As the growing international economy and prevalence of virtual communication continue to flatten the world, millions of individuals are finding it easier to cross national borders, leaving their native countries for opportunities to work and live abroad, whether going from the US to other countries or coming from other countries to work and live in the US. Yet crossing international borders introduces a number of unique issues and challenges, from financial reporting obligations to tax complexities, moving money across currencies to moving retirement benefits between countries… which on the one hand creates a unique opportunity for financial planners to specialize in the needs of cross-border clients to differentiate themselves… but also increases the burden of what financial advisors must learn to be able to effectively provide advice to an international clientele.
In this guest post, Ashley Murphy – Founder and Executive Director of the Global Financial Planning Institute in Minneapolis, MN – shares a framework for financial advisors to classify common issues that arise with inbound or outbound cross-border clients, and discusses some of the main challenges that advisors must be aware of when working with an international clientele. Additionally, he offers resources and suggestions for financial advisors to expand and hone their knowledge of the issues that their cross-border financial planning clients require from them.
The types of services cross-border planning clients require from financial advisors can often be categorized by their particular stage of transition with respect to crossing national borders. These stages include 1) Pre-Move, 2) Acclimation, 3) Global Integration, and 4) Retirement and Independence. Each comes with unique planning issues, and by identifying the specific transition stage that applies to their client, financial advisors can more readily pinpoint their international clients’ current needs and anticipate what they may require in the future. For example, clients in the Pre-Move stage may need help with immigration logistics and pre-move planning, banking and cash management, and ironing out family issues (e.g., identifying education standards for children, work options for spouses and other family members, etc.), whereas clients in the Acclimation stage may need help with worldwide tax questions and establishing or transitioning retirement plans. Clients in the Global Integration stage might need more help with longer-term immigration planning and coordinating and allocating their worldwide assets, and clients in the last retirement and independence stage may have the ‘usual’ planning needs (e.g., retirement and estate planning), but advisors will need to understand the international aspects of these areas to help their clients effectively.
Cross-border planning clients have unique considerations that financial advisors must take into account when helping them set their financial planning goals. For nearly every international client, advisors should know how long the client expects to stay in their destination country; the US and foreign tax implications of all income sources, including any capital gains; the protocols in place for foreign investment and performance reporting; and the account transfers that the client will need to make, along with the logistical issues that may arise from those transfers (especially when these transfers are between different countries). Notably, advisors should also be cognizant of Foreign Bank Account Reporting (FBAR) requirements and potential penalties related to Passive Foreign Investment Corporations (PFICs) that may affect their clients.
In addition to helping clients identify goals, advisors also must be familiar with the resources and services that their clients will need to make progress toward and realize their goals. For instance, advisors should be able to identify appropriate products (e.g., life insurance, disability insurance, investment funds, etc.), suitable broker-dealers or custodians to service their clients (as many won’t accept international clients, due to the additional compliance burdens), and competent experts to step in when specialized services are needed (e.g., international tax planning professionals and estate planning attorneys).
When it comes to servicing international clients, financial advisors will have their own operational needs. For instance, an advisor with cross-border clients will need to understand the relevant regulatory and licensing requirements in place with the foreign countries where their clients are located. They may want to review their Errors & Omissions (E&O) coverage to ensure that exposures unique to their international clients’ planning needs (e.g., trading in foreign securities) are sufficiently covered by their policies (which isn’t always the case). Furthermore, advisors may even wish to review their business model to ensure they are servicing their international clients most profitably, as the traditional AUM model (which typically is reliant on a long-term US-based portfolio) will not always be the best solution for the advisor.
Finding suitable products and service providers not only for clients but for financial advisors themselves can be a challenge when there may be limited means available to vet such products and services. However, there are resources to help advisors with their international research needs, such as the Financial Planning Standards Board (FPSB), which oversees international CFP certification standards, and the Global Financial Planning Institute (GFPI), which offers resources specifically to support advisors with international clients.
Ultimately, the key point is that while advisors with international and cross-border planning clients need to understand a wide range of rules applicable to the other countries in which their clients reside and be able to access services and products that their clients may need, there are resources and specialists available to the advisor that can help them serve their clients effectively. And because of the growing community of expats around the globe, financial advisors may find it worthwhile to establish competency in these cross-border financial planning issues to help their international clients… no matter where they may live!
