto wealth managers – they need to really understand what their investors care about and they need to build out their product shelves to provide a much more robust ESG offering.”
