Podcast: What we've learned: helping international Americans invest their wealth

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Read the full transcript below.

Helen Burggraf: Welcome to a discussion where we're looking at all the big issues facing US expats and their investments today. So if you're a U.S. citizen living outside of the States and wanting to invest, or if you're a resident within America, but investing outside of the States, then what we're talking about here is going to matter to you and hopefully going to help you too.

I'm Helen Burggraf. I'm a U.S. citizen based in London and I'm also a journalist and co-founder of the American Expat Financial News Journal, a website focused on US expat’s finances. So I get to see very much first hand the problems international US investors often face and my job is to try and explain it all in plain language. Exactly what we're going to be doing here.

To help, I'm joined by two top experts in the field of investing for globally mobile Americans. They are Martin Heale and Janette Saxer. Of Schroders Wealth Management US limited, which of course is a division of the Global investment business, Schroders PLC. Schroders is one of the biggest wealth managers to specialize in looking after international American clients with a 3 year record of working in this field. Martin and Janette have between them decades of experience of working with US clients, so they are really in a perfect position to explain some of the key investment problems facing US expats.

So welcome to you both and thanks very much for your time.

Janette: Hello Helen.

Martin: Helen Hello.

Helen Burggraf: Let's dive straight in and to begin with, let's have a broad look at what's changed for international US investors over the last 10 to 15 years. There's been an incredible amount of change, hasn't there?

Martin: Well yes, you're right, Helen. So I think the first place to begin is to say that how an American is taxed is really quite unusual by comparison with the rest of the world. An American is taxed on their citizenship as opposed to their residency. For many jurisdictions where someone is resident, that is the country that they are obliged to pay tax to.

But for Americans, they’re taxed, regardless of where they live in the world, they still have to pay tax to America based on their citizenship, and while that's unusual, also, it's not something you can’t easily shake off. It's quite hard to renounce your citizenship, so it's something an American has to live with.

The second big change, really has been the introduction of a new piece of legislation, or relatively new piece of legislation called FATCA, which stands for the Foreign Account Tax Compliance Act and this has caused a great deal of work and confusion amongst US taxpayers and indeed many advisors, particularly offshore investment advisors. In fact, within the industry we actually refer to it as the Fear and Total Confusion Act.

It first came in under the Obama administration, roughly in around 2009 and piecemeal over a few years thereafter. And it was really intended to capture Americans holding money offshore outside of the US, but not necessarily reporting on the gains and the income on those accounts, therefore denying the IRS of their tax.

So the US government, passes legislation actually on foreign companies, foreign financial institutions, and it said to them, you have to identify which of your clients are American citizens and you have to report them to the USA. Now, that was quite revolutionary and quite a big change at the time and done for quite well-intentioned reasons, but the impact was that it captured many ordinary average everyday Americans who were living and working abroad, who weren't endeavouring to hide any money, but they were captured by this law as well.

Now bearing in mind the time that this law came into effect, it was started in 2009, shortly after the global financial crisis. Now bear in mind at the time that many financial institutions at that time were rebuilding their balance sheets, were divesting themselves of many businesses, were very conscious of risk and suddenly, a new risk comes along, you've got to identify which of your clients American you've got to report on them.

You have to have the systems in place, so quite frankly, many institutions at the time said, "we don't want to take on this additional responsibility. So therefore we won't deal with Americans at all", and that meant that your average American working abroad found it difficult at times to find an institution that would indeed look after them.

Helen Burggraf: And one thing to think about actually with the legislation is that it is actually quite simple as well. A foreign institution really just has to report whether they've got clients who are US persons.

Janette: And so for example, with Schroders, we're holding an FCC license which enables us to look after the American, we report and so long as we've got the infrastructure behind us from a compliance perspective, this is actually fairly easy for us, and I think a lot of the other institutions haven't quite appreciated that. They've just preferred to say, "we don't look after Americans", and I think that that's one thing that it just shows that you know, our decision of Schroders to specialize in this area has enabled us to be out there in the market looking after these clients. Because these clients are becoming orphaned by other institutions and some other very big institutions.

Martin and I are both also US qualified, which means that we can arrive in the US. We can help strategize with the clients and make sure that how we run our portfolios are suitable for the clients. I remember nobody ever used to ask a client. Are you an American? But now suddenly these institutions had to. This is where the phenomena of an accidental American came out.

So an American is either somebody who was born in US, they hold a green card. They’re taxed on their worldwide assets, or they might have been born in the US and then came back when they were very young. Because they were born on US soil that makes them American. The one that gets people is where one of your parents is an American. You might be born in the UK. But unfortunately that makes you American and this has caused a lot of problems for clients, not quite realizing that they should have been filing their US taxes.