International and cross-border financial planning is a common yet not well-understood area of professional expertise in financial planning. There are more than 40 million foreign-born individuals living in the United States and 9 million Americans abroad. Serving these clients requires specialized knowledge to avoid major pitfalls.
Financial planning for the average client comes with its fair share of challenges, but tax, retirement, and estate planning become even more complicated when working with clients whose financial lives cross national borders. And whether temporary or permanent, short-term or long-term, expatriate status can present multiple stumbling blocks for financial planning. The exact details of these hurdles vary depending on the countries involved, but several challenges are universal. Financial professionals must be aware of these concerns when working with international clients.
In this article, we shall define what international and cross-border financial planning is, the different stages of planning that an international client with cross-border planning needs progresses through, and the different types of international clients. We will highlight the differences between domestic planning and international and cross-border financial planning, look at the challenges in working with international and cross-border clients, and, lastly, provide resources as to where to find answers to common questions when working with such clients.
Global Financial Planning: Inbound, Outbound, And Cross-Border Planning Stages And Types Of Expats
Financial planners engage in domestic planning when they work with a client whose entire financial life takes place in a single country. The coverage of domestic planning engagements is ubiquitous in mainstream financial planning literature. However, some planners may not realize that the financial planning they do is actually a smaller ‘domestic’ subset of a larger scope of financial planning that can include cross-border and international issues. For many clients, however, comprehensive financial planning requires the planner to understand international issues as well.
Depending on the client’s needs, at any given moment, a planner may engage in inbound planning, outbound planning, or (ongoing) cross-border planning.
- Inbound planning – Inbound planning applies when clients and/or their assets move into a country (e.g., an individual moving from abroad to the US). This category of global planning includes strategy and guidance before and after arrival in a foreign country. For instance, in the case of a non-citizen moving to the US, inbound planning involves helping clients to still take care of their financial concerns in their home country while also acclimating to the US’s financial system (i.e., its tax, retirement, investment, insurance, and related areas of concern may be substantively different from what the client is familiar within their home country).
- Outbound planning – This type of planning caters to clients and/or their assets moving out of a country. An American person planning to move abroad exemplifies a client in need of outbound international planning. It involves pre-departure preparations, such as helping an American client understand their financial obligations as a US taxpayer abroad and tying up their loose financial ends in the US. For these clients, advice is typically tax-focused (e.g., retirement account transfers, taxation of US assets, and tax-residency planning). US citizens will also require advice regarding their ongoing financial reporting and investment constraints, especially given recent financial and tax reporting requirements implemented by the IRS and Treasury for US citizens living abroad.
- Cross-border planning – Cross-border planning describes a comprehensive financial planning approach that accounts for a client and/or their assets from the perspectives of both countries involved in an international move, or with clients who have dual citizenship or residency statuses in another country who need both inbound/outbound and ongoing advice support. Arguably the most specialized type of financial planning advising for cross-border clients requires more intimate knowledge of each country’s financial system, and how the rules of each system interact.
Financial Planning Strategies Are Influenced By The Client’s Stage Of Move
It is important to consider the international client’s stage of transition. Simply put, an international move is a complex process, with distinct strategy and guidance required for each stage.
Broadly, these stages include i) Pre-Move, ii) Acclimation, iii) Global Integration, and iv) Independence and Retirement. Advisors must be prepared to address specific concerns at each stage and work with clients as they transition through these phases. Expatriate clients may consult with a financial advisor at any stage of their transition, whether it be before their international move, as they first arrive, or well after moving.
The transition stage when an expat client ultimately seeks advice has a profound impact on the financial planning engagement. As shown in the chart above, the issues that influence a client’s financial life change through the stages of transition. During the Pre-Move stage, the focus may be on immigration rules and bank and currency exchanges. Once in the US, the focus is on acclimating to the US tax system and unique retirement accounts. On an ongoing basis, advisors must help clients integrate and coordinate their US and non-US assets and income. Eventually, international clients need support in handling the transition to retirement and its own set of unique issues and challenges given various countries’ systems for retiree health care (e.g., Medicare) and retiree income (e.g., Social Security, pensions, and similar systems abroad).
Unfortunately, the longer a client waits before engaging with a planner, the more likely they are to experience a pitfall, the more complicated it may be to gather data, and the more difficult it will be to coordinate their financial life across borders.
