This is the Part B of the full story, you can find Part A here.

We work with a lot of entrepreneurs in China managing their overseas assets.  Still, it suprises us how many try to labor alone rather than calling on the services of a specialist.  

We found this article recently from an American entrepreneur which we found valuable for all investors, whether they are an entrepreneur or not.  This article originally appeared on www.inc.com but we will repeat it here over two posts, along with our comments where appropriate. 

“No, no, I mean what’s with all the trading you’re doing?”

“We’re momentum players,” he said.

“Momentum players? You didn’t tell me that when I interviewed you,” I said. I had no idea what he was talking about, but it didn’t sound like anything I wanted to be involved with.

“Look at the returns we’re getting,” he said.

“The market is going crazy,” I said. “A blind monkey could get these returns. I’m concerned about what happens when the market goes down.

You’re putting my money at greater risk than I’m comfortable with.

This is not what I asked for.” I closed the account–and found myself back at square one.

Again Norm has gone for a brand name – Prudential is a big company and something must be behind that success right?  You might also think a positive return justifies all, but Norm was right to close the account.  For three reasons.  Firstly active trading is bad in many circumstances since it leads to higher costs.  Its also worse for Americans who can be hit with short term capital gains tax which is a much higher rate than the longer term tax. 

Even ignoring tax secondly they didn’t listen to their clients and their goals and identify the appropriate strategy by providing independent advice.  Thirdly, and most importantly, they misled their client about their strategy and how they invest.   That is a downright breach of trust and worthy of a departure all by itself.

 In Shanghai the way that manifests itself is companies who “tailor make” and investment plan that consists of a “flexible” investment with a fixed period of 18 months that ensures your money is entrapped for 25 years.  Is a product that was literally plucked from the shelf really that “tailor made”?

Well, almost at square one. I had learned a few lessons. For one, I’d decided that I never wanted to place all my money with one firm.

Ideally, I’d have a main manager and a backup, someone who could step in if the lead guy didn’t work out, or retired, or whatever. With that in mind, I’d recently invested some money through a friend, Harvey Wolf, then a financial adviser at Morgan Stanley and now at UBS. I’d laid out the same objectives I’d given to the Prudential guys. Then I waited and watched.

Notice how Norm is now focusing on the person, not the company. That is step one in finding the right adviser.  It’s to focus on your relationship with the person in front of you – not the brand name behind them.  Are they listening?  Are they providing tailored advice or a ‘one size fits all’ approach?  Are they keeping to the strategy you designed together? Are they qualified?  Do you get along well?

 It might come as a surprise but sometimes we turn away clients when the connection doesn’t seem to work.  It might be that the common understanding of our role and theirs, is not shared or it might be the way we are treated.  If there isn’t a mutual respect and good relationship then it is doomed to fail… for both parties.

Forget about the brand names

It soon became apparent that Harvey had listened. He invested the money exactly as I wanted, placing it with professional money managers on whom he had done research and who had no affiliation with his firm, thus precluding a conflict of interest. Each was a specialist in a different type of investment. Harvey monitored their performance and made sure that my investments were properly diversified based on risk, liquidity, tax considerations, and so on. I paid a quarterly fee–between 1 and 2 percent of the assets under management–out of which the various parties were compensated. For the first time, I felt confident about the way my money was being handled. So I made Harvey my lead manager and began to search for a backup.

We were starting to get the feeling that Norm would never get there, but he finally did.  The paragraph above, particularly the focus on “conflict of interest” amply demonstrates why Harvey was doing a good job.   All advisers in Shanghai claim independence (except the banks of course) but it is impossible to judge without understanding their commission and its structure.  So demand transparency so you can decide for yourself.

I’m still searching. I thought I’d found the right person, a broker at Merrill Lynch. He listened to my speech, said he understood what I wanted–and then proceeded to put almost 40 percent of the money I gave him into two Merrill Lynch funds of hedge funds. Although I wasn’t happy about that, I figured I had to let him use the tools he felt he needed to achieve my objectives. My concern increased, however, when I saw the hefty fees that the funds were charging and watched their value rise 6 percent while the S&P 500 was going up 12 percent. I became really unhappy when I decided to cash out of the hedge funds and found that it would take six months to get my money. I was eventually paid in full with a modest return, but I no longer trusted the broker. I closed that account and gave the money to Harvey to invest.

Norm is pretty perceptive for two reasons.  Around 90% of hedge funds provide lower returns than the market with considerable correlation.  Oh, and much higher fees.   You would be better off just buying an exchange traded fund that tracked the market.  We only use one or two hedge funds that can demonstrate a lack of correlation across a decade or more and good returns in all markets.  It’s taken us a lot of sifting through thousands of funds and several years to find them, but we did. 

The second part is the unspoken conflict of interest.  A banker placing funds with funds managed by their own bank is so common, it is amazing.  The only more amazing fact is that bank managed funds are usually in the bottom quartile of fund performance, but remain in existence due to the retail branches sending money from their less sophisticated clients.  If a banker recommends the bank’s own fund management arm – ask them to explain what other funds that were similar, why they were excluded and why.  And also how much commission he generates.

And yet, through all these bad experiences, I think I became a fairly savvy investor. I realized that I needed to make my own decisions–at least the big ones–about what to do with my money. I’ve always put about 10 percent of my money aside for angel investing. I figured out what percentage of my assets to invest in real estate outside the business, and what percentage in government bonds, corporate bonds, and stocks. Then I worked with Harvey to make sure my portfolio reflected my decisions.

This is possibly the most important paragraph of the whole article.  It’s almost worth repeating it again.  Stay involved with the big decisions, the allocations to different asset classes and then check on your adviser to ensure they implement as discussed.

I still go through that process each year. All in all, I’m feeling pretty secure these days, although I’d feel more secure if I had someone good to back up Harvey. But if you happen to be a financial adviser or money manager, please don’t take this as an invitation to send me your brochures. I won’t read them, and they will provide tangible proof that you aren’t the kind of investment person I’m looking for–that is, someone who understands that no means no. Then again, if you’re an entrepreneur like me and happen to use someone who sounds like Harvey, I’d love to hear from you.

In Shanghai you are bound to get cold calls (although not from us).  Don’t let that put you off.  Organize a chat with us and the others, and you will see the difference. 

Norm Brodsky (brodsky13@aol.com) is a veteran entrepreneur whose six businesses include a three-time Inc. 500 company. His co-author is editor-at-large Bo Burlingham.

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.