Money TALK: Finding A Broker

Dear James,

I'm new to the investing game and have been trying to find a good stockbroker to help me out, but it's a jungle out there. Should I choose a discount, full-service or online broker? Opt for commission-based or salaried? Stay local or go international? There are so many options to choose from that I need a broker to find a broker!

Broker-ed Out

Dear Broker-ed Out,

You’re right, dear reader, China does seem to offer plenty of options for expats. So let me break it down: first, there are products and second, there’s advice.

For products, the simple answer is, you should invest through an online discount broker because you’ll save money on the cost of investing. For expats, there are American companies like Charles Schwab or E*Trade, or Luxembourg-based expat-specialist Internaxx. The American firms only offer access to American markets whereas Internaxx also offers access to European markets plus Singapore, Hong Kong and Australia. To get an account you’ll need a copy of your passport and proof of address in China.

But the ID requirements, and just getting started in general, are often the biggest obstacles to expats taking advantage of discount brokerages. That’s because the thing they’ve stripped out to make the savings is the handholding. And expats do tend to love a bit of handholding, which is why in China there are so many financial advisors selling distinctly non-discount products.

"Water, water, everywhere…"

Again, well-informed reader, you are right: China is not short of expat financial advisors. Why, only this morning one of the kindly chaps called me up to offer to meet with me to talk about my financial situation!

"… Nor any drop to drink"

The trouble is Shanghai is short on financial advice – at least, advice based on qualified expertise where the advisor’s interests are aligned with yours. Most of the advisors in mainland China don’t have any financial qualifications at all. Mind you, maybe that’s not entirely their fault, as it must be hard to choose a qualification when you’re not clear what role you’re playing: are they financial planners, brokers, or money managers? In practice they are usually doing the job of all three, but most often with qualified expertise in none.

Worse still, the unregulated industry attracts outright crooks. A Dubai-based top salesman for a large firm of independent advisers was jailed for fraud two years ago. He sold dozens of investment policies to expats, all the while avoiding the criminal charges that eventually caught up with him. And it’s not like you can just go to an international behemoth for safety. A rogue salesman at UBS recently conned his clients out of millions of dollars.

But even if your guy (and they are mostly all guys – I knew one female who serviced clients in Shanghai, but she’s now out of the game) has the right letters after his name, a niggling doubt persists about whether the advice is based on your best interests. The doubt is caused by the business model. The marketing says ‘Free Financial Advice’; so how do these guys get paid? Well, it’s commission from the product providers. And that’s where the charges in the products come from. On a USD 500 per month investment on a 25 year policy, an advisor/salesman might make USD 4,000 in up front commission. But you’ll be paying fees for 25 years. Apart from the questionable value of the product, the more important point is that the ‘advisor’ in front of you is seriously limited in what he can recommend. He can’t make a living if he doesn’t sell some policies. So his analysis of your personal situation must conclude that you need a commission-paying product – not a better value, online brokerage, for example. Or just a bank account.

In developed markets this model is being phased out. The UK will ban advisors from taking commission on financial products at the end of 2012 because of the inherent conflict of interests, and there is an accompanying revolution in fee-only advice. And now, China’s fee-only market has its first expat entrant. Step forward Mr Anthony Noto. CFA-qualified, Noto is hopefully just the first fee-only financial planner for cross-border people in China. For now, your first port of call for advice is one of Noto’s free initial sessions. Then you can find out what he will do for you and how much he’ll charge you.

A final word though: you should still be sure that you understand the advice that he, or anyone else, gives you. You don’t hand over responsibility for your money when you hand over your fee.

James is the editor of 'eg', the online money magazine for expats in Shanghai. Visit www.egmoneymagazine.com to read more about making the most of your money.