International And Cross-Border Clients Have Unique Financial Planning Advice Needs
The expatriate population is hardly uniform. The root of the term “expatriate”, or “expat” for short, is an individual who resides in or has been sent away to a country that is not their native one. The word is also used to describe individuals who renounce citizenship to their native country. Advisors working with expats must thus be cognizant of this distinction, and the individual’s intent to remain abroad for an extended or permanent period of time (or not).
Accordingly, expatriates can be categorized as one of three types, based on their intent to remain abroad:
- Temporary movers are typically anticipated to be in their new country for less than 3 years. Given their shorter stay, temporary movers rarely require in-depth cross-border planning, as they will generally keep the majority of their assets in their home country, and typically won’t stay in their new country long enough to accrue significant wealth there.
From the advisor’s perspective, temporary movers tend to require limited-scope engagements and rarely proceed beyond the Acclimation period (Transition Stage 2). Their advice needs are mainly focused on a brief overview of the new country’s financial system and how to make the most of their time while avoiding inbound and transition-related pitfalls.
The most forward-thinking temporary movers may engage a financial advisor prior to their move. But, typically, it is only after they’ve landed in their new country when they realize there’s a whole new financial system to learn.
- Period Uncertain Movers have already been in the country for several years with no specified return date and are still not certain how much longer they will stay. They are aware that they’re beginning to accumulate potentially sizable assets within their current country, and they will probably have loose ends that need attention before they return to their original/home country.
The focus of advice for these clients is maintaining global financial flexibility. More specifically, this can mean avoiding major tax traps, making long-term immigration plans, and buying, selling, and maintaining real estate across borders. Planning that takes into consideration both countries is optimal. These clients tend to go as far as the Global Integration period (Transition Stage 3).
- Permanent Movers are typically clients who have relocated to the US from another country (or are US citizens planning to relocate from the US to another country for good) and who have plans to stay in their destination country for the rest of their lives. Most permanent movers who are planning to stay in the US will have been in the US for some time already. Their identity has likely shifted to being less of an expat and more of an American. For these clients, there’s likely a finite set of tasks that need to be performed to resolve any foreign financial complications that remain, before the rest of the engagement focuses on more traditional domestic financial planning areas such as retirement planning topics included in the Independence and Retirement Planning period (Transition Stage 4). Depending on the client’s age, length of stay in the US, and location of family members, these topics may necessitate cross-border planning.
For clients who have just recently moved to the US and who have already decided to stay permanently, the initial focus of work will generally be on the global integration of their financial lives into the US financial system. For instance, these clients would require advice about the IRS’s reporting requirements and investment restrictions for their foreign accounts before forming a plan on how to transition these accounts.
For clients permanently leaving the US, the process mostly works in reverse – with some exceptions. A US-based advisor may help his or her client find a new advisor overseas. A US-based advisor could also help the client to sell off US-based assets to better integrate their financial life into another country’s financial system. In many cases, however, it is best to leave some assets in the US. Relative to most other countries, the US investment ecosystem offers lower fees, more transparency, and more flexibility. It is not uncommon for permanent movers out of the US to leave some assets under the management of a US-based advisor – even if they go on to receive comprehensive financial advice from a planner in their new country.
Above all, it is important for financial planners working with expats to recognize that this group is not a monolith composed of clients with uniform needs. Rather, individuals living in other countries will have unique situations and evolving preferences that require differing planning approaches.
Consider the following examples:
- An American expat moves abroad for a temporary work contract and rents a home. They intend to return to the US after the contract expires.
- Another American expat moves abroad for a temporary work contract and buys a home there. They sell their property in the US, as they do not intend to return even after the current work contract ends.
- Yet another American expat moves abroad for a temporary work contract and buys a home there. However, they maintain their property in the US, without necessarily having made up their mind as to whether they will stay abroad or not. Their idea is that they may go back and forth for a period of time and rent out whichever country’s home they’re not currently living in.
There are countless more situations, like individuals on working holidays, for which there is simply no one-size-fits-all solution. Comprehensive planning thus makes all the difference for individuals anticipating a cross-border move, whether permanent or temporary.
