China Key Person

Hey high-powered Chinese and expat managers! Here’s a crazy idea that just might work. Stop looking for a better job.

Think about staying put for a while. If you’ve got two jobs of less than 2 years in the last 6 years on your CV, then you have a potential problem on your hands. This is especially true if the only promotions you’ve ever had were from job-hopping. This could be a great time to stay put and do a little career fine-tuning. (And if you are an expat considering heading home without a 100% sure thing lined up – I’ve got one and a half words for you: RETHINK.)

You should make plans on sticking in out for another 2 years if you can make it work – even if you don’t think you have to. But if you’re Chinese at a multinational and you have a job title that would take you another 5 years to get overseas, then dig deep and discover that long-lost sense of perspective and realism – because the negotiating environment is much different in a global recession. As staffs start to tighten they will still need highly paid young managers, but they may not need as many

When negotiating for long-term compensation packages:

• Keep the negotiation friendly and open-ended. Remember - the whole point of this is to be more of a team player and build up that ‘management & leadership’ aspect of your CV. You want to look like a leader - not a pouty whiner.

• Win-win is not a loss or a last resort. Leave something on the table. Your goal here is to move up in the estimation of your bosses and peers — not alienate the entire management suite for an extra 1000 rmb per month. This is a great time to appear more human and mend fences.

• 18 months is the magic number. They start paying more after that – or should. The corollary, if your CV doesn’t have at least one gig lasting 2.5 years or 50% of the time since you’ve graduated, you have a potential problem on your hands — and everyone knows it but you.

• Don’t be passive – Walk in with a list of bargaining points. Chinese negotiators tend to be particularly weak in this area. Some have been known to get a good offer from a headhunter and walk away without even renegotiating with their exisitng management. That’s fine for kids taking their second job, but serious managers on thw ay up will have to take the lead - without the greed. Get creative, and link pay to performance. But be ready to give comparables from industry leaders

• Start introducing the word “productivity” into your vocabulary, and learn how to pretend you can increase it in your department. Talk about your own productivity — the ability to perform more for the the same compensation — and then talk about how you can boost the output of your department. When your senior bosses talk about ‘leadership’, this is what they really mean.

If you are an expat in Shanghai, you have probably heard financial salesmen using these 3 phrases more or less interchangeably. But are they really the same thing?

Financial Planning is the process of matching your assets and income to your long term goals. This often requires professional help, as some difficult choices and complex calculations may be involved. An integrated financial plan encompasses savings, investing, offshore banking — and most of all, goal setting. If your financial advisor isn’t spending a lot of time discussing your major long term goals then something is wrong. A good financial plan will act as a roadmap covering the major expenses of your life, including tuition, housing and retirement.

Portfolio management is an older, more established discipline where professional managers construct and balance a collection of assets. If your assets and income are modest, then you can usually rely on a structured savings plan to cover most of your portfolio management needs. As you build up your household’s asset base, however, you will need to devote more time and attention to managing your portfolio. Professional portfolio managers speak in terms of risk-return profiles, diversification, asset allocation and investment horizons. Portfolio management can be a complex process, and if your net worth is approach the 7 figure range it is probably a good idea to get professional help. Lots of people talk about it — few do it. As a general rule, you don’t want your portfolio manager involved in the sales process (since it could lead to MAJOR conflicts of interest).

Wealth management is a product or collection of banking & financial services dreamed up by marketers. It encompasses both financial planning and portfolio management. Back in the US or Europe, ‘wealth management’ and private banking are used interchangeably to charge wealthy people more money for more and better services. For expat managers in China, however, wealth management is less of a luxury and more of a necessity. Unless you plan on devoting a lot of time to banking, taxes and insurance issues, you may want to avail yourself of one of the many fine wealth management and private banking companies in China. Choose carefully, however, and make sure you choose an advisor who can actually make good on their promises.

Sign up for the CKP/EIG whitepaper: LifePhases Investing – A Guide for DIY Financial Planning.

You’ve heard the jokes – you may have even made them. “I couldn’t go home now even if I wanted to on account of the economic situation back home – and the opportunities here.” This is one time when the joke is funny – for those of us already here. But just remember two things: Tough times may hit here as well – and if the economy in the West doesn’t look better soon, there is going to be a lot more competition over here. It may not just be out-of-work twenty-somethings looking to roll the dice after graduation, either. Expect to see more small firms enter the China markets – and more big ones ramp up their presence here. One way or another, times are going to be getting more difficult – but not necessarily less profitable.

Which brings us to an important, but often overlooked point. Holding on to the money you’ve already made – and preparing for a future that may be very difficult to predict. How do successful China-based managers handle their money? Every case is different, but here are a few ideas to get you started on your personal financial checkup.

1. Study up. Maybe a little, maybe a lot. Whether you’ve got a lot of money or just a few bucks in savings or 401ks, there’s a good chance that you will need to rebalance your funds in the near future. You’ve got 3 choices: know a lot about investing, know a good advisor, or try to wing it on dumb luck. If you are planning on doing #3, we’re done for the day. The first two options take some degree of effort.

2. Know your own numbers. How much do you have, how much do you owe, how much is your property worth (right now – not after there’s been a sudden recovery), where your money is and how much you are earning (or losing). This can be traumatic if you haven’t done it in a while, but you are much better off knowing then blundering on in ignorance – or self delusion.

3. Decide on a risk-return profile and a time horizon. Don’t tough it out. Make your decision – and then develop a strategy. Remember – just because you’re fed up with risk right now doesn’t mean you will be in 36 months (or 6, for that matter), so don’t lock yourself into anything overly safe and low-paying just cuz you’ve been burned.

4. Get your ducks in a row. If you’re over here you’ll need to have a plan for dealing with taxes, currency, banks and more taxes. The IRS doesn’t accept “oops” as a substitute for paperwork – and the Chinese are also getting kind of sick of it. Have a team of professionals lined up as you plan and transact – not when you have to file or return home.

5. Know who to trust. You’ve got to differentiate between honest and competent. Lots of beloved family members and friends and loved ones will you give some god-awful advice when it comes to overseas finance. If you are transacting more than $10,000 US across international borders, then people you don’t know will know you.

I’ve heard some very smart people spout absolute gibberish about both Chinese and US tax law. It would be funny if it weren’t so needlessly expensive and stressful. Educate yourself early and build a team of qualified experts BEFORE YOU NEED THEM.

Sign up for the CKP/EIG whitepaper: LifePhases Investing – A Guide for DIY Financial Planning..

Expat professionals often feel richer in China than they did back home. The good new is the disposable income, the army of housekeepers, ayi’s & drivers, and the comfort and prestige that come with being a leader in an emerging market. The downside? Bureaucracy, regulations and responsibility.

That’s why you should check out this week’s, Shanghai Family Finance for an overview of Wealth Management as it applies to the well-heeled China expat.

A good wealth management firm can pay for itself many times over and help you to avoid costly mistakes as you navigate the world of international finance. A bad one can leave you broke and bitter — so know what you’re getting yourself into.

At the very least you should sit down with a consultant and learn more about their company. These guys can work real wonders in a planning and advisory role — but tend to come up short in damage control mode. In other words, they are much better at helping you avoid tax problems than in getting you out of trouble once you have already done something foolish, expensive and/or illegal.

What kinds of fees can you expect to pay when working with a financial advisor?

Most financial advisors in Shanghai will talk to you about insurance-based regular savings programs. For the vast majority of households, this type of investment program is the most appropriate for your needs and long term goals. But how much are you paying? It’s sometimes hard to identify the real price, because fees and charges are hidden among the clauses of a fairly complex contract document. Here are some starting points for your discussion with the IFA you are working with:

1) Commission vs. Fee-based advisors.
Commission systems are favored by 2 groups of people: those not buying and those about to buy. Non-buyers like commissions because they don’t have to pay for answers. People in the process of buying like commission systems because they get unparalleled levels of service. Who doesn’t like commissions? Those who have just made the purchase. Because commission-based sales organizations get paid on the products they sell, the direct charges are very visible and can appear quite high in isolation.

2) Front end vs. Back end
Financial services fees can be applied in two ways. Sometimes fees are levied on the amount you are investing. The fees come “off the top” and your invested funds are reduced by the amount of the fee.
Back-end fees work just the opposite way. 100% of your investment is applied to the target fund — but you are charged when you withdraw your funds or take distributions. The good news is that your payment isn’t coming unti8l the far, far distant future. The bad news it will be much higher than an upfront fee.

3) ICP vs. FUM
Long term financial contracts — particularly those of the insurance variety — tend to designate a set Initial Contribution Period, or ICP — that often carries higher fees than the rest of the balance due. The logic is that these long-term savings plans are expensive to set up but cheap to maintain. By designating the early period of the contract as an ICP, managers can better isolate and allocate fees. Investors who stick with the plan are rewarded with lower fees over the life of the investment plan.

A related concept is Funds under Management, which includes everything invested AND all the gains made. Many products combine and ICP and FUM fees in differing proportions — so know what you are getting involved in before you sign.

4) Penalties.
These long-term savings plans are designed to last for a specific period. Make sure you ask about what happens if you try to cash out early. Don’t be surprised if you end up losing a pretty significant chunk of you ICP (Initial Contribution Period) investment — which can be pretty hefty. I know that things look great right n9ow, but be sure to ask about a range of different scenarios.

5) Other
Is that all there is? Nope. Marketing departments in Zurich and the Caymans are burning the midnight oil trying to figure out new ways to charge you, fee you, or find some way to separate you from you r money. Be on the lookout for little fees like contract fees, policy fees, management fees, and switching fees. Sometimes they are insignificant, like the $7 per month policy fee charged by one large European insurer. Other fees, such as charges for switching from one fund to another, can mount up in a hurry. Ask about everything, and don’t be afraid to look naïve.

High-earning Shanghai expats have an exciting new option when it comes to property investing. Off-plan or Pre-Release investing allows you to access a wide range of investment targets, economies and types of real estate developments while also taking advantage of pre-release prices.

Off plan investors are getting in BEFORE the ground floor is even built. It is early stage investing — the kind traditionally only available to insiders and institutions. When the project is still in the early stages and developers are working “off the plan” instead of with completed model units, you have an unparalleled opportunity to score significant gains. Proper due diligence and risk management - and careful selection of the right partners and consultants — maximize potential ROI.
Why is this kind of investing so interesting to so many people? For comfortable earners who have already covered the basics, property is the next logical step to a diversified portfolio.
How do you judge the merits of a project? Make sure to ask questions about these factors:

• Diversification. Off-plan investing is a great way to diversify your holdings in terms of asset class AND geographic risk. But don’t make any assumptions. Be sure that the project you’re looking at isn’t just putting some of your eggs on the other side of the same basket.

• Risk vs. Profit opportunity. Off plan investing makes you an insider – but it exposes you to new types of problems. You shouldn’t expect to earn outsized gains without additional risk.

• Tax efficiency. Making money is one thing – holding on to it is even harder. People promise you the world when they are trying to sell you an off-shore investment, but the fact is that laws and regulations are in constant flux. Make sure to investigate all of your options in advance. Once you’ve sold, it’s too late to start planning a tax strategy.

• Currency. International investment means a wide range of currency options – and the headaches that go with it. Many international investments require you invest in a currency you don’t plan on ever using. Make sure you understand the ins and outs of currency and exchange rates.

• Professional management and due diligence. You need to do both top-down and bottom-up analysis of your project – and your team. Bottom-up means starting at the very basic level and moving up to the general. You’ll want to know about the local economy, the rental and resale markets – and at the quality of the people doing the actual building and management. Once you’re satisfied, move up to the next link in the business model and find out everything you need to know. Top-down analysis starts by looking at the most general assumptions possible and then getting more and more specific. We start by looking at the broad economic, political and financial environments, and then gradually becoming more focused on the nuts and bolts of our project.

What is a Portfolio Bond?

A portfolio bond, often referred to as an insurance wrapper, is a financial structure that protects your assets and shields you from unnecessary taxes. When you have a financial advisor set up a portfolio bond, you are basically buying an empty container located in an offshore tax haven. You are now free to fill that container with funds, stocks, bonds, and other tradable financial instruments.

Portfolio Bonds vs. Insurance Wrappers.

When financial consultants refer to insurance wrappers, they are usually referring to off-the-shelf savings plans that may be funded with a lump-sum investment or on a regularly scheduled savings plan. You have a wide range of investment options, but they tend to be limited to the funds authorized by the insurance company managing your plan. Portfolio Bonds, such as the PIMS plan offered by Scottish Life, take an open architecture approach that allows you a great deal more latitude as to what kinds of assets you can house within the bond. Basically, any financial product which is publicly traded (internationally) and marks to market daily is eligible to be inserted into the Portfolio Bond. You may even be able to insert assets you already own into a newly established portfolio bond – which may have a big impact on your tax bill and estate planning situation.

What does NOT fit into a portfolio bond:

1-Real estate, artwork, physical commodities, and anything else that doesn’t mark to market and settle on a price daily.
2-Insurance –including other forms of insurance wrappers.

What can fit inside a portfolio bond:

1. Stocks
2. Bonds
3. Mutual Funds

Costs of a Portfolio Bond

The good news is that portfolio bonds are relatively cheap, considering the range of suitable investments and the tax shielding. The danger here is ‘double dipping’. Make sure that your IFA isn’t charging twice.

Tax consequences.
Since portfolio bonds can be domiciled in tax havens such as Isle of Man, they can be used to shield your investments from unnecessary tax. Always remember, however, that everyone’s tax situation is different and you must confer with a qualified tax expert and financial advisor before undertaking any investment decision.

Soon after you started researching financial planning, you probably encountered the phrase ‘insurance wrapper’. The basic concept is that mutual funds and other tradable financial instruments can be ‘wrapped’ in an insurance policy to give it additional tax and estate planning benefits. Theses are insurance products in name only – the actual insurance coverage is only about 1% of the value of the portfolio, and investors don’t have to pay separate insurance premiums. 100% of contributed capital passes right through to the investment funds. The result is a flexible, tax-efficient structure for investing in the same types of funds that most households are already using.

Why are these instruments so popular now?
Insurance wrappers allow private investor to put their investment asset portfolio in a tax efficient structure. Earned income is tax-free as long as the assets remain within the wrapper. Policy holders can make their own investment choices or direct a professional fund manager to take charge. This approach is also appropriate for estate planning because the investor can designate a beneficiary who will receive the life insurance proceeds (i.e.: investment funds) tax free.

How does it work?
Unless you have millions to invest in a private placement, your best bet is to use an off-the-shelf savings or investment plan offered by large, stable insurance companies. Big international houses like Generali, Aviva, and Friends Provident should meet most household investor’s needs. They are stable, regulated and usually domiciled in tax havens such as Isle of Man, Guernsey or Hong Kong.

Your advisor will help your figure out how much to invest. Investment plans usually come in the form of regularly scheduled cash injections or a single lump-sum payment. Some plans are more flexible than others when it comes to changing your schedule or adding lump sum payments, so makes sure you understand your options.

Once you have made the necessary decisions, you take ownership of an insurance policy while the insurance company retains ownership of the investment assets. A contract secures your ownership and stipulates your rights, responsibilities and names a beneficiary.

What about the premiums and fees?
The assets being placed within the wrapper count as the premium paid. You will pay fees and charges for the set-up and management of the insurance wrapper, but not in the form of premiums. Fees vary with the company and product, but most use a variable system of charges may include an ICP, or Initial Contribution Period, management fee, or other charges and fees. Ask your financial consultant about the ‘all-in fee’ for a specific term to compare different contracts.

What are the benefits?

There are 5 important benefits to using insurance vehicles as long term savings plans.

1) Security. These companies are old, secure and highly regulated. In most cases the funds are protected and guaranteed by government agencies, but you must check carefully since contracts vary.

2) Tax. This type of savings plan is highly efficient. That means no unnecessary taxes. Investors are not taxed on growth of investments held in the wrapper but you are still governed by applicable tax authorities. Once funds are removed from the insurance wrapper your tax situation will depend on your specific situation and the governing laws of the jurisdiction in which you operate. (In most cases law abiding Americans are going to find that they are not getting as much of a benefit as their European and Asian counterparts.) Everyone’s situation is unique, and you should make sure that you discuss this issue carefully with both your financial advisor and tax specialist.

3) Flexibility. Insurance wrappers are consumer products, and have many convenient features built in to the basic contract. You should investigate what competing contracts offer as far as access to investment funds before the end of the plan term, suspension or changes to premiums, and free switching between mutual funds. Companies offering insurance wrappers work hard to maintain a wide range of in-house or authorized funds that gives most investors an adequate choice. All wrappers should allow you to assign beneficiaries, giving the plan a strong estate planning function as well.

4) Professional management. Regular savings plans are built and managed by financial professionals and fund managers. Most plans offer professional portfolio management for free or at low fees. Furthermore, wrappers integrate very well with the rest of your financial and estate plans.

5) Cost. Figuring out the final cost of these programs isn’t easy but if you are investing for over 15 years you’ll probably find that your all-in costs are under 2% of total funds under management. You will have trouble finding a cheaper option for a comparable level of management and service.

The bigger your earning, the more important it is to identify your ‘free cash flow’ or excess income that you can set aside for investment. This is much harder to do in Shanghai and other Chinese business cities because costs and charges are so different, expats’ spending habits change and many big items are covered by employers.

Financial planners calculate your ‘excess’ income which is free to be invested as:

Net salary – expenses – discretionary spending (travel, restaurants, clothing, etc)

If a plan doesn’t take into account the last part of the equation – the discretionary income that defines your lifestyle – then it is not going to be effective or long-lasting. A good planner will focus on doing everything possible to maintain your standard of living and range of activities. Be on the lookout for aggressive financial planners or advisors who intentionally pad your excess income in the hopes of boosting their commissions from the bigger investment.

The true danger here is that many people have a distorted view of their own spending. They tend to under-count their expenses –and ignore their discretionary spending all together. Early iterations of your financial plan may indicate that your excess cash-flow at the end of the month is 70% of your salary. While this may turn out to be accurate, it is more likely that you are grossly underestimating your true expenses. If you are spending over 5,000 rmb every month on restaurants then you can’t calculate your food budget based on the ayi’s Carrefour budget. You have to be realistic about your habits, customs and lifestyle. If travel, restaurants, shopping, bars or anything else is a significant part of your life, then you have to count it.

One advantage to doing this kind of rigorous analysis of your own finances is that you will have better information about the amount money you can comfortably invest. A second benefit is that if you find that you are falling short of your goals and need to save more, then this is precisely the information you need to adjust your free-spending ways.