The Business Owner Who Wants the Portfolio Fixed First
Client: 52, married, two adult children; the elder, 29, is the company's operations manager. He owns 100% of a Hong Kong trading company valued at HK$31m on EBITDA of HK$4.6m. Outside the business: HK$9.2m of a single US-listed semiconductor stock accumulated through a former employer's plan, HK$3.1m in MPF, HK$1.4m cash, and a flat worth HK$14m against a HK$5.6m mortgage. He wants to stop working at 60 and needs HK$75,000 a month in today's dollars. He has well-controlled hypertension and his father died of a stroke at 63. There is no shareholders' agreement, no buy-sell arrangement and no key-person cover. Two customers generate 55% of revenue. He rejects "selling the crown jewels" but accepts that something must change, and he asks you to run the asset allocation work on his HK$9.2m holding first because that is the part he can actually switch.
1. He wants the portfolio work done first. Is that the right sequencing for this client? Defend your order of work.
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No - the allocation of HK$9.2m is third-order compared with the risks that can cancel the plan outright.
Why the sequence is wrong. His net worth is roughly HK$50m net of debt, and about HK$45m of it sits in two concentrated, correlated, illiquid bets: one company with 55% customer concentration, and one semiconductor stock. Optimising HK$9.2m cannot rescue a plan in which the HK$31m business loses its two anchor customers, or in which he dies at 63 having left a HK$5.6m mortgage and an unsaleable asset.
A defensible order:
- Protect the plan from ruin - mortality/morbidity cover sized to the mortgage and income gap, key-person cover on himself inside the business, and a written buy-sell with the son and any co-owners.
- Fix the concentration where it is cheap to fix - there is no capital gains tax in Hong Kong, so the usual "I can't sell because of tax" defence does not apply. Selling the single stock in tranches is the cheapest risk reduction available to him.
- Convert the business into money on a timetable - customer concentration is a valuation problem, not just a risk problem; addressing it before age 60 raises the multiple.
- Only then run the asset allocation, because the answer depends on how much liquidity the business actually produces.
2. Roughly size the retirement goal and show what has to be true for it to work.
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The goal. HK$75,000 a month is HK$900,000 a year in today's money. Over a 30-year retirement (age 60 to 90) at a 2.5% real return the annuity factor is about 20.9, so he needs roughly HK$18.8m in today's money at 60.
What is plausibly there. MPF HK$3.1m compounding at 4% for eight years ≈ HK$4.2m nominal; cash HK$1.4m; the US stock HK$9.2m, likewise ≈ HK$12.6m if retained and it compounds. Total ≈ HK$18.2m nominal, which at 2.5% inflation is only about HK$15.0m in today's money. The flat is excluded because he lives in it. That leaves a real gap of roughly HK$3.8m, and his ongoing savings capacity is not yet documented.
Therefore the plan only works if:
- The business converts to cash on schedule, at a defensible multiple - and the multiple survives the loss of one major customer.
- He does not need to draw on the business dividends before 60, because those dividends are the thing being capitalised.
- The US holding is not treated as growth capital; if it halves, the gap widens by more than HK$4m.
Sensitivity to run with him: retirement at 58 (two fewer compounding years, two more drawdown years) and care costs for one or both parents. State plainly that a HK$3.8m gap is bridgeable, but only through the business, which is precisely the asset he refuses to discuss.
3. On the HK$9.2m US stock he says: "It's my best performer, I'm not selling." What is your argument, and what would make you accept his position?
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The argument. Do not lead with diversification as an abstraction; price it. The holding is about 18% of net worth but it is not 18% of risk, because it is correlated with the same consumer-electronics and trade cycle that drives a Hong Kong trading company. Two positions, one macro factor.
The usual client objection - "selling triggers tax" - does not exist here: Hong Kong imposes no capital gains tax. Removing that objection leaves only transaction cost and sentiment, neither of which survives scrutiny.
The mechanics I would propose: a written schedule of six to eight tranches over 18–24 months, with a rule that accelerates sales after a 25% rise and pauses after a 25% fall (so the client feels he is not selling the bottom). Retain a maximum 5% of investable assets as a deliberate "conviction sleeve", ring-fenced and disclosed to his wife.
What would make me accept his position:
- The position is under ~10% of investable (non-business) assets, not of net worth.
- There is a signed, dated divestment plan with pre-set triggers, not an intention.
- He can articulate the downside number in dollars and confirm his retirement date is unaffected by a 50% fall.
- He has no debt secured on the position.
If all four hold, the residual concentration is a preference, not a planning defect, and I document it as such.