International And Cross-Border Financial Planning Offers A Broad Spectrum Of Challenges For Advisors
Expatriates in the US and American taxpayers working abroad encounter the complete gamut of financial planning challenges when it comes to taxes, investments, retirement, and estate planning. As such, planners must be prepared to:
- Explain the difference between residence and domicile in determining various types of residency for tax and immigration purposes;
- Help clients understand the financial impact of terminating citizenship versus keeping it;
- Present a global balance sheet totaling clients’ worldwide assets and liabilities (in a particular base currency);
- Determine the tax reporting obligations of foreign assets;
- Offer guidance on choosing an appropriate global custodian, and how to cost-effectively and risk-appropriately conduct foreign currency exchanges;
- Advise on the best course of action for the transfer of overseas retirement accounts; and
- For expat clients eager to maximize their financial position across their global holdings, it is crucial to be able to explain the financial pros and cons of each different country and provide clear guidance in achieving the best outcome possible within the regulations of one’s given location.
With these complexities in mind, financial advisors must rise to many challenges to gain the expertise necessary to serve expat clients well.
Not unlike working in any other specialized area of financial planning (e.g., divorce, special needs, etc.), the most basic challenge in working with International and Cross-Border Clients is simply knowing what the pertinent issues are.
International and cross-border financial planning is littered with pitfalls that can have a massive impact on a client’s financial life. Two of the most commonly witnessed of these potential pitfalls relate to Passive Foreign Investment Corporations (PFICs) and Foreign Bank Account Reporting (FBAR).
A PFIC is a foreign corporation with at least 75% of its income derived from passive investments. In practice, most foreign-domiciled mutual funds are classified as PFICs. Before 1986, many Americans took advantage of a tax loophole by investing in foreign funds that didn’t recognize gains on an annual basis, which offered an unfair advantage compared with the tax treatment of domestic mutual funds. A 1986 tax law not only closed that loophole but also introduced steep tax penalties. While there are a variety of ways penalties may be applied, the most common is offshore investment holdings that run afoul of the PFIC rules and that are taxed at the highest marginal income tax rate in each year the investments are held.
Another major potential pitfall involves Foreign Bank Account Reporting (FBAR). For most people, simply reporting foreign accounts is enough to satisfy FBAR. But what if you didn’t know you had to submit FBAR paperwork? Extremely steep penalties may be issued for violators: from a $12,921 (2020) “non-willful violation” to the greater of $129,210 (2020) or 50% of the account value for “willful violations.”
Moreover, financial advisors may work with any one of a wide permutation of expatriate clients (e.g., an Australian temporary mover in the US, an American permanent mover in Mexico, etc.). Consequently, US-based international and cross-border advisors must be familiar with, or know where to go to obtain answers on, a wide range of financial issues from a transnational standpoint, including taxes, banking and money transfers, health and life insurance, investment accounts, and estate planning, which in turn are often specific to particular countries the client may be expatriating to or from.
Accordingly, compared to working with domestic clients, there is additional information one must gather to appropriately serve a cross-border client. Additional fact-finding involves the country of origin, migration history, location of a family (especially children), domiciliary intentions (i.e., where do they think they’ll be living in the short-, medium-, and long-term), accrued assets/pensions, and all foreign income, savings, assets, and liabilities.
Gathering this data is not always a simple process. Expat clients may not have ready access to all of their data, particularly if they left their home country many years ago. Financial planners working with international and cross-border clients must therefore be especially diligent in the data-gathering phase of the financial planning process.
For cross-border clients, then, it is pertinent to create a global balance sheet early in the relationship, and that can be used to track the individual’s assets, liabilities, and equity on a multinational scale and on an ongoing basis.
This grows more complicated when attempting to show asset allocation of investment accounts. A complete statement detailing the entirety of global clients’ finances helps both the advisor and client set realistic financial goals and mitigate against unforeseen challenges.
Goal Setting And Strategizing For Inbound/Outbound And Cross-Border Financial Planning Clients
Cross-border clients face unique goal setting and strategy issues. Some of the issues that must be addressed for inbound/outbound planning and cross-border planning are listed below.
For Inbound & Outbound Planning:
- Determining the length of time a client expects to spend in the destination country.
- Determining the US tax implications of foreign sources of income and capital gains. Issues to consider here include (but are not limited to) whether the income is earned or unearned; if the income was unearned, which type of assets produced the income (e.g., retirement account, personal property, real estate, or some other asset); how much income was received – if it was more than the Foreign Earned Income Exclusion, whether a Foreign Tax Credit and/or Foreign Housing Deduction would apply; if the individual lived in the country all year or was a Dual Status Alien; and what bilateral treaties exist between the home and host country that may create special issues for the income. These considerations affect everything from the country (or countries) permitted to tax the income and gains, to the relevant tax rates, and even possible penalties if one does not file the appropriate tax documents.
