US expats have suffered in the financial advice market due to the rise in complexity of their financial affairs over the last few years.
And it, unfortunately, shows no signs of stopping as they continue to be affected by the Foreign Account Tax Compliance Act (Fatca), because the US has a citizenship-based taxation system.
There is a lack of services and offering for US expats in the global financial advice world due to the difficult situation forced upon them.
However, serving US expats was not always a problem for the advice industry.
Stigma towards US expats
Nathan Prior, head of international at Partners Wealth Management, told International Adviser: “When you go back 20 years, you had quite a number of businesses over here that were happy to work with US clients, but then Fatca came along and there were issues between the US and Swiss banks.
“This caused a wave of big companies saying it is ‘too difficult trying to deal with many different regulators and tax institutions, so we’re out’. They all closed, discarded their US clients, and nobody was interested in the market.
“That market has gradually come back over recent years, as companies have now understood how to deal with the Fatca reporting and other factors. However, I would still say that there remains a huge amount of apprehension in UK businesses taking on US clients. You could contact 10 different advice businesses and probably all would say ‘we don’t want those US clients’.
“The reason for it is because it is a niche market, as US citizens represent a small percentage of UK residents but they require a completely different service. You can’t just put them on a regular UK platform and buy funds or use the same investment solutions that you’re using for your other clients.
“You can’t even put them in the same offshore service you’re using for your other non-doms. You must have a completely separate specialist service proposition for US clients. Businesses need to decide to either avoid working with individuals with a US connection or go ‘all in’ and create a specialist service.
“I think that with anything in-between, you either risk not covering the costs of service for the business, due to the amount of work that goes into it, or you don’t put enough structure around it and you could potentially make mistakes, impacting the client.
“I think it is a difficult area for advisers.”
Segmentation
Partners Wealth Management is one of the small number of UK firms that do offer services for US expats despite the issues surrounding them.
They offer services around foreign exchange, investment independence, pension and retirement planning, life insurance and protection and mortgages.
But, how do you deal with them?
Prior added: “As an adviser, if you only have one US citizen client, you’re not going to remember in three years’ time what all the rules are and implications are. There are so many unknowns or issues that can arise if you don’t specialise in this area.
“For example, one of the most common situations is when clients will quite often have a family where one of the spouses is a US citizen and the other spouse isn’t.
“They may say ‘we’ll just do all the investments in the in the UK citizen’s name because then we haven’t got the US issues’. In a few years’ time, once children come along and they start funding investments and completely forget that because one of the parents is a US citizen, their children are most likely US citizens as well.
“You can’t apply usual UK financial planning that you would for your other clients, therefore, it’s got to be managed by a specialist team, who deal with these situations every single day. That removes the risk of not being aware of the rules and requirements at all times.”
Dealing with US assets
Due to the complications around dealing with US assets, UK firms must understand how they can work with expats.
Prior said: “One of the beautiful and unique elements about our service is our investment independence. Unlike the majority of firms in the UK who are looking to work with US citizens, we do not believe there is a single investment proposition that best suits all Americans.
“The same as for the rest of our business, we are independent advisers and are advising clients on their financial planning as a priority. Then through our tried and tested independent manager research, we identify and advise on the right investment management solution for the individual client.
“For our US clients, we often partner with SEC-regulated investment management businesses who have offices here in London, we therefore know they are specialists in working with US citizens in the UK. Often these businesses focus only on the investments and not financial planning and so we have many strong partnerships with them.
“However, one of the challenges is that many of these SEC-regulated managers have high minimum investments sizes, because a higher amount of assets is needed to cover the cost of bespoke investment management, Fatca, tax reporting, and they need to have the right custody arrangements.
“Often you will find the investment amount needs to be in excess of £1m ($1.4m, €1.17m), but in some cases, it’s a few million pounds. For many families, that’s just not practical. Either they haven’t got that amount available to invest in one go, or they don’t want to put all their money with just one investment manager – they want to diversify their assets around a little bit.
