Investing in the U.S. is a popular desire of many international high-net-worth individuals. For some, it may be the perfect fit, but for others, leaping through the cross-border hoops may not be worth the rewards.
Brokerage account border control
Many people living outside the U.S. are surprised when they learn that a major brokerage will not open an account for them. Canadians, for example, are extremely culturally similar to Americans, speak the same language (or nearly) and share an expansive border with the U.S. But they can’t generally invest in a regular U.S. brokerage account because rules differ between the U.S. and Canada, and many U.S. brokerages do not want to take on the expense of assuring compliance with Canadian regulations. Even in the U.S., there are restrictions on who may purchase certain types of bank or mutual fund products. To explain why goes beyond the scope of this article, but during a short discussion with a major online broker we learned that their “international” accounts permit only stocks, bonds and ETFs, not mutual funds or bank deposits. And beyond just facing limitations on their investment, some countries’ residents are excluded altogether from opening U.S. accounts for political reasons.
Investing in the U.S. brings several benefits
Why would a non-U.S. resident want to invest via a U.S. account at all? For one thing, the U.S. has the most robust, complete securities market in the world. There is an investment product available for just about any idea you can think of. The mutual fund universe includes thousands of pooled investments managed by professional, expert managers.
Not only are many U.S.-based mutual funds among the cheapest in the world, but some U.S. exchange traded funds charge less than 10 basis points (that’s under 0.001%) on assets under management. Such ETFs provide nearly free exposure to the market. You can also trade many ETFs without commission at certain brokers. Compare that with the fee-heavy and cumbersome trade rules in other countries, and the advantage to having portfolio assets in the U.S. is pretty clear.
Spreads on exchange traded products (such as stocks and ETFs) tend to be tighter in U.S. markets, meaning international clients don’t lose as much between a purchase and a sale.
On a final note, over the past 10 years, the U.S. dollar has proved a strong reserve currency and U.S. markets the healthiest. There is thus a natural pull for foreign investment money into U.S.-based securities. This probably won’t continue indefinitely, but investment money tends to flow toward the stronger currency and economy.
Should the U.S. dollar depreciate against a client's home currency, for example, they could lose versus investing domestically. And if they want to invest internationally (relative to the U.S.), using a U.S. fund could be suboptimal, depending on your views on foreign currencies. Taxes also form a bigger area of concern. Not all countries have a “tax treaty” with the U.S., so using U.S. vehicles may not be optimal from a tax standpoint. Please see this helpful page for guidance.
Even where there is a U.S. tax treaty with a home country, there could still be additional taxes to pay and attendant complications in filing, as a client must consider their citizenship (U.S. citizens continue to file U.S. returns even when living abroad), credits against taxes paid in another country and differential tax rates on the same income between countries. Some countries have prejudicial tax rates on distributions from U.S. investments, for example.
Consider U.S. trust situs
If your clients are looking for greater access to the U.S. market and/or have complex estate planning needs that involve a trust, then one solution that can overcome the residency issue as well as help them plan their estate successfully is a U.S. trust situs.
Forming a trust in the U.S. permits a foreign national or a U.S. expat to open a brokerage account in trust name through a U.S. trust company. The trust company serves as a corporate trustee and is actually a U.S. person, so there is no residency issue in most cases. The beneficiaries of the trust can live just about anywhere without affecting the trust’s freedom to invest in U.S. investment markets. If your client does not want to turn control over completely to the trust company, they can have a trusted person serve as co-trustee, although this may complicate matters if that co-trustee also lives outside the U.S. The trust company will simply vet the beneficiaries to ensure compliance with their set of regulations before approving the trust. Note, the trust company can also hire/fire an investment manager. This power may especially serve a client's interests if they are not familiar with U.S. investment markets or what constitutes good management.
Arthur Doglione is the president and founder of Alpha Fiduciary.