A China-savvy independent financial adviser (IFA) is a guide for maximizing your investments and savings – such as helping you prepare for retirement, save for school tuition and shield your funds from taxes – while living in China. IFAs can be useful, as they frequently work with the expatriate community and have knowledge about available products, services and regulations that apply to the working expat.
Many IFAs offer to manage your fund portfolios, evaluate your holdings, plan household budgets and offer advice and recommendations about financial plans. These recommendations usually come in the form of an insurance policy that allows you to invest in a wide range of mutual funds. If you are saving for retirement or college tuition and can stick to the financial plan for more than 15 years, you will not find many cheaper options.
And while you never directly pay the IFA (or put any assets directly under his or her control), he or she is certainly not working pro bono.
IFAs act as the sales force for a broad range of insurance companies and mutual fund providers. They get paid a commission from whichever company’s product they sell. Last generation’s traditional insurance man has morphed into the modern IFA.
However, it’s an unregulated industry here in China, so just about anyone can call himself an IFA without worrying much about legal implications. Quality varies widely, but there are plenty of options to choose from – so be picky.
What to expect
The first meeting: One of two things should happen at your first meeting with an IFA. He should introduce the IFA firm and the range of products and resources it offers. He should also discuss risks, obligations, charges, fees and the application process.
The second phase of this meeting will be when he tries to get you to do the talking. Expect to answer some pretty intimate questions about how much you earn, how much you save, how much you owe and how much you have in banks and investments. Sometimes this part of the process requires more than one meeting.
The proposal: It is now time for the IFA to get down to work by generating a report and running some projections (or illustrations) about the company’s recommendations for you. Don’t be surprised to see some divergence between the optimistic musings of the first meeting and the legally approved projections contained in the proposal – but there shouldn’t be any direct contradictions or omissions from what was discussed in the first meeting. The package will contain several varying options. Read the material carefully and make sure you understand exactly what the proposals mean.
The presentation: The proposal is the basis for your next conversation with the consultant. You will want a presentation that is both thorough and clear – which is not a given considering the complicated nature of the material.
Beware of IFAs who are much better at spinning attractive pie-in-the-sky scenarios than deciphering fee structures and explaining application processes. He should talk a lot about risk and the strategy for managing funds. It should be crystal clear to you exactly where your assets will be and what will be done with them.
The fee structure: Most of the products you’ll be looking at are mutual funds being offered for sale by insurance companies, with the contracts written by international lawyers and actuaries. They can be dense, confusing, and seem to contain an endless list of fees, charges, penalties and conditions. Set-up and administration fees are often charged. Some investment plans have exit fees, while others may have penalties for early withdrawal.
What’s the solution to the fee game? Ask the IFA for an “all-in,” life-of-contract fee total. If you are investing in a managed portfolio of funds for more than 20 years, your all-in fee should be in the neighborhood of 2-2.5% of the fund value, although every situation is unique.
Follow-up meetings: After you sign the contracts and do all the paperwork, you have one more chance to pull out. During the “cooling off period” – a period of two weeks or so after the policy document is issued – you can still cancel the contract. Your advisor should deliver the policy document in person and discuss any issues outstanding.
After that, it is not unusual for him to arrange regular meetings every six months or so to review your plan’s performance and update your account. Don’t be surprised or put-off if he recommends other types of products, such as health coverage, life insurance or additional investments. However, he should not be counseling any massive restructuring of your account.
Andrew Hupert runs ChinaSolved, a Shanghai-based consultancy that helps international companies in China build and maintain value-adding sales teams. His clients come from the finance, banking and B2B service industries. Read more at www.ChinaSolved.com.