- Finding a custodian that will accommodate an international move (discussed later).
For Cross-Border Planning (in addition to the aforementioned issues that may be applicable in inbound/outbound planning):
- Gaining familiarity with the bilateral tax/totalization/estate treaty(ies), if applicable.
- Making retirement account transfers. Unfortunately, transfers among various country’s retirement accounts are not well-specified in tax treaties. Instead, the planner and/or a tax professional must look for guidance from alternative and sometimes less authoritative sources (for example, the knowledge circles of professional associations or the blogs of tax attorneys).
- Determining the treatment of capital gains taxes and identifying which country gets the first chance to tax a particular source of income (essentially all nations have rules to avoid the double taxation of income; whichever country gets to tax income first is, generally, the only country to tax that income).
Taken together, these challenges show that the onboarding process for working with cross-border clients is generally lengthier and more intensive than is the onboarding process for domestic clients.
Finding Suitable Products And Service Providers For Clients In Foreign Countries
Cross-border advice often means making a recommendation about where a client should retain certain kinds of insurance, or where they might consider holding investments. Without intimate knowledge of the pros and cons of different countries’ financial systems, it is not possible to make an informed recommendation.
For instance, take the example of life insurance between Australia and the United States. When purchased through the Australian retirement account system, known as “Superannuation”, life insurance premiums are tax-deductible, while the same life insurance premiums are almost never deductible in the US. On the other hand, the cost of insurance coverage in Australia is often much higher than it is in the US, even when accounting for the tax-deductibility of premiums in Australia. Furthermore, death benefit proceeds received by a US resident citizen beneficiary of a US policy are almost always tax free, but in Australia, a beneficiary deemed a non-tax-dependent of the insured will find the death benefit is taxable.
Further nuances exist, but an advisor working with an American taxpayer in Australia or an Australian expatriate in the US would need to be cognizant of this distinction in the first place to provide the appropriate recommendation. Issues to resolve include which country’s insurance companies the policy should be purchased from, in which country the premiums should be paid, and in which country the death benefit should be received. And while even in this context, it is generally preferable to purchase life insurance in the US, there may still be instances where a client is better off purchasing a policy in Australia given restrictions in underwriting criteria.
And the above example concerns just one product and only two nations! In any comprehensive engagement, planners don’t only make recommendations for life insurance – other commonly recommended financial products include disability insurance, liability insurance, annuities, investment funds, and so on. Complicating matters further, the diverse possibilities inherent in international and cross-border planning necessitate specialized knowledge of the financial products available in a specific country. Not only must advisors understand the advantages and disadvantages of different products relevant to a specific client, but they must also be aware of which products are more favorable for them based on their location, the products’ suitability, and the client’s ability to access these products.
Advisors can get up to speed on these issues by attending FPA and other relevant conferences both in the US and in foreign countries, by earning a CFP in other countries, by reading relevant books and other publications, and by joining relevant knowledge circles and professional networks (links to some general resources are provided later in this post).
If this seems daunting, consider that most cross-border planners focus only on a particular country or a particular region in which the rules are fairly uniform.
Finding Suitable Products/Service Providers
Even after determining the suitability of products in the cross-border context, there remains an additional barrier to finding suitable service providers. Cross-border clients generally require all the same service providers as a domestic client, plus more. Foreign exchange and international accounting, for example, are common cross-border services unique to cross-border clients. It is also common to require the services of a more specialized advice provider, such as an immigration attorney or tax attorney.
As is the case with domestic planning engagements, some specific providers are more suitable than others. Some providers offer higher quality products and services, some offer lower cost and more value (more ‘bang for the buck’), and others offer more prompt and courteous customer service (but may be more expensive as a result).
To determine the suitability of a provider, a planner might look at reviews, peer recommendations, their own experience, and professional association networks (I list a few relevant ones below). However, all of these sources of information may be more restricted in a cross-border engagement.
Compounding this issue is that, even if a planner identifies a suitable provider, they may decline to work with your cross-border client at all if they don’t feel they have the depth of knowledge to handle the applicable cross-border challenges!
Cross-Border And Foreign Broker-Dealers And Custodians
Finding a broker-dealer and/or custodian who will service your offshore client can be especially troublesome.