Martin: Can I just add to that? You're absolutely right. Time and time again we come across people who don't realise they are American and haven't realised that they should have been filing tax returns from the age of 18. And of course we're in a great position to help them. We're very well connected with the right legal advisors and tax advisors, and we'll do our best to help them, to get into the right place for them.

But just to follow up on one other point you said Janette, I think many firms decided not to look after Americans because they simply didn't have the knowledge base to go to build the knowledge and expertise and skills to serve Americans properly. On the other hand, because Janette and I have been in this industry for many years, we are ideally placed to help those orphaned Americans who quite rightly go about their day-to-day business in the UK, but then are caught by this unintended consequence of the legislation.

Also, quite bizarrely, what we're seeing is, banks tend to move in herds, and what we're seeing is many US-based banks are saying to their investment management clients, “You have an address registered in the UK, so we no longer want to deal with you”. And we're seeing many UK-based institutions saying to their American clients, “You have a US address we don't want to deal with you”.

Now, conversely, I think Schroders have a great deal of expertise in serving wealthy international families and they saw this opportunity that many global international families have an American somewhere in their midst, either through marriage or study or work or birth or whatever it may be. And so by having this area of US expertise in the Schroders group allows us to serve global families completely.

Helen Burggraf: That I can see yes. But that is not the only regulatory burden either. There are all sorts of other reporting requirements out there in terms of tax and offshore assets. I sense a great deal of confusion among my readers. Can you explain a bit about these?

Janette: Yes, of course. So as an American accidental or not, citizen, green card holder, there are various reporting requirements. So they have to file a US tax return each year and they have to make sure they've got all of the right information to be able to do that.

Some people know that they've got to report. Some people aren't quite too sure how they're meant to report, and we can help guide the clients by introducing them to professionals, accountants that can help them do that. One of the things that clients miss and I speak with clients, especially Americans, who have suddenly come over to the UK. There's something called the Foreign Bank Account Report, FBAR as we call it, that has to be reported each year. It's not a tax as such, but it’s a report that you've got to say to the US tax authorities "I hold some bank accounts outside of the US".

Now a person living in the US at the time wouldn't really know anything about it if they've never had an international bank account and then suddenly they arrive in the UK, they are unaware that they have to do that. So there are various reports that they've got to do. It's not an additional tax on FBAR, but there are some really strong fines that could be given if you're not reporting, and that's both from your tax returns as well as these bank accounts.

We can help clients. I mean it is quite a scary position that some people find themselves in that they're just not quite too sure how to deal with it. And with our expertise we can guide them, help them and then get them in contact with the right experts that can help file their taxes.

Martin: We've had some funny stories about things as simple as an FBAR. For example, if you're an American accountant, but not necessarily with a huge amount of international expertise and you read the legislation of reporting you can interpret an Oyster card as actually a foreign account that needs to be reported. And we actually had that question from one accountant because to them Oyster card may have been a bank account or whatever, so you can see where the confusion arises and the complexity.

Janette: I've seen and heard a lot of people who perhaps have had to go back and redo some of their tax returns because they weren't aware that they had missed off some things that they thought one country was paying tax on, but they needed to report it.

Martin: For most cases, these are innocent mistakes. People didn't know what they should be reporting or they made a good attempt, but didn't quite get it right. Then you get another category of people who should have known better and then you've got the category who have wilfully tried to evade their obligations.

If it's a very straightforward case of resubmitting a couple of years returns or very simple remediation, then a client doesn't necessarily have to pay top dollar. We can introduce them to people who can do a perfectly adequate job. It may be something a bit more serious, requiring more formal streamlining.

In some cases, we've had quite high profile individuals where we've referred them to say, lawyers who can work under attorney privilege, but also will have a reputational management team, for example. In case the news leaks out and could cause a little bit of embarrassment for the client.

Helen Burggraf: You often find people who have not had great advice and don't know about the American situation. And I do know from my own experience that a lot of people don't have the knowledge that you have, so you have an advantage there.

Martin: I mean at the end of the day, we're here to help clients, and we're here to help all professional advisors we deal with frequently, either a lawyer, accountant or client will come to us or a colleague may come to us and say we have an American client. This is their list of investments. This is what they've got. Could you look through it and see if there's anything that needs to be sold, repaired, improved, and we'll do our best to help. And again, this is where we can introduce the right specialist as needed, but we review these things all the time.

