With China now the fastest-growing wealth market in the world, wealth management lawyers are very much in demand, providing advice on succession planning, inheritance, trusts and more. As a result, Chinese law firms have begun to specialise in this fast-growing practice area, as well as beef up their wealth management teams.
There is an increasing number of wealthy people in China now who require professional assistance to manage their sizeable resources, and the legal industry is gearing up to fulfil this growing need.
The total amount of individual wealth in China exceeded 146 trillion yuan ($21 trillion) last year, according to a report by digital wealth management platform Yiren Wealth.
And that number has maintained an impressive average annual growth rate of 20 percent in the past decade. Though times have become more volatile of late due to various tensions, the growth in the last 10 years bodes well for the wealth management industry.
There are now 30 million individuals in the “mass affluent” category, which refers to those in the wealthier end of the mass market. And as for the fabulously wealthy, the number of high-net-worth individuals (HNWIs) reached 1.67 million last year.
According to the China Private Banking Report 2019 released by China Construction Bank and Boston Consulting Group, each of these 1.67 million people has individual investable financial assets of 6 million yuan and above.
As a result, China’s wealth-management industry is the fastest-growing in the world. Personal assets for investment rose from $11 trillion in 2012 to $22 trillion by 2017, according to consultancy Oliver Wyman, with that figure expected to reach $37 trillion in the next five years. Of that, only 5 percent, or $1.1 trillion, was invested offshore in 2017.
The banks are getting into the action. The private banking units of top Chinese commercial banks, including China Merchants Bank, Industrial and Commercial Bank of China, and Bank of China dominate the local market, according to Asian Private Banker, according to Reuters.
And foreign lenders are queuing up. Reuters reported earlier that Japan’s Nomura was awaiting a license to launch a wealth business in China, while JPMorgan and Bank of Singapore, a unit of Asian lender Oversea-Chinese Banking Corp were among others considering entries. Citigroup expects its China wealth-management client base to grow faster in 2019 than last year, at more than 30 percent, its country CEO Christine Lam said in January, Reuters reported.
CLEAR TRENDS
With so much at stake, lawyers are becoming a key part of the landscape.
Zhang Jun, senior partner at Dentons, believes that the wealth management market is changing rapidly, and the trends are clear.
“What clients need are lawyers who can understand wealth management needs, who have studied this matter in-depth and can execute the plans, and who can integrate service resources,” says Zhang.
Clients need services beyond private wealth management. “They also need legal services for families to grow their wealth and manage their businesses with top-down structural design. Hot areas these days include the top-down structural design for foreign tax residents, simultaneous planning for domestic and foreign equity trust, ownership restructuring for family business, compliant tax planning, foreign grantor trusts under U.S. laws, non-resident trusts under Canada laws and offshore ‘Granny’ trusts,” says Zhang.
Zhu Tengfei, partner at Tian Yuan Law Firm, sees wealth succession and tax planning as particularly important areas for the wealthy.
“The wealth of these cross-border high-net-worth individuals has become more transparent, which makes wealth succession and tax planning important for them. The planning we emphasize is not the one in traditional sense. It comes with two levels based on the current trends: first is compliance, second are measures to reduce risks and avoid double taxation,” says Zhu.
But almost all the high-net-worth individuals are exposed to wealth management risks.
Xiao Wei, founding partner at JunHe, thinks some of it could be tricky with so much at stake.
“There’s a lot to consider, such as how to get succession done, how the children’s marriage impact the family, how to pass the wealth across generations. If it involves shareholding of a family business or a listed company, they need to think about how to control and distribute the shares. Offshore assets also involve laws and regulations of different jurisdictions,” says Xiao.
Another related trend is the protection of their wealth.
“What I mean here is protection of the ownership of their wealth, but not protection from investment risks,” says Xiao.
He says factors to consider include if the risks are separated. For example, if the entrepreneur has separated the risks of his/her family asset from his/her corporation and if the assets were acquired legally, such as tax compliance to reduce risks from non-compliance.
“The third trend is that more families and individuals are willing to donate their wealth to charities. This requires lawyers to make planning in terms of structure and operation,” explains Xiao.
CHALLENGES FOR LAWYERS
Dentons’ Zhang sees the service model as the biggest challenge in wealth management for lawyers and clients.
“There is a mismatch between a lawyer’s practice area and a client’s need for an integrated solution. It is thus essential for lawyers to combine resources and capabilities to serve the clients,” he says.
Another major challenge is the ability to provide cross-border services regarding the clients’ business development, asset allocation and residency status, and simultaneous planning is always needed.
“What is more important is that such cross-border services involve multiple jurisdictions. How to solve the legal differences among the jurisdictions to ensure compliance is undoubtedly a big challenge for lawyers,” says Zhang.
Tian Yuan’s Zhu points out that when asset allocation is put in a global context, wealth management lawyers are required to have a high level of proficiency in foreign languages. Not only that, equity adjustment could mean corporate restructuring and merger and acquisition.
Additionally, the mix of personal and professional matters that is commonplace
amongst the wealthy can also prove challenging.
“A direct challenge is how to gain your clients’ trust. As family and individual wealth is often kept as a secret, it is different from working as an external lawyer to solve legal matters. So, trust is the first and the biggest challenge,” says Xiao from JunHe.
A lot of the wealth management lawyers started with practicing marital and family law. To close this gap could be difficult for them.
“Combining commercial law and family law is the strongest legal protection for ensuring wealth succession and planning. It is expected that some competent foreign-focused commercial lawyers and family law lawyers will form the best group in the wealth management sector in just a few years,” says Zhu.
He feels this could prove to be a lucrative career path for foreign-focused commercial lawyers.
China’s regulatory framework for wealth management is still taking shape. And Zhu observes that although the framework is still being improved upon, it is possible to use necessary legal tools to achieve wealth management goals under the current legal system.
“With that said, China still needs legislation for laws such as the trust law. The lack of legislation has to do with the failure to solve certain theoretical issues regarding the trust law and the legislature’s understanding of the social values of these laws,” says Zhu.
He suggested drawing from various wealth management tools such as banking, insurance, trusts, tax planning and wills to offer the best service for clients.
“Wealth management lawyers must have capabilities to learn as the legal framework in this regard is still being developed and improved. They also need to think about how to coordinate the laws and legal framework of other countries with China’s, which will require forward-looking thinking,” says Xiao.
“Only in this way can they help clients solve not just today’s problems but also tomorrow’s.”
LOOKING TO THE FUTURE
The development of the wealth management industry will inevitably promote and advance legal services in this area. Zhang says it is an industry consensus that wealth management will be a regular business with great potential.
And he foresees that the breadth and depth of wealth management will eventually lead to segmentation of legal services.
“Law firms vary in terms of their brand image, management model and business. The most effective way to stand out is to find your position based on your resources and capabilities and to establish a system for this business,” says Zhang.
And after establishing your tools and resources, the best strategy is to be specialised in one area to expand your market in this legal industry ecosystem.
“A better approach is to lead the market segment and stay competitive overall,” says Zhang. “The knowledge management skills and the ability to combine services of the lawyers are keys to developing your business.”
And, of course, no single lawyer or law firm would always have all the things necessary. To this end, Zhu suggests looking at the big picture and seeking partnerships.
“Private wealth management is a complicated task that involves the overlapping of different business areas and collaboration with clients and partners. To offer quality legal service, we must uphold the concept of win-win cooperation and work with lawyers from first-tier cities to maximise the clients’ interests,” says Zhu.
“We can cooperate with other outstanding private wealth management teams that have a big platform, resources and reputation to satisfy the clients’ needs for cross-border and multidisciplinary services.”
And it is a capable pool to draw from. Wealth management lawyers are a group of professionals who are fluent in foreign languages, specialised in commercial and family law and capable of using various legal tools to offer family businesses a one-stop solution to wealth protection and succession. Zhu stressed that lawyers in wealth management cannot afford to be operating solo.
“The competition will be on your ability to improve your reputation, integrate your resources, become more specialised and build your team and core values,” he emphasised.
Zhang says wealth management lawyers must look at four areas to stay competitive, namely: their professionalism, perspective, organisation, and technology.
“Professionalism, of course, is the fundamental requirement. Perspective means they need to think from the family’s perspective and prioritise their needs in wealth management, as balancing the family business and the family is a key requirement,” says Zhang.
“As good actions come from good organisation, it is a core requirement to establish a ‘small organisation’ that can integrate into the wealth management ecosystem. Meanwhile, knowledge management skills and the ability to apply technology in your services are requirements under the current trends.”
Some say Chinese families’ demand for wealth management lawyers is still in an initial stage and there is room for more development.
As Xiao sums it up: “Overall, there needs to be highly professional lawyers with a high standard of ethical conduct who are dedicated to serving the clients, to keeping clients’ information confidential and to providing clients with an integrated solution by combining resources at home and abroad.”
To contact the editorial team, please email ALBEditor@thomsonreuters.com.
