Offshore investing seems so ‘James Bond’ to some people imagining secretive vaults hidden in the Swiss Alps or a lair in Monaco.  Secretive, exclusive and cool.

But in reality it’s far simpler, less nefarious and more mundane than either and most people can do it themselves, they just don’t know how.  But what are the options and which is best for me?  The following is the previously unwritten truth.

What is offshore?

Offshore investing, simply put, means having your assets in a place that doesn’t charge tax on investment gains (like capital gains) or investment income (like interest, dividends).  The places range from the weird to the mundane.  Switzerland is the most famous.  Luxembourg is also up there alongside Hong Kong and Singapore

So if it’s offshore, it’s always tax free?

Usually, but not always.  You can be charged tax in one of three ways.  Where you presently reside, where your assets reside and what passport you hold.  As a China based expatriate you only pay tax on your non-Chinese income if you have been here for more than 5 years without a 30 day (tax) holiday.  If your assets are somewhere tax free like Singapore or Hong Kong, then the majority are home free.

The only unlucky people left are those who are taxed globally, regardless of residence or income source, like Americans and Chinese passport holders.  Of course we have simplified matters. Some individual situations are blurry, often on what “residence” is all about.  So if you are in any doubt you should contact a tax adviser familiar with tax systems involved, or contact us for a referral.

So what are my options, offshore?

There are several options which we will offer our no-holes-barred opinions.

Discount Trading Accounts

Accounts from Internaxx and Interactive Brokers are relatively new developments for international investors.  And good ones too.

Here are the reasons we like them.

• They have 100% access at all times.
• There are no charges in or out of these platforms
• Trading costs are usually the lowest around.  Interactive Brokers costs 4 GBP in the UK and just $1 per trade in the US – that’s much lower than $9.90 per trade for E-trade for example.
• The give access to dozens of markets globally with far more choice than you really need.
• For currency transactions you can get the market rate, thus saving bucket loads when moving
• They are very transparent with reporting.
• You can use by yourself or in conjunction with an adviser who can help you manage.

So what’s stopping you?  Usually it’s time and knowledge for most people.  Trying to find time to set up the account and finding the time to manage it.  These platforms also have a pretty steep learning curve since they are usually built for professionals and don’t offer a lot in support (that’s why the costs can be low).

What help can I get?

Several of our clients have used our managed account services once they tried, and realized they either didn’t have the time, inclination or knowledge to be doing it themselves.  We have also trained clients to manage themselves for those who had the time but not the know-how.  The choice is up to you.

A Bank Trading Account (including Private Banks)

There isn’t anything significantly wrong with these.  Often they aren’t too bad since you do, usually, have access to your money and the world at your feet.  Many of the major banks offer decent platforms but the shortcomings in our opinion are thus.

• Share Trading is pricy – usually in the $30-50 per trade which can add up.
• You usually get no advice – just options.
• The options presented are done so because they earn commissions.
• Funds sold often have bid-offer spreads of 3-5% (so you are losing before you begin).

These platforms can be used well if you focus on funds that are exchange traded (ETFs), avoid structured products, and take a low turnover buy and hold approach.  But there are better.

An Offshore Policy

If you do go with a cold-caller then there is a strong chance you’ll end up with a unit linked policy.  We have to be careful here since the vast majority of our competitors in Shanghai work in this space and have their lawyers on speed dial.  But here is our best attempt to provide useful advice without the lawsuits.  Let’s concentrate on the questions to ask, rather than opinions.

Things to ask when investing:

• Access to your money – when do you get access to all your money.  More is better in our opinion.
• Is there a way to do a lump sum investment?  They usually provide better access and flexibility on when you invest.
• What does it cost?  Do your own sums and discount bonuses that get charged away. The less cost the better.
• What are their best income funds?  These platforms usually stink in this area.  Can they beat a dividend yield of 7% plus on something like Pimco Income Opportunity (PKO)?
• What other options did you consider and why did you exclude those?

Ask the questions and ensure you know the detailed answers to the questions, because your adviser is actually a salesman, despite his friendly everyman demeanor.  True advisers with professional qualifications back home have to disclose their exact conflict of interest, ie how much they get paid.  If your ‘adviser’ isn’t disclosing the exact amount and structure of their commission, then it’s really a sale then, isn’t it?  Treat it as such.

Trusts and Company Trusts

It is difficult to generalize in a useful way in this area, but let’s try.  Sometimes there are good reasons to use these structures; sometimes not.  These aren’t investment structures per-se either; more legal structures.  The key things to consider however are access, control and cost – often you give up a considerable amount of one or both and add to the cost.  These structures have both set-up and management costs that usually run into thousands of dollars.  Are those costs and restrictions worth the potential tax savings?

The main reason to consider these structures is for estate planning.  Estate tax, regardless of where you live (it’s usually based on your passport), can often be eye-wateringly high.  Often in the 50% range.  Another reason is simplicity if you have assets in multiple countries.  If you think red-tape is bad in China, imagine it combined with 5 different countries, each being different and a requirement to do things in person.  That’s what probate is like for the long term expatriate with no planning.  Ultimately it’s like picking the best wine for dinner.  It depends on what you are eating.  Or in this case on what the situation, problems and goals at hand are for your assets.

Final Advice

We have seen hundreds of accounts and proposals over the years.  Deciding on an account is pretty easy if you keep some basic questions in mind and insist on clear direct answers.  The questions are cost, access, investment range, jurisdiction (country), investment security and management time.  Keep those in mind and you too can be a James Bond, in your own living room at least.

About Caterer Goodman Partners

Caterer Goodman Partners is a Shanghai based wealth management firm established with a clear vision to provide a new level of personalized financial planning services for expatriates in Asia. Our financial advisors provide guidance for our clients in all areas of investment, specialising in managed accounts, money-market funds, retirement planning and alternative investments. At Caterer Goodman Partners, we offer our advice and experience to provide low cost, tax-effective and simple solutions to match our clients’ interests.

About Owen Caterer

Since graduation Mr Owen Caterer has worked with the Queensland Premier's Department in Trade Facilitation and then as a financial adviser in Shanghai from 2005 until 2010.  He then rose to Senior Adviser, then Business Development manager and then to Chief Investment Officer responsible for portfolios to a value of US$280 million across Asia. Following that Mr Caterer left to found his own firm with a partner in the financial advisory and wealth management area.   This focused on developing China and Asia's first fee-based financial advisory (rather than commission-based). This has grown to now have 8 staff and and managing almost US$35 million for clients throughout Asia. This business success was recognized as a finalist in the 2013 ACBA in the Start Up Enterprises category and are one of a small number of foreign managed firms to have a full asset management license in China.  Owen has also been active in the community volunteering for the Australian Chamber of Commerce in Shanghai and acting as the Vice-Chair of the Small Business Working Group (2012-2014) and as the Co-Deputy Chair of the Financial Services since 2013 until the present. They have continued to grow their business and have now been selected as a small group of companies who are platinum members of the Australian chamber of commerce. The achievement they are most proud of is their efforts to reform the financial planning industry in China and push it away from a hard-sales commission driven model to a more ethical management fee and long term customer service model.   Owen has a Graduate Diploma of Applied Finance from the Securities Institute of Australia of which he was a member as a Fellow of Finance for many years and also has an undergraduate degree from Griffith University in International Business.  Owen's interests are tennis, running and his wife and two children.  He speaks fluent Chinese, first arriving in China in 1997.