Interview Series #2 - Private Wealth Management in China

Here is our second interview in the China Finance Interview Series. It is with a private wealth manager who has had previous experience on both the buy and sell side. As the financial system in China is rapidly changing yet maintains its general opaque-ness, skilled money managers are needed to both preserve the wealth of high net-worth families as well as advise a generation of entrepreneurs how to shift from paper millionaires to living the lives of their dreams. This is a conversation with a manager who does just that.

Can you please describe what your company does and your role within the firm?

So I guess I’ll sort of start with the structure of our company. Our parent company is [redacted] Investment Holding Co. Traditionally we’re a private fund, which, as you know, is kind of China’s prototype to a hedge fund. So we have five funds in all, all of them RMB-denominated. About a year ago, our founder began developing a private wealth management service. So we’re sort of in infancy right now, but we’ve begun to attract ultra-high net worth clients and families. Our model stems from our internationalized team - we’ve developed a model that incorporates Western ‘best practices’ while maintaining aspects of a Chinese-type firm that our clients can identify with. And also a model that suits China’s current environment - what we can do and what we can’t do realistically from here.

On my day-to-day, so we’ve been in the development phase for about a year. At this point we’re sort of beta testing our model with clients on a day-to-day basis our teams are working to find creative solutions for our clients’ immediate needs. And in the meantime developing our service systems to cater to those needs that might be a little off in the distance. So that’s our way to gain a client’s trust, get to know them better, show them our capabilities, and ultimately have more of their assets transferred over to us, which are currently being held in a private bank, or several.

We’re still trying to find ways to fill in the gaps between how a Western private wealth management office would handle certain issues as well. So we’re kind of doing due diligence on exactly what services are needed here. First of all, is it possible to deliver it out of China? Because obviously it would be from somewhere like the U.S. So a lot of it is how we can execute that service from the mainland. Keep in mind that many of these services have never been offered before on the mainland, especially this kind of comprehensive private wealth management office solution provider like us. So navigating and mapping out the right processes can clearly change on a day-to-day basis, but my role for now is continue the development of the company and working on specific cases as they come up.

Seems like you guys are developing quickly and have some great projects underway. Do you see your role changing as the firm matures?

I mean, it’s hard to say what will happen because of reform, but I think two years from now we’ll be in the position where we’ve accumulated a lot more clients and the funds are much bigger. I personally, will be doing a lot of the hands on work with our portfolio team, whether it’s still doing a lot of due diligence for external managers we’re sending money to, but also portfolio construction here. It’s difficult to say right now because a lot of our clients prefer... they’re not looking at their portfolio at a high level…so as of now they’re not looking at spreading out risks, which is what we’d eventually like them to be doing. And thinking about things that way will take a lot of education, but ideally I’d like to be looking at their portfolio and working with clients and showing them how they can diversify their investments, by potentially how they can lever up on less risky assets, things like extracting personal wealth that’s completely concentrated in their personal business. Things like that. I imagine at that point we’ll be doing a lot more estate planning for these families. A lot of Chinese families are emigrating, which is a big process, so it’s a just a lot of talk from our potential clients right now. Hopefully in that amount of time, it’ll be more of a reality. There’s obviously a lot of complications with tax planning. I’ll always have my foot a little bit in all of these client requests, but ideally I’ll do more of a wealth preservation and accumulation side of things.

So you kind of mentioned there that a private wealth management office in China is different than one in the U.S. So what are some of the differences you see between this new business model in China, the one you’re pioneering right now, and classic private wealth management offices in the U.S.?

Well, first of all, capital flow controls make things completely different. We’re limited by those. Of course, there are some unique ways to get money offshore and a lot of people we’re talking to already have money offshore, whether they accumulated it there because they have businesses offshore - in Hong Kong or Singapore or even the U.S. So that’s one way.

We’re very different because we’re dealing with completely different clients. Culturally, what they expect from us is very different, because a lot of it is educating people here on what we can provide to them and why they need it, not why we’re better than the other guy. In the U.S. people have been educated for the most part as to why these services exist, but for us it’s a huge educational thing. I think that because of their situation, certain services become much more important to the client. For example, finding techniques for our clients to maybe get exposure to offshore assets. Emigration is a huge, huge process. Besides the whole waiting period, there’s a huge amount of tax planning that takes place, restructuring of assets. You’re working with lawyers, you’re possibly working with tax attorneys. It goes on and on. I mean, how often is a private wealth management office in the U.S. going to deal with a client emigrating? Would they have the knowledge to do it? Probably not. Whereas that’s one of the main services we’re pushing forward with because there’s so much demand for it here.

So we’ve been able to mold our company as we’ve been developing, in order to meet what we see are client needs now and those we see in the future, we’ve been in a good position where we’ve basically been catering to their current needs and also taking those assets from a Western service system and educating our clients on work they may need done in the future. And that’s different from someone who’s say, a domestic private bank or something like that. You’ve limey been institutionalized to be a high-end domestic operation. If you’re a foreign private bank, it’s very hard to get access to China. And on top of that, a domestic bank is going to have to become more global bank in their practices, which as you know can be very difficult. And the international private banks, whether they get access here through a joint venture or whatever it is, they’re definitely going to have to find a way to still cater to the Chinese way of thinking about things, which would be very different for someone without experience in China. We’ve been molding our model to kind of fit both sides, so we feel that’s a competitive advantage we think, going in the future.

You previously worked at a bulge bracket investment bank. What are some of the differences between working in a U.S. role and a role in China for that bank?

Wow. So the first things that come to my mind are probably number one, culture and two, talent, I think. Without getting into too much detail, offices are just run differently in China. Things that are taken for granted in the west, like organization, transparency, basic communication, are generally lacking here. Talent is also lacking a bit. Not to say there aren’t brilliant people over here, but the training tends to be very, very poor. Also, best practices that are used in the U.S. are often irrelevant here.

As far as talent goes, it’s kind of what I spoke about before: coming from the west, if you’re a financial analyst, for instance, you’re probably spending a good amount of time on modeling skills. Here it tends to be irrelevant because the IPO process - both how the CSRC has formed it, but also because things out here are done so much more on a relationship basis. Technical skills just aren’t needed. It doesn’t separate you from other people too much. And now, to rewind a bit, from a cultural standpoint, compliance is still [laughs] an unheard of term here. Most business do not have a legitimate compliance division that’s really overlooking things, making sure companies are doing things in alignment with Chinese law but also with the laws of other countries.

So in general that becomes a concept people don’t think about: if you’re potentially going to work with a U.S. company or a Chinese company, I find that people here are not often thinking of the other side. Whereas in the U.S. you have people saying, “What would the Chinese company think of this?” “What are the clients thinking of this?” that never really comes into consideration here most of the time. So yeah - culture and talent are the two things that come to mind.

Those differences between the Western world and China, looking at financial issues, such as compliance, how will they come closer together? How will the differences be rectified?

I think it’ll be through several things. I mean, for the most part, any big bank that wants to do business here, and this goes for all businesses but we’ll just talk banks here, you really can’t get your foot into China without a proper joint-venture. You won’t be able to get the business you want, you’ll be restricted from getting certain licenses and things like that. So as more of these JVs come in, they’re already a lot, these can integrate the two businesses further. Those banks will start to have practices that potentially outweigh the benefits the solely domestic banks have, which is relationships, basically, and kind of force other people to start adopting those practices. That’s one thing that will happen going into the future.

Another thing is banks here will start to be dealing with more clients outside. So for example, Julius Baer entered into a partnership with the Bank of China subsidiary in Switzerland and now they’re working very close together. Bank of China is learning a whole lot from Julius Baer, from what I know, but it’s just that type of cooperation, how things will work. So the whole reason besides the capabilities, is the Julius Baer coverage but also practices that Bank of China does not have. From what someone said who I spoke with recently, they’re sharing their know-how. So I think going into the future, you’ll see that happening more and more with financial institutions.

And then there is of course the other side where the government is going to start to force audits, a lot of SOEs are being audited right now, or other restrictions on financial institutions. I don’t know if that’ll happen soon or not - it’ll continue to be pretty deregulated for now from that standpoint, while maybe deregulated a bit as far as having to deal with the outside world. As far as best practices internally, we’re hoping the government will begin holding people accountable for having a compliance department, things like that.

Lastly, how did you break into finance in China? Why did you want to be in China? What recommendations might you give to someone who wants to do the same?

In college I was studying finance and taking Chinese classes. Each summer I did an internship at a financial institution. It was always in the back of mind that was something I’d like to do. Of course if you’re studying finance, you’re hearing a lot about China and the opportunity for the future.

So now, regarding the bank you mentioned earlier, I was set to work for them in New York City, but they told me there was a joint venture they recently executed and some pretty promising things happening there, for example, the international board potentially being passed soon, allowing a wave of foreign IPOs in China. So I was originally supposed to work in New York, but was offered the opportunity to move to China and took it. So that’s how I got my foot in the door.

Learning Chinese - no matter what. If you’re in the U.S. studying, it’s going to be a completely different experience being over here and having people talk to you. Try to spend some time here during school or on your off-time. I definitely think it’s extremely important to spend time in New York or the U.S. or wherever at a firm that will offer you adequate training. An internship, or the actual training before moving over here, because it’s not something that’s normally offered unless you have a very big, big program. It’s important to get the technical skills down that the western world utilizes and over here you’ll learn how a Chinese firm operates, which is completely different and you’ll really be able to learn how to have an advantage over those guys in the U.S.

From a recruiting standpoint, I really don’t know, because I don’t know a lot of companies that actively recruit from schools in the U.S. It’s much more talking with people in the U.S., networking, but also if you’re interviewing with a firm, ask if they have exposure to China and after that express interest in potentially moving because a Westerner who speaks Chinese and wants to move to China doesn’t come around every day.

Great. Thanks so much for your time.

Thank you.

Interview has been condensed and edited