A wealth management house which caters to expat Americans warns about the quality of service such people might be getting from other advisors as banks turn their backs on such US citizens.

(With large numbers of US citizens and Green Card holders living in Asian wealth management centres, as well as other regions, this article, which was based on an interview in London, nevertheless has specific relevance for the Asia-Pacific region. If readers have comments about this issue from an Asia perspective, do let us know.)

As Charles Dickens’ novels and grim reality demonstrate, being orphaned can sometimes be a frightening experience. And the term “orphan” is sometimes used these days to describe those whom non-US banks don’t want as clients any more – expat Americans and Green Card holders.

The danger is that some advisors who are entering the space vacated by banks and others are not fully up to the task. Expats who have been pushed out of banks by the regulatory costs imposed via the US Internal Revenue Service enforcing tax compliance laws could be getting inadequate advice, which could be legally and financially costly.

That is the fear of Daniel Freedman, founder and managing director of London & Capital, the wealth management and advisory firm that has been advising US citizens for over two decades. (The firm was founded 25 years’ ago). He recently spoke to this publication about his concerns that some of the firms and advisors who are working with such expats might not have the full range of knowledge and experience. He did not identify names either on or off the record, but wanted to flag up this issue at a time when the industry is still coming to terms with the impact of FATCA and related US tax compliance legislation.

He illustrated his point by highlighting some comments people have passed on to him. “There are certain investments that give rise to beneficial tax treatments. For example, if you buy a preferred security in the US, income is taxed to capital gains,” he said, stating that this is a clear win for the investor. “We are finding that in some cases clients [of other firms] have not been made aware of this,” he said in an interview at his gleaming new offices in Regents Place, London. (The firm also has an office in Hong Kong.)

Tales from the trenches

“One client who had been advised by a firm told me that it only accepted cash and that the client would have to sell everything up before he could be a client,” Freedman continued.

“We had another case where a client proposed an acceptable portfolio of investments but no pension provision had been made. Pensions can in fact be very useful in terms of reliefs and US tax credits,” he said.

In fact, Freedman is concerned that even the most diligent advisors, if they lack experience, might not give top-notch advice, although everyone has to start somewhere: “If you have only worked serving the US market for two years it is unlikely you have enough knowledge to advise clients properly.”

Freedman knows that some industry competitors might feel he is trying to do down the competition, but he said his views are driven by concerns about the sort of problems he mentions. He told this publication of stories of how firms were contacting him to say they could no longer serve US clients and could he or someone else serve them.

The issue can be illustrated by some numbers. Although accurate figures are hard to obtain,  most reports and commentaries indicate there are around between six and seven million expat Americans. A significant chunk of them live in London and many of them work in the City financial district. The FATCA Act - enacted in 2010 and being rolled out in stages - has been blamed for an unprecedented rise in the number of US citizens renouncing their membership of Jefferson’s Republic. According to Federal Register data, 1,131 people gave up their US passports at American embassies in the year to June, 2013. Only 189 US nationalities were renounced by expats the year before. Some commentators, such as Daniel Mitchell of the US-based CATO Institute, refer to such Americans as "Going Galt". (The term comes from the 1957 novel, Atlas Shrugged, by Ayn Rand, in which the plot revolves around entrepreneurs and others following a character called John Galt in giving up their careers and business to avoid stifling taxes and regulations.)

FATCA bites

As an anti-tax evasion measure, FATCA – or Foreign Account Tax Compliance Act - requires individuals to report their financial accounts held outside of the US and foreign financial institutions to report to the Internal Revenue Service about their American clients. US payors making payments to non-compliant [with FATCA] foreign financial institutions are required to withhold 30 per cent of the gross payments. A number of banks, such as HSBC and Deutsche Bank, no longer serve US expats; this publication has been told by other banks and wealth managers that they regard US expats as a compliance headache and don’t seek their business.

However, London & Capital, Royal Bank of Canada and some other firms see an opportunity. At L&C, the firm – it had $3.3 billion of client AuM at end-March this year - recently rolled out a new service for US resident non-domiciled persons and Green Card holders to obtain a US domestic bank account without them having to hold a US primary address. Until that service came along, London & Capital said that onerous reporting requirements made it impossible for such persons to get a domestic US bank account. The new facility has been created with RBC – the latter being a bank registered with the US Securities and Exchange Commission. 

Freedman said that one area the IRS is looking at is “passive investment companies” - such as fund managers – that can collect what are thought to be unpaid taxes from US citizens. It’s more the reporting obligations of companies and the fact that they have to decide if their clients have a US connection.

“These sorts of changes have spooked a lot of institutions into saying that they don’t want to deal with US people and have asked them to leave,” he said.

Freedman said people needed to be confident that an advisor knows the rules, which are highly complex. There are plenty of opportunities for canny advisors to minimize tax burdens, he said.

“We look at offsetting gains in the portfolios with a  special consideration to short-term capital gains (realized gains from securities held less than a year) to help mitigate their tax bill at the end of the tax year,” Freedman continued. “Foreign tax credits can be very useful in managing a client’s affairs.”

What are the risks of inadequate tax advice? Freedman says there are three dangers: professional indemnity insurance could be invalidated; an advisor could be sued and finally, that clients could complain to the Financial Conduct Authority, the UK financial regulator.

“I am seeing increasing concern from clients that they haven’t got many options now. The FCA and other authorities need to be sure that advisors are competent to offer advice,” he said.

There is a lot of focus on disclosure and transparency at the moment, but competence is arguably even more important for clients at the end of the day, he added.

The FATCA legislation has sometimes been described as “The worst piece of tax legislation most Americans haven’t heard of” (Bloomberg) but whatever the merits or downsides of it, this law is having a significant impact on how, and where, US citizens conduct their financial lives when abroad. Freedman’s call for the highest standards in serving the “orphan Americans” deserves to be taken seriously.