US citizens living overseas are probably among the most complex clients to cater to from a financial advice and wealth management perspective.
Regardless of the level of their wealth status, be it ultra- or high net worth (UHNW/HNW), their needs are a lot more specific than those of domestic clients.
Just because of the sheer fact that they are not in the US, this complicates what types of investments they are allowed to put their money in, followed by a plethora of reporting requirements to the Internal Revenue Service (IRS).
One of the most notorious is the Foreign Account Tax Compliance Act (Fatca), a piece of legislation setting out that all US citizens living overseas must file a tax report to the IRS. The law, however, also binds their foreign financial institutions to sharing their personal data with the US taxman.
Neil Williams, partner at LeifBridge, told International Adviser that often Fatca is used as an excuse to not offer services to US expats while, for some firms, the real reason is that taking on US clients living abroad is simply too costly and complex for them to be able to implement their offerings effectively.
In fact, in the last few years, there has been a growing number of financial institutions either straight up refusing services to US expats or notifying them that they would no longer accept business due to the requirements tied to having them as customers.
But with all these complexities and hurdles to face, where can US expat clients turn to for financial advice?
Lack of understanding
Robert Paul, partner and head of US family office at London & Capital, told IA: “The most common problem faced by US expats is a lack of firms who actually understand the challenges they face and as importantly a lack of firms who are geared up to provide what they need.
“Despite the common misunderstanding, US citizens/greencard holders living abroad can quite often utilise many of the same products that their local counterparts can – with a handful of exceptions based on their country of residence and how the domestic products overlap with the US tax system. It is more often a case that the domestic wealth management industry is not prepared/licensed/structured to provide them with the real service they require.
“These US citizens need advice on not just ensuring that they do not invest in tax punitive investments but also ensuring that their financial planning takes into account their global wealth. Often domestic firms may be able to invest properly for these families but will only be able to advise on domestic accounts but not those based offshore or legacy accounts in the US.
“Subsequently, the US domestic adviser looking after the legacy investment accounts is far less likely to understand the UK tax implications of these investments but is also very unlikely to be able to advise on the families UK or offshore products/accounts. These leaves the family to try and piece together two or sometimes more financial planners’ advice.
“It is the equivalent of having one adviser for your Isa, one for your pension and one for your offshore investment account and with all the accounts in different currencies and with different tax rules applied to them, you just wouldn’t do it.
“This is the biggest challenge faced by international US families.
“Fatca has certainly contributed to this situation but the raft of further legislation (AIFMD, CRS, Non-Dom changes in the UK and other EU countries to name a few) together with a nervousness from large wealth management institutions to deal with non-core clients has been as much a driver of these problems.
“I often say that in a world where international families are more transient than ever for work/life/family, legislation has resulted in the wealth management industry becoming far more provincial. This has led to HNW/UHNW international families trying to navigate planning their wealth often themselves by piecing together advice from local firms and then trying to overlay advice from tax and estate practitioners. It’s a big challenge.
But LeifBridge’s Williams said not all hope should be lost as there are some ways US expats can circumvent the difficulties they face with their finances abroad.
“US citizens should be able to consider a wide range of savings products as part of their overall financial and estate planning needs. With the right adviser(s), they can consider various pension and insurance linked savings products, recognising that the additional benefits of investing into these types of products also brings with it additional reporting requirements.
“Should a client wish to consider family investment companies, partnerships, foundations or trusts, then careful consideration needs to be given to ensure the structure meets with their long-term objectives and that all parties are fully aware of the ongoing tax reporting obligations. Again, careful planning at the start goes a long way to towards a successful outcome for a client.
“Perhaps the most common accounts amongst US expats are in fact general investment accounts. General investment accounts don’t offer any particular tax benefits but do offer an investor simplicity in approach and the opportunity to invest and grow their capital.
“The universe of investment products available to US expats has certainly grown over the last few years and we’ve seen an increasing number of products, such as ETFs, come to market.”