Janette: What we find is clients do approach us where they're wanting to make some investments and they approach a local banker, a UK bank, and they get told, “Really sorry we can't open your account”. So they find us that way and what they come to us to ask is, “What are my qualifying investments?  What can I invest in, as an American resident here in the UK?”. And this is the problem that they're having. So what we do is we help find investments that are tax-efficient from both the US and the UK standpoint.

We run and look after portfolios where we hold individual equities and bonds and this is where we come on to the dreaded name that a poor American whenever they're looking at is PFIC, passive foreign investment company. These are funds that are out there that are foreign-registered, which unfortunately the US tax authorities look at and they tax onerously. So therefore, you know, where a typical client might buy a fund here in the UK. These are just not vehicles that are good enough for a US client because by the time they've made any gain on them, they're paying the tax on them as well.

Martin: And the CPA's time as well.

Janette: And the CPA's time of sorting it out. So we're really able to help and tailor-make a portfolio. That we're looking at both the US and UK tax efficiencies and making sure that, for example, you're looking at an ETF. It might be an index tracker. It's US registered, so it takes a box from a U.S. tax perspective, but as soon as they are in the UK they need to have UK reporting status. So therefore we look for these things for the clients to make sure that their portfolios are tax-efficient.

Martin: Quite often we have clients come to us from different institutions saying. "I need a service that's specifically tailored for the needs of the US taxpayer", and so really those are the two main areas where we help, and those are the first two ports of call coming to us.

Helen Burggraf: A lot of people struggle with the plans that they get from their employers here in the UK and the American tax system is very difficult. What do you do for your clients, especially if they want it to be good for the environment? I imagine you get this a lot. What do you tell that American that has this company retirement account here in the UK?

Janette: Yes, we've got some wealth planners here within Cazenove, our wealth management arm of Schroders, that can help guide clients and give them some pension advice. Many clients that we see have worked for big institutions here and as you said, have collected a company pension. We can help run self-invested pension plans. We have some pension administrators that are happy to deal with where there's a US person involved. And then we can help run the portfolio alongside their personal investment portfolio and we can put an ethical overlay, we can offer any sort of ethical investing, and again we run it in a tax-efficient manner.

Martin: As an aside to that, Helen. Janette mentioned Self-Invested Pension Plans, otherwise known as SIPPs and this is a common problem. I think it's worth mentioning. It's common problem for US persons having worked in the UK who’ve generated a pension plan. If it's in the form of a SIPP and they returned to the US, they find it extremely difficult to find a manager for two reasons.

Firstly, a US investment manager tends to be very uncomfortable managing a UK pension plan and a UK manager tends to be quite uncomfortable managing investments for US resident, so we are one of the very few people I know that are very comfortable to manage investments for US residents holding the UK SIPP and certainly, as Janette said, we can run ethical and sustainable mandates within those plans.

Helen Burggraf: Let's widen the chat out a bit to include a bigger group of internationally minded Americans. Americans in America. There's a lot of change happening in the world, and the reality is that to protect themselves more people are wanting to spread their investments across jurisdictions. Is that something you're seeing among your clients? Martin?

Martin: Yes, absolutely. It's something we have been doing a standard for many years. We look after a great number of US-based Americans.

Their reasons for holding money outside of the US, offshore from the US are varied. Without taking too long, I would say the most popular reason is because a client would like international diversification in many different categories. Internationally-minded clients, appreciate that the globe is a big place and they appreciate that the investment style of an investment manager in the US is different to the style of say a manager in Switzerland, or a manager in Singapore, or manager in London.

Very generally speaking, US investment managers tend to be more domestically focused and on a standard risk scale they tend to be slightly more risk-tolerant than, say, a Swiss manager who, generally speaking, tends to be quite conservative with a much higher weighting in bonds and gold, whereas UK managers tend to be very international, I think as a nation we are very international we’re great traders and you can take that back to the initial trade routes.

Approximately 40% of the world's FX businesses go through London. It's a very international place, but likewise in our portfolios we’re very international. We offer global mandates. We cover a multitude of different currencies, so clients can get from us the best performing companies around the world, including USA Investment, but I find we're a terribly good compliment to the manager in the US, who is US centric, we are international.

The manager in Switzerland is much more conservative, but for the internationally-minded American he can have four managers around the world with assets physically held in different places around the world. And let's not understate the attraction of that, but with four different styles.

You've got four different types of performance, four different types of risk, four different types of fees. A very good competitive instinct, but also, you're crossing the boundaries of jurisdictions in terms of legal protection, so assets held in the UK are protected by the UK legal system as they are by the Swiss system in Switzerland and clients can see a value in that.

Janette: And to add to that, these clients aren't doing it for any tax reasons. It's purely for diversification of their investment.

Martin: Absolutely.

Janette: And you hear people using the term offshoring. For us, it's just holding money outside of the US. So for that, it is an offshore. That being said, you've got these clients, international Americans looking at the UK, they might have their assets set up in either US domestic trusts, because they've had estate planning, or actually, it might be that we have some Americans who are also beneficiaries of foreign trusts. Trusts that are held out of the Channel Islands.

Now the word offshore to a lot of people in the UK historically meant that it was that you were keeping money out for tax purposes - this isn't the case for Americans. This is just purely they're using the offshore trusts as different jurisdictions to hold their assets, and this is where we come in.

We work a lot with some trustees where they've got these trusts and suddenly they have a US beneficiary. And where previously they would actually either discount them in the investment management or they wouldn't include them purely because of the tax consequences. Now you can't do that. You've got to embrace that some clients might get a US passport. So we help trustees run the assets in a tax-efficient manner for US beneficiaries as well. So I think that that's an offshore solution to them is just meaning money outside of the US, but for no other tax issues.

Martin: And I, I think for a trustee's fiduciary responsibility, it's important because they know that when they are delegating investment management to US qualified, US experienced and US skilled managers, they have discharged their responsibilities well and they know that their beneficiary's assets are in good hands.

Helen Burggraf: We've covered a lot and hopefully explain some of the big issues in the nasty acronyms out there. Is there anything else you'd like to add?

Martin: Nothing we'd like to add that would get totally off the wall. There's plenty more to this, but I think one of the skills of our role is to make the complex simple for the underlying client. The world of investments in the world of US legislation and UK legislation can be quite scary, but we try and cut through that and explain it all very simply and clearly to our clients.

I think the only way that we haven't mentioned is that, specifically, tax reporting is very important for US taxpayers, and particularly US taxpayers resident in the UK, who also have to report to the UK authorities as well. We provide each client with tax reports dependent upon their tax obligation countries. So, for example, for US taxpayer after the 30th of December each year, we will provide a report that covers 1099 information, long short gains, qualifying dividends, non-qualifying dividends.

As Janette said, FBAR highest balance information and for UK returns, we produce a UK compliance tax pack after the 5th of April. So clients can rest assured that as well as the investment advice we can follow it up with good reporting as well, and I'll touch on one final thing as well, that where necessary we can separate capital and income for US clients where many other institutions certainly offshore struggle with that capability.

Janette: One of the things I'd like to put out if you're an American, an accidental American, we will help them prepare. Help them prepare if they're moving. If it's an American moving here to the UK or even a British person moving to the US, we can help prepare them. Move with them, help them establish what they need to do, and make sure that this doesn't impact their finances. With Martin and I dealing with US persons for many, many years, there isn't a situation that we haven't come across that we can help clients.

And some quirky ones as well. Once upon a time, we had that case where a client had been born in a foreign embassy in the US. And the question was, "Were they born on US soil? Were they a US person or not, and therefore a US taxpayer?", And it was a great question for us. We've not come across that before, have we? And we referred the case to a leading international tax attorney.

Interestingly, the answer came back that if the foreign embassy was owned outright by that foreign government, then they were not born on US soil and therefore not a US taxpayer, if in fact it had been rented, then it was felt, the opinion was, that they were born on US soil and they were obliged to pay U.S. tax. Very interesting, very helpful for us and of course it helps the client ultimately.

Helen Burggraf: Would you care to give some of the basic rules of thumb?

Martin: I think I would like to say this in two parts really. So I think for professional advisors out there that aren't totally experienced in the US world,  the first message and rule of thumb is that as an advisor, the onus is on you to establish whether your client is an American or not. Because if you've discovered, if you establish they are American, there are certain obligations, and there's certain advice that you should and should not give them. So the first thing is to always establish who your client is and if they are an American immediately refer to a US specialist. We get calls like this all the time. So whatever the clue is, give us a call and we'll help from there.

The second message to US persons is take advice as early and from as many people as possible because there is a checklist to go through and with the best will in the world, one specialist won't necessarily think of all the items on the checklist that another specialist may think of. For example, frequently we see as we talked about, SIPPs, American clients, moving to the US, but they forget about the UK pension. So take early advice and as widely as possible and hopefully will capture everything that way.

Helen Burggraf: And on that note, it's just for me to say goodbye and thanks to Janette and Martin for their time and expertise.

Martin: Thank you Helen.

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