“We have worked with platform provider Praemium, who have a specialist US service and have specialist investment managers, who have made their model portfolios available on the platform.
“Therefore, we can work with clients who either want that manager diversification or don’t meet the high investment thresholds from the outset. Clients are still benefiting from expert investment management, the right tax reports for the US and the UK, and all the right compliance and investment structures, as well as PWM’s expect financial planning.”
Fatca
The simplicity of cross-border planning for US expats can become tricky with policies like Fatca. The US legislation sets out that any US citizen living abroad is bound, alongside their foreign financial institutions, to report data to the IRS for tax purposes.
The US is one of two countries in the world who has a citizenship-based taxation system, together with Eritrea.
Prior said: “When Fatca first came out, it was thought to be this big impactful system specific to US clients. In reality, however, with the introduction of the Common Reporting Standard (CRS), it doesn’t matter whether a client is US connected or not, businesses have a responsibility to do Fatca or CRS reporting regardless of citizenship.
“The key is that the underlying custodian selected needs to be capable of performing the required reporting back to the US and support the client in providing suitable tax reporting. And so, the challenge as an adviser is finding the right investment managers and the right custodians who are able and willing to that. That comes back around to why a lot of businesses put on those higher minimum account sizes.
“It does mean that a large number of the investment managers who we would generally consider for our non-US clients just doesn’t work. This is because they’re not able or willing to do that reporting or to do undertake responsibility for the investment management because this would be different to what they do for the majority of their clients.”
Where do US expats go wrong?
All expats should financially plan and prepare before they enter another country for issues like tax.
But unfortunately, not every US citizen looks into their financial affairs before they step foot into the UK.
“A common situation we come across is when individuals come to the UK, they have the mistakenly believe that they can say ‘I’ll leave my assets in the US and pay tax there, and then on UK assets I will pay in UK’. They think ‘I’ve got to pay tax in two jurisdictions but that’s separate’. This is not the case when you’ve arrived in the UK, as you are taxed in both jurisdictions on all income or gains.
“The focus is not just on new planning and new investments that clients undertake when they arrive. They also need to review the investment and planning from before they arrived, look at the structures that they set up in the US and make sure that they are also compliant in the UK.
“Ultimately, individuals need to be compliant in both jurisdictions. As much as they need to consider US tax, they also need to think about being efficient in the UK. One of the mistakes that I see most frequently is clients not thinking about what they have done in the past. There is often a focus on, ‘how do I invest my new cash in the UK efficiently?’”
IHT
Another issue that stumps US expats is inheritance tax.
In the UK, the threshold is £325,000. This is a very small number compared to the US estate tax threshold of over $11m (£8m, €9.2m).
“Because of this difference, inheritance tax can really trip people up,” Prior added. “There’s a large gulf in allowances between the US and UK. When people come to the UK, they don’t always realise they could be charged UK inheritance tax and that can be quite a big shock.
“Of course, if they’re not UK citizens, they may be non-domiciled and so there are planning strategies that can be put in place around estate planning, which is a whole new subject.”
Future
US expats are a niche yet wealthy segment. There are 200,000 US citizens estimated to live in the UK.
They all need their financial affairs sorted and Partners Wealth Management will continue to offer services for US expats.
“It’s not simple to hire specialist advisers as there’s not many US specialist advisers anyway and even fewer looking to move companies at any one time,” Prior added. “However, we have experienced advisers who are now interested in making US clients their specialism. We will therefore help to train and develop their knowledge, which in turn helps to ensure we have the adviser capacity to keep growing.
“What we’re very mindful of, and one of the things that I was keen on at the outset, is not to become one of these firms which have to start raising their minimum account sizes because of capacity constraints. The only way we can do that is to have the infrastructure in place, so that we can accommodate clients at various life stages and have the experts ready to advise these clients.
“I believe we have a very strong service offering for US citizens in the UK and it has certainly been an area of growth for us over the last two years. I expect this to continue, as our unique combination of expertise and independence is highly sought after by clients and yet difficult to replicate.”