International clients face a restricted set of financial products and services compared to their US-based counterparts, due primarily to the rising scrutiny on international money-laundering. To prevent money-laundering, cross-border financial institutions have implemented additional costly compliance oversight policies and procedures, such that banks and other financial institutions perceive more compliance risks from working with this population. In addition, in recent years, there has been increased scrutiny from the IRS and Treasury on the use of foreign bank accounts for US tax avoidance (e.g., the 2010 Foreign Account Tax Compliance Act or “FATCA”, which sets additional compliance rules for financial institutions serving US citizens, residents, and green card holders).
In fact, US custodians will work with clients in specific countries outside of the US but not others. And various financial institutions, both foreign and US-based, may restrict or even close the existing accounts of American clients living abroad or may refuse them service to begin with. And, given the ever-changing compliance laws in countries around the world and differing interpretations of those laws, custodians that may have supported clients in a particular country at one point may abruptly cease service.
These concerns are, of course, not limited to US expatriates. Banks, brokers, and other financial institutions may hesitate to work with any international client regardless of their nationality. Alternatively, some may be willing to serve an international or cross-border client but simply lack the know-how for their specific needs. Advisors working with international clients must thus identify custodians that are both willing and qualified to work with a more diverse clientele. Advisors with less cross-border experience can get up to speed by attending relevant conferences, joining knowledge circles and cross-border professional networks, and leveraging the referrals of other cross-border advisors.
How Immigration Status And Residency Can Affect Cross-Border Recommendations
Cross-border recommendations are affected by a multitude of issues that simply don’t exist within domestic planning engagements. Of particular note are issues related to residency and taxation. Planners must be aware of the various definitions of residency from both a legal tax and an estate tax standpoint.
First off, residency and domicile are distinct concepts. Any given person may only have a single domicile – the location where they intend to stay permanently. On the other hand, they may have multiple different residencies despite nominally living in a single location.
Moreover, the definitions of residency are different in the legal immigration status, income tax, and estate tax contexts. It is possible for someone to not be a legal permanent resident of the US, yet be considered a tax resident who must pay US income taxes. Generally speaking, a foreign-born individual’s immigration status is determined by their visa or a legal permanent resident card issued by US Citizenship and Immigration Services. On the other hand, one’s tax residency is determined by whether an individual passes the Green Card Test or the Substantial Presence Test. A person who is not a legal permanent resident may still pass the Substantial Presence Test and subsequently be taxed on their worldwide income by the IRS!
Given these complexities, it is possible (and even likely) that a client will not know his or her own various tax residency or domicile statuses. Thorough data gathering, then, may require the planner to carefully determine a client’s residency classifications and subsequent tax obligations in different countries.
These sorts of issues are not limited to immigrants to the US. US citizens are subject to a worldwide tax net that is relatively unique among the nations of the world – simply put, that US citizens are taxed on all income worldwide, regardless of whether they or the assets/income are currently in the US. Accordingly, US citizens who reside in other nations – particularly if they also earn income in those nations, and may be subject to income taxes abroad as well – must be careful to understand their tax obligations and asset reporting requirements to their host country and to the US. Fortunately, foreign tax credits can mostly mitigate the potential for double-taxation across borders, as most other countries’ federal rates are higher. But failing to carefully comply with these reporting requirements in the first place can be extremely costly and result in civil or even criminal penalties.
Operational Concerns For Financial Advisors With Cross-Border Clients
Regulatory And Licensing Considerations
Financial planners working with cross-border clients have a relatively difficult (and expensive!) regulatory environment. The reason is that different countries have different financial regulatory systems. And because virtually all countries impose some regulations and oversight of financial advisors, this means potentially being registered and overseen by every country for which the advisor is providing financial or tax advice! If you’re providing advice to a client who is an overseas resident or advising a US-based client with assets overseas, how do you know whether you’re providing advice in a manner compliant with regulatory obligations?
Advisors working with international clients may find themselves in a difficult position regarding licensing and compliance. Can an advisor be said to have made a good-faith effort to operate in compliance with a foreign jurisdiction if they haven’t read the foreign financial regulations or aren’t appropriately licensed? Does the advisor know what scope of advice can be provided without triggering advisor registration and compliance in the foreign country, and what ‘crosses the line’ and would require registration/oversight?
A first step in becoming familiar with the relevant regulations is knowing which regulatory authorities even claim jurisdiction over a given advisor-client relationship. Certain countries (such as Australia) take a residency-based approach to the regulation of financial advice – that is, an advisor providing advice to a resident of that country, unless an exemption applies, is required to be licensed regardless of the location of the assets being advised.
