Getting it right with international portfolio diversification

Despite the much awaited transition to a consumption and service-driven economy, the pulse of the Chinese economy is very much still investment led. The increasingly affluent population of Chinese individuals and corporations structuring their wealth offshore and diversifying their portfolios internationally presents a huge market potential for overseas portfolio management professionals. A great number of jurisdictions worldwide, either through public or private initiative, have taken the time to methodically build an understanding of the key market of Chinese high net worth individuals (HNWIs) and, to a great extent, have succeeded in getting them on board their showpiece tax-attractive and asset-protective structures and services.

The conceptual alliteration of the services available, particularly in Commonwealth and ex-Commonwealth jurisdictions, makes it a challenging task for HNWIs and their advisers in getting the top-tier jurisdiction of their structure right. The selection process will entail reasonably weighing up a number of variables and advice, all of which will ultimately be scrutinised against, and decided alongside with, implementation and long-term maintenance costs. The potential of acquiring a foreign citizenship and passport has arguably moved centre stage in jurisdiction decision making nowadays, as ever more HNWIs are seeking to couple investment returns with a generation-surviving legacy for themselves and their dependants.

Once the jurisdiction has been decided upon, it is of equal importance to consider who can be entrusted with administering the services in that jurisdiction. With the portfolio management landscape predominantly coloured in by legal professionals, tax advisers and corporate service providers of all shapes and sizes operating far from the locality of the HNWI, putting together the right decision-making variables becomes ever more important in choosing the right person for the job.

Corporate footprint

The footprint of the overseas professional in the Chinese market tops the selection considerations. Presence by way of branch or representative office in China rather than a mere token presence pays unquantified dividends in terms of building business and professional ties of trust with Chinese HNWIs. Interest in the Chinese market can also be firmly conveyed by a proven participation record of the professional in accredited networking events taking place on Chinese soil. Consistency in keeping up appearances in such events is the key consideration, rather than a one-off opportunistic dip of success.

The absence of actual physical presence from the Chinese market should not be deemed as detrimental, particularly where it can be compensated by other manifestations asserting the professional’s interest in the Chinese market overall. The existence of a fully fledged China desk set up at the locality where the professional mainly carries out its operations may vividly furnish such an interest. This in its own right constitutes evidence that the professional has legged out by capitalising on full-time staff and resources readily available to follow up on requests and convey information to Chinese HNWIs in their native language. Overall, this purports a high threshold of customer service and a sense of commitment to the Chinese client’s custom and market.

Full service

The integration of investment portfolios in many sectors fleshes out the importance of having corporate, legal and accounting services provided under the same roof. Comprehensive understanding of a HNWI’s portfolio is essential not only in decision-making terms, but also for risk assessment purposes. Portfolio handling is a demanding process and it is essential that the professional entrusted with maintaining it at a good standing can in fact deliver to that standard. Apart from keeping up with all administrational duties and compulsory formalities, the professional would need to show an equal diligence and anticipation in market awareness. With substance of the portfolio being a recurring ground of scrutiny with tax authorities worldwide, the professional should be in a position to advise, cater and switch to credible corporate lodging alternatives, if and when required.

Dealing with a sole provider further impacts on keeping access and disclosure of sensitive business information and personal data to a minimum. Client identification and source of funds due diligence processes, universally associated with the engagement of any portfolio management professional, are practically kept to a minimum as disclosures are made to one firm. Should the devolution of information be a prime concern, it is imperative for the HNWI to establish from the outset that the professional engaged is not an agent or a universal provider who merely acts as a reseller of services of others. Optional services enhancing confidentiality and functionality of a HNWI’s portfolio, such as the provision of individual and corporate directors, nominee shareholders, bank account introductions and assistance with offshore bank account openings, document custody and re-mailing services are also dealt with by the same professional.

Mutual and vested interest considerations

With HNWIs functionally fixated in the decision-making process of their portfolio and underlying structures, it is necessary to ensure that the channel of communication between HNWI and professional is complemented by mutual understanding. HNWIs should seek out professionals who are able to show and maintain a vested interest of their business with that of a HNWI’s portfolio. These would be professionals who also stand to benefit from the HNWI’s success in the market by being credited as delivering top quality services to their client and his/her portfolio enlargement.

Further assurances

HNWIs should enquire and establish with reasonable care and certainty that the professional has in place an indemnity cover of a substantial surface when compared to the overall portfolio value. Professionals operating in a regulated environment, such as law and accounting firms, will undoubtedly be in a position to provide a higher level of comfort to HNWIs, since by the very nature of their activities they will have to adhere to rules set forth and reviewed by their regulatory body. Feedback from existing clients and accreditations by independent rating agencies should also be taken into account in establishing a hands-on consensus of the professional’s services. A resounding clientele comprised of longstanding corporate and institutional conglomerates is undoubtedly indicative of incisive professional services and constantly performing well in the high end.

Nick Tsilimidos is an associate at L Papaphilippou & Co in Cyprus