USSep 6 2017

Investment options for American expats

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Investment options for American expats

The Foreign Account Tax Compliance Act (FATCA), the taxation of foreign trusts and the global remit of the Internal Revenue Service have had the practical effect of making US clients unwelcome at many non-US financial institutions.

The American expat community in the UK, like those in Frankfurt, Dubai and Singapore, has a limited range of options to choose from to manage their financial affairs. Most, understandably, want their finances to comply with local and US laws so they can get on with their lives.

The range of choices depends on the net worth of the individual. For American expats with $10m-plus (£7.72m-plus), a small number of private banks offer solutions. Often they will only take on these clients if they are able to manage all of their assets and the offerings are not always as bespoke as anyone with these financial resources would expect.

Clients who work in private equity or who have complex financial arrangements due to periods of work in various jurisdictions may find that the bespoke nature of the advice they are given by their lawyers and accountants is not matched by the standard solution proffered by large financial institutions. This segment of the US expat community does not receive the level of service and tailor-made financial offering they expect.

They are often left feeling that the only alternative is to self-invest, but this is not ideal if they have busy lives. These clients are the epitome of asset rich, time poor. The answer is to find a wealth manager who welcomes American clients – a registration with the US Securities and Exchange Commission (SEC) would be the most obvious sign of this – and is willing to tailor any investment mandate to their specific requirements.

Ideally they also would not demand that the client use only their proprietary investments, bank account and mortgage products. A high level of service from a stable team of investment professionals sounds like a statement of the obvious, but is not always easy to find alongside a long-term commitment to work with US clients.

Key Points

  • The American expat community in the UK has a limited range of options to choose from to manage their financial affairs.
  • Fidelity and Merrill Lynch have cut ties with Americans whose primary residence is outside the US.
  • This group still has to find a solution that suits their exposure to the US and UK tax regimes.

For this client group it is also essential that the wealth manager works seamlessly with tax advisers in the UK and possibly also the tax advisors and investment managers in the US. 

American expats with $1m (£772,000) to $10m (£7.72m) in liquid investable assets have even fewer options. In recent years firms including Fidelity and Merrill Lynch have cut ties with Americans whose primary residence is outside the US. This has been in reaction to both US and European legislation regulating taxation, reporting and financial product promotions. Self-directed investing has many drawbacks, not least the question of time mentioned above.

This group of clients will more than likely have assets in the US including real estate, 401Ks and IRAs. It is vital that any tax and inheritance planning they receive is truly joined up, taking into account both the US and UK impact of any investment solution.

Real estate, pension assets and investments all need to comply with US and UK tax rules as well as achieve their investment objective. Co-ordinating US-based and UK-based tax advisors and investment managers can be challenging. For those clients staying more than a few years in the UK, having a trusted tax advisor and investment manager who understands both jurisdictions is key. This will allow investment goals and life goals to be achieved, safe in the knowledge that neither the IRS nor HMRC will significantly alter the outcome.

The final group of clients is the least well served, being those with liquid investible assets of less than $1m. This group is often not even served by the one or two private banks that will work with American clients. Few wealth managers will work with them and they are the least able to afford expensive advice on tax and planning.

At the same time this group still has to find a solution that suits their exposure to the US and UK tax regimes. There is no reason why this group should sacrifice their investment goals in order to squeeze into a tax-compliant strategy.

Certain pension and insurance arrangements marketed to this group as a magic wand that removes all regulatory issues, at the very least, tend to involve high fees likely to be a drag on investment returns. In a low-return world this group of American expats, in common with everyone in this category, must find a reasonable solution at an affordable price. Money in the bank does not provide what it used to.

These underserved American expats need an investment solution that is directly invested and therefore does not cause issues with their US or non US tax filing. It must also offer several different risk profiles in order to match the client’s attitude to risk and their return requirements.

They are only available through a UK IFA or international financial adviser. These clients need advice alongside their investment plans. For US expats living in the UK they will find relatively few IFAs or financial advisers willing to deal with Americans. Many advisers will be told by their professional indemnity insurer that advising American clients carries with it extra layers of risk that they are not willing to take.

There are, however, a small group of advisers who do cater to American, as well as other, expats living in the UK. These advisers understand the complexities of US and UK tax and inheritance rules and have experience of the options that work with both systems. They will also take a complete view of the clients’ financial assets wherever they are in the world and the client’s personal circumstances. So, while life has not been made easy for the American expat, a few quality companies are able to help. 

Andrew Vaughan-Payne is a director in the private client team at Waverton Investment Management