Other countries, such as the US, regulate advisors based on their location. US-based advisors must register with the SEC or a state regulator, regardless of the location of their clients or their assets. Advisors based outside the US may not need to register with a US regulatory body at all, depending on how many US-based clients they serve or whether their home country has a relevant regulatory agreement with the US.
Once the advisor identifies which regulator or regulators are involved, the best way to find out whether you’re compliant is to contact those agencies. At a minimum, advisors should reach out to the agency in the country or province in which the clients live, as well as the one in which the advisor’s business is located. Advisors who would like more clarity can hire compliance consultants, meet with other advisors operating in the same jurisdictions, read books and other media on the topic, and join relevant knowledge circles.
Errors And Omissions Insurance Coverage
The wide geographic scope of expatriate clients and the knowledge required to competently serve them increases the likelihood of a planning mistake. This is especially pronounced in the area of retirement account transfers, where advice on what tactic a client might take can literally save or cost a significant percentage of an account.
On the other hand, the most common category of claim on an Errors and Omissions policy in the United States relates to investment losses. Investment losses in a cross-border context can be magnified when currency fluctuations are introduced. However, not all domestic E&O policies for financial advisors will even cover trading activity in non-US-based securities held in foreign accounts and/or in foreign jurisdictions.
The key here is for advisors to review their E&O policies and understand their exposures. Unlike those that work only with domestic clients, advisors that serve cross-border clients need to confirm their coverage specifically covers trading in foreign securities. (Earlier in my career, I was surprised to see a specific exclusion in my E&O insurance on foreign domiciled stocks!)
If an advisor’s E&O coverage does not include a particular activity, there are two options. One option is for the advisor to limit the scope of their engagements to avoid that activity. The other is for the advisor to find a new E&O policy that covers the activity – if one exists! Also, make sure that one’s Client Services Agreements specify a US jurisdiction for the settling of disputes.
Investment Information And Reporting
Investment management of a global portfolio is a challenge not just from avoiding PFIC pitfalls and appropriately allocating a portfolio, but also in researching foreign investment and performance reporting.
A shortlist of pitfalls includes:
- Failure to notify clients as to their tax reporting obligations under FATCA, where penalties may be as much as 50% of the asset value for willful non-disclosure of a foreign bank or investment account. In short, a client must submit to the IRS the appropriate account information for any foreign account with more than $10,000 in assets.
- Failure to identify the presence of Passive Foreign Investment Corporations (PFICs) within the portfolio of an American tax resident abroad. This would leave that investor exposed to punitive PFIC taxes and reporting.
- Failure to advise clients on the tax inefficiencies of certain types of US retirement accounts (e.g., Roth IRAs, Roth 401(k)s, and HSAs). Most countries do not have a bilateral treaty with the US that recognizes the potential for tax-free distributions from these accounts (in fact, only Belgium, Canada, Denmark, Estonia, France, Latvia, Lithuania, Malta, and the UK currently do). In many instances, these accounts are categorized as “foreign trusts” with either growth, distribution, or both subject to taxation. In the case of the Roth IRA and Roth 401(k), that means a client may end up being double-taxed in the event of an overseas move – once when the contributions go in, and again when the distributions come out!
Inadvertently stumbling through one of these pitfalls can clearly cause major harm to a client!
The Right Business Model Allows Financial Advisors To Serve Expats Profitably
Another major challenge in working with expats is devising a profitable business model as a financial advisor. Unlike domestic accumulation-phase clients, expats commonly have either the bulk of their money overseas (with the intention of keeping it there) or are seeking to transfer their US assets overseas in short order. This is anathema to the traditional Assets Under Management (AUM) business model that presupposes a long-term (US-based) portfolio.
Of course, the AUM model is not the only model available to compensate a planner for their skills. More commonly, cross-border planners charge by the project, by the hour, by a predetermined retainer, or make use of a subscription-based model. And, depending on the particular needs of the client or client-base, some cross-border planners use a hybrid of these and/or the AUM model.
Resources To Help Financial Advisors Hone Their Competence To Serve International And Cross-Border Clients
Of course, advisors cannot be expected to know every section of the US Internal Revenue Code, not to mention the entire tax code of another country as well. Nor can they be expected to track all possible changes in international law that might affect any/every client in any/every possible foreign country.
For this reason, advisors working with expatriates must be aware of credