Andrew Law, CEO of The Bahamas-based International Protector Group, discusses Asia's wealth surge and the trends that have emerged in private wealth planning. He addresses the importance of the Bahamas Executive Entity (BEE) Act in the global private wealth planning industry, highlighting some of the complex governance issues in managing fiduciary and wealth management structures and looks at how the Act can be used to resolve these issues to establish greater control, offer flexibility and reduce personal liability.

Asia-Pacific topped North America to become the single largest home to high net-worth individuals in 2011 according to a recent report by RBC Wealth Management and Capgemini. In fact, the number of HNWIs in Asia-Pacific with at least US$1 million in investable assets grew 1.6 per cent to 3.37 million, helped by an increase in wealthy people in China, Japan, Thailand, Malaysia and Indonesia.

Asia's HNWIs are younger than their Western counterparts, presenting an attractive opportunity for wealth managers. According to Capgemini and Merrill Lynch, 41 per cent of Asia-Pacific's HNWIs are 45 or under, versus a global average of 17 per cent. This suggests that they are still creating and growing their wealth, in contrast with Western HNWIs who tend to focus more on wealth preservation.

The growing importance of wealth planning in Asia

Despite their wealth, these families are not immune to the stresses that come with financial decision-making. Generally speaking, many businesses in Asia are family-owned and as a result, there is a narrow division between family and commercial life. We have recently seen disputes over money/wealth played out in the full glare of media publicity, such as the dispute over the Macau casino empire of Stanley Ho and the feud involving different family members over the control of the Yung Kee restaurant business. Families obviously recognise the practical, commercial and financial costs that stem from such disputes.

Asia is now seeing growing interest in private wealth planning, with a surge in demand for more complex solutions to hold the broad range of international assets of wealthy families. While the circumstances of every family are different, there is a growing appreciation by clients of the importance of addressing private wealth planning and for putting in place a structure that will avoid or mitigate issues arising in the future.

It was to meet just this very requirement that, in 2011, The Bahamas implemented a series of new legislation aimed at bolstering the competitiveness of its financial services industry and strengthening its legal and regulatory framework. More importantly, however, these new developments arose in a bid to cater to the boom in UHNWIs and to enable them to secure greater control over the management and security of their wealth.

The new Bahamas Executive Entities Act is a key part of this new legislation. The Act is a unique and ground breaking piece of legislation that has been designed specifically to resolve complex governance issues in fiduciary and wealth management structures in a cost effective manner.

Features of the Bahamas Executive Entity

The Bahamas Executive Entity (BEE) encapsulates the powers currently evident in existing wealth management and estate planning structures within a new form of legal entity – completely standalone in nature – enabling it to own and conduct transactions independently. It is an incorporated power holder of perpetual duration administered by its officers. It does not have a share capital and has no shareholders. It differs from a foundation in so far as it has no beneficiaries. The BEE may also own assets, sufficient to enable it to fulfil its functions.

The BEE is equipped to perform various functions, including the ability to act as a protector, settlor, founder or investment advisor of any trust or foundation. It can also act as shareholder of a private trust company, making it very versatile and comprehensive. Taking a look at these, firstly:  

1. As the Shareholder of a Private Trust Company (PTC): PTCs are growing in popularity in Asia as they enable the settlor of a trust to establish greater control - particularly over who will act as directors of the trust company - rather than retaining the services of a trust provider. However, they must have a shareholder, usually either a purpose trust or a foundation. This poses a problem as most offshore financial centres with purpose trust legislation have imposed restrictions on who can act as trustee. In addition, they have introduced the concept of an “authorised applicant,” or enforcer whose duty is to see to the proper administration of the trust by the trustees.

This brings the settlor back to the starting point of finding a professional trustee of the purpose trust and it effectively eliminates any control they may have over the PTC, as the professional trustees can remove its directors.

Establishing a BEE as shareholder of a PTC allows the settlor to appoint trusted advisors to the BEE council. This eliminates the need for third party trustees and effectively allows the settlor to maintain crucial influence over the entire structure.

2. Protector of a Trust or Foundation: The role of protector in an international trust is often fulfilled by one of the settlor’s family members, a trusted advisor, a lawyer, or some other professional usually known to the settlor. However, serious consideration needs to be given to the terms of the trust or foundation, its purpose, as well as the circumstances of the settlor and his family. With litigation on the rise, settlors need to be able to appoint an individual as protector without imposing personal liability on them. The BEE does just this. It reduces personal liability from say, a family member by ensuring that the power is held in a legal entity.

3. Investment Advisor to a Family Office or Trust: Trusts often have an investment advisor, and a person acting in this role often assumes a significant level of professional liability. They also bear responsibility for monitoring transactions, investment recommendations and appropriateness, among other duties, in addition to balancing the needs of various family members. If this person is also expected to manage the family business, then the task of being an investment advisor can be overwhelming.

Traditionally, this person would have to establish their own series of companies and trusts to provide liability protection. A BEE achieves this in one simple step by removing the personal liability from the function, and also provides the means to appoint council members who can assist with the various aspects of investment management. The BEE provides additional flexibility as it does not need licensed persons to act as officers or executive entity council members. 

While private wealth planning remains at an early stage in Asia, this sector is expected to grow dramatically. Looking ahead, Asia is expected to retain its leadership position in providing support to global growth and underlying wealth creation. The arrival of the BEE is timely. With flexibility and independence, coupled with its ability to simplify complex wealth management structures in a cost effective manner, it is able to provide international wealth planners with a tool to address the needs of both clients and their advisors effectively and efficiently, no matter where they may be located.