Cross border business - foreigners or jet setters?
#crossborderbusiness #globalisation
August 2020
The best thing about working in private banking is the opportunity to work closely with some of the most intelligent bosses in the banking business. Our business model has none of the hierarchy in investment banking and is small enough to allow the fresh grad to shadow seasoned bankers and the most senior management personnel. I’ve had many great mentors throughout my career but one person I always turn to for advice is my first boss. Every now and then I will check in on him and pick his brains. In 2015 I asked him to give me a big idea for our industry and he said this, “we used to serve our clients whenever (all year round ) wherever (they are in the world). Now every country is imposing restrictions on banking services provided to visitors to their country, we have to suspend banking service to some clients while they are travelling or terminate the client relationship when they relocate. This will be the greatest challenge (loss of business) to our industry,”
Loss of business could mean lower share of wallet or loss of client relationships. While the former can be caused by almost anything from account underperformance to wealth transfer to younger generations to injecting assets into a risky or illiquid investment. Total loss of client relationships is rare; except at the demise of a client!
In our brave new world, unexpected loss of client is caused by 2 types of physical relocation; permanent relocation (immigration) or temporary relocation to accommodate business or educational needs. Immigration involves physical relocation for at least a couple of years and thereafter the change in tax status could mean that even if the client moves back to the original jurisdiction he can no longer be served by licensed bankers based in the original jurisdiction. Immigration, unlike inter generational wealth transfer, is not something bankers can time or psychologically prepare for.
Temporary relocation is even trickier in the sense that they happen at shorter notice, sometimes for reasons previously unknown even to the clients. Professionals are often offered opportunities within the company to work abroad; some get into competitive business school programs. The banker can try to find out when the client plans to return but it’s not always possible. Then there are other equally common scenarios. Korean matriarchs often escort their daughters or daughters-in-law to the US if they are expecting, especially if they are expecting baby boys. I have also known Korean families who enrol the dad-to-be in a non selective educational program so the son can be born out of Korea and avoid mandatory military service. Many Asians seek cancer treatment in the US, the Anderson Cancer Center has comprehensive service including interpreters for Chinese patients and their families. This I learnt from a Beijing-based client. Need I say more?
When I started working in private banking in 2000, a client who requested to see his bank statement or other documents while travelling would have to first secure an in-room fax machine from the hotel, and call us with those details. Times have really changed, and so have our modus operandi and accompanying security precautions.
The conveniences of the two Ds, devices and data, have made many otherwise cumbersome processes seamless and effortless. Our smart devices, together with inexpensive data roaming, have taken over the roles of landline phones, fax machines and printers. Clients receive email updates which they can read on their smart phones or tablets. They can call the banker from their phones (most of us can recognise clients’ voices) and discuss ideas, place orders or give other instructions (“please give me a call when....”) Some banks might request clients to call from the handful of designated numbers pre-registered for security protection. This is no longer an issue with many call / data roaming packages priced at USD 10 per day. The lengthy documents can be viewed on tablets and any necessary signatures can be scanned by smart phones and emailed to the banker.
Thanks to the device + data combo, we quickly got used to serving our clients when they are home in Hong Kong, or when they are at their factories in Southern China, visiting a supplier in rural Italy, helicoptering children at boarding schools in the U.K., shopping for antiques in Paris, touring colleges in the US, or on a retreat in Thailand. And clients definitely got used to giving us instructions from anywhere in the world!
Fast forward to 2010-2013, my most considerate clients would email me and my colleagues with their travel dates, time difference and contact details ahead of summer vacations. I would often look back to that period as the sweet spot of tech-enabled connectivity juxtaposed with old school courtesy. Because things were about to change dramatically.
The United States announced that they would deem any person spending a month in the country in one go or accumulate 180 days in the country in a calendar year as establishing physical presence in the US and therefore subject to US taxes. That alone changed the landscape for private banking in Asia, especially for Hong Kong. In Hong Kong, the typical client is over 60, US-educated and has either sibling / cousins /children living or studying in the US. More than half of my clients fall into that category. Some people plan to spend the whole summers or long vacations there to enjoy more time with their families and some plan short stays only to postpone their return trip because of family circumstances. The latter is inevitably a knee jerk reaction to some unfortunate family matter, ranging from minor accident, emergency surgery to critical illnesses and death. Not only will these accidental US persons be subject to US taxes, as long as they are on US soil they will not be able to call their bankers in Asia and ask for recommendations or request them to execute securities transactions. Regulations vary at each banks but the spirit is Asian bankers are neither licensed bankers nor licensed securities brokers in the US and should not make recommendations or carry out securities dealing activities for any client physically situated on US soil.
A new challenge presented itself during the COVID WFH adjustment. Many clients and expat bankers have gone home to hunker down with their families or left home to hunker down in holiday homes. We now have the double challenge of clients in jurisdictions where the bankers are not licensed to make recommendations and bankers in jurisdictions where they are not licensed representatives of local legal entities.
Another COVID phenomenon is large population of global citizens being stuck in transit. I have 2 neighbours hosting house guests from Beijing during the public holidays before COVID. They are both PRC born academics who went to the US for their PhDs and PostDoc studies and eventually became US citizens. They moved back to China to be closer to family, travelling with US passports and tourist visa to enter China. With COVID lockdown Beijing doesn’t allow foreigners to enter, the 10-year visa granted to these Americans are no good now. Right now they are trapped in Hong Kong.
Covid might be the wrath of nature we didn’t anticipate. But we can definitely anticipate that people need to have human connections; and if their most important connections are scattered around the world, they will just have to travel. There’s nothing scary about doing cross border business; what’s scary is not wanting to define a framework and setting up infrastructure for it. In a world where everyone can establish connections with perfect strangers who share their hobbies and beliefs on digital platforms, the elites and well-endowed need to consult bankers and lawyers before they travel. How will we continue to serve the banking needs of the jet set? If we choose to let xenophobia consume us and drop our clients the minute they land in an unfriendly jurisdiction, we will quickly lose them all to to the robo-advisor who enjoys no citizenship and carries no securities advisory license.