October 2017 – Smart Money Asia

Offshore Banking

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There’s something very exotic sounding about offshore banking. It conjures up visions of men in white suits checking into Caribbean hotels with suitcases full of cash. Since the release of the Panama papers, there is heightened suspicion about anything “offshore”.

However, for most expats an offshore bank account is just a simple, and perfectly legal tool to help manage their finances across different countries. As this post on the Common Reporting Standard discusses, the days of hiding money offshore are gone, and pretty much any institution where you open a financial account will require your tax ID number in order to report to your country of residence.

So do you really need an offshore bank account? Perhaps not. Most likely you have at least one account in your home country, and one in your current country of residence. People who have moved around a lot may also have accounts left over in other countries. There’s certainly no need to complicate things with unnecessary accounts.

For some people though, an offshore account may be helpful. Banks these days are coming under more and more pressure to track what people are doing with their money in order to comply with anti-money laundering regulations. In some cases the compliance burden is becoming so heavy that they simply refuse to make certain transactions. Typically these are “third party payments”. If you are trying to send larger sums of money to an account that is not in your own name, you will probably need to provide some kind supporting documentation explaining why you are making the transfer. Even then you may not be able to complete the transaction. I have come across several cases recently where banks in Japan refused to allow account holders to send money to a company overseas that they hold an investment account with. If it gets to the stage where local banks are preventing you from sending your own money to your own investment accounts, then an offshore account may be the right solution. That way you can send your money to your own account overseas, and from there transfer it on to your chosen destination.

Offshore accounts can also be useful when withdrawing money from overseas investments or receiving other payments from overseas. You may not want to bring the money back to Japan and have it converted to JPY for example. An offshore account allows you to keep it overseas, in the currency of your choice, until you need to use it.

Offshore accounts typically also offer online banking and credit / debit cards which allow you to shop and use ATM’s worldwide. This can come in handy when you travel, whether for business or pleasure. The application process typically involves completing an application form, including information on your personal financial situation, and submitting a copy of your ID and proof of residential address.

Although Caribbean islands do sound exotic, the best regulated locations for offshore accounts are the Isle of Man and Jersey. If you are looking to get started you could first check if your bank at home also offers an offshore account. HSBC and Lloyds are examples of big banks with an offshore presence. You could also talk to a financial adviser and find out if they have any recommendations.

I hope this helps you to get control of the current assets part of your balance sheet. Let me know if you have any questions.

Disclaimer: This should go without saying, but the information contained in this blog is not investment advice, or an incentive to invest, and should not be considered as such. This is for information only.

Paying Down Debt vs Saving and Investing

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The question of whether to focus on paying down debt or to prioritise saving and investing is one that many people wrestle with. Like most trade-offs there are several variables to consider, so let’s see if we can simplify this into some workable strategies.

Firstly, you cannot come to a conclusion unless you have a handle on your budget. Getting clear on your income and expenditure is the first step. That way you will know exactly how much you have left at the end of the month to allocate.

The next thing is to make sure you have some basic financial security. If you don’t have any savings it is perhaps prudent to pay off the minimum on your debt until you can build up an emergency cash reserve. Aim for a minimum of three months expenses so you have some breathing space if you lose your current source of income.

Obviously you want to try to pay off any high interest debt first. Credit cards are the number one offender here. With APR often as high as 18% it is wise to clear this as quickly as possible.

Student loans often come next. For people who studied in the US for example, student loan interest rates seem to be around 6-7%. If you are thinking of investing the money to get a better return and pay off the debt later, this is not an easy hurdle to clear without taking a lot of risk.

Where the trade-off question gets interesting is with home loans, particularly for people living in Japan with floating interest rates below 1%. There’s a strong argument for making your minimum monthly payments and saving and investing everything you can. I certainly wouldn’t disagree with that, but everyone feels differently about debt. I know people who never bought their own home because they couldn’t stand the idea of owing the bank that much money. If it keeps you awake at night, there’s nothing wrong with paying off your mortgage as fast as you can.

Once again, it’s good to make sure you are clear on your budget. Then make sure you have an emergency cash reserve, and have protected yourself in case you get sick or injured and are unable to work. In Japan you are required to buy life insurance to cover the loan in case of death, but in other countries you may need to consider this yourself. Paying into some kind of pension plan counts as one of the basics too and I would prioritise that over paying down debt. In his book Rich Dad Poor Dad: What The Rich Teach Their Kids About Money That the Poor and Middle Class Do Not!, Robert Kiyosaki talks about the concept of paying yourself first – make sure you are saving and investing for your future before paying the bank back more than you have to.

That said, if you are hitting your targets for saving and investing, then paying down debt is certainly not a bad thing. It reduces the amount of interest you will need to pay over time and the number of years it will take to repay the loan. Even 1% per year adds up!

For people in Japan, here’s an unexpected bonus: In order to get a mortgage in Japan you are required to appoint a guarantor. For expats this usually means paying a loan guarantor company, and you pay them up front when the loan is arranged. If you make ad-hoc lump sum payments to reduce the debt, the guarantor’s liability is reduced and they actually pay you back some of their guarantor fee. We recently made a payment of ¥1,000,000 on our home loan and received almost ¥60,000 back from the guarantor.

So to summarise, cover the basics first, prioritise high interest debt, and make sure you are saving and investing for the future whilst paying off the rest.

Brokerage Accounts – Investing in Japan and Overseas

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For people who are looking for a high level of control over their investments with low cost, an online brokerage account is a great solution. In a way it’s a little sad that people no longer call their broker and instruct him to place orders for them, but it is very convenient to be able to do this yourself online. It also lowers the cost for the brokerage firm, which in turn lowers costs for investors. Today we will take a look at how these accounts work.

Let’s start with a definition: “A brokerage account is an arrangement between an investor and a licensed brokerage firm that allows the investor to deposit funds with the firm and place investment orders through the brokerage. The investor owns the assets contained in the brokerage account and must usually claim as income any capital gains he/she incurs from the account.” (from Investopedia)

If you live in Japan and are looking for a local brokerage, there is plenty of choice. Some well known ones are Rakuten Securities, SBI Securities and Matsui Securities. However their interfaces are not available in English, so you will have to be able to work through the application and use of the platform in Japanese. I have an account with SBI, so will use them as a reference in this post.

If you are looking for an account in English, then Interactive Brokers is probably the best option. IB have a Japan office and offer both a local Japan account for investing in the Japanese market and also a US account, which can access not only US, but also European and other global markets. The US account is completely separate from the Japanese company and is administered in the US, although you can apply through the Japan office.

Other overseas brokerage firms may or may not accept investors based on the country they live in. Japan residents will find they are not eligible to open accounts with most of them. In fact I think Interactive Brokers may be the only option available at present. (please correct me if I’m wrong on this)

SBI allows trading on both the Japan market and also overseas markets, namely the US, China, Korea, Russia, Vietnam, Indonesia, Singapore, Thailand and Malaysia. Once you get used to the interface it is fairly easy to navigate and execute transactions. Google translate does a reasonably good job these days if you get stuck.

Security – nothing is 100% safe, but as long as you are using a recognised broker you can expect them to be heavily regulated. You retain ownership of the assets in the account at all times. Obviously, because we are talking about online accounts, you need to be careful with your personal online security. Your brokerage should be using high-end encryption, but you need to make sure your login details are kept safe and that you change your password regularly.

Investment options – A brokerage account gives you access to direct stocks, bonds, ETFs and mutual funds. Many also offer FX trading, options, and margin trading.

Cost – costs vary from one broker to another. Some may charge a fixed fee per transaction, and some may have a sliding scale depending on volume and how often you trade. Here is a breakdown of costs for Interactive Brokers and SBI.

Tax – As noted in our definition, these are taxable accounts. If you reside in Japan and use a local brokerage, you will receive a summary document each year you can submit to your tax office. If you use an overseas account, you will be responsible for reporting on this account in the country or countries you are tax resident in.

Drawbacks – Interactive Brokers has an account minimum of $10,000 for the US account. I think it’s ¥1,000,000 for their Japan account. (SBI doesn’t have this minimum so it’s easy to get started with a small amount and build up over time) Obviously the lack of an English interface for the Japan accounts can be a problem. For some investors this kind of account could simply be too “hands on”. You have to make all the investment decisions and execute them yourself. Hopefully this blog will make that easier! (see the section on Asset Allocation)

Account opening – information on opening an Interactive Brokers account is available here. For SBI, the process is as follows:

Fill in some personal information on the website and request the account opening documents.
Account application documents are mailed to you.
Complete account application documents and return along with a copy of your residence card and tax ID number. (My Number)
The securities company then notifies you that the account is open, either by mail, or via login to their website.

Hopefully this gives you an idea of how brokerage accounts work. If you are new to this it may seem a little daunting at first, but if you start with a small amount of money and study as you go, you may find it is not so hard to get the hang of. As always, let me know if you have any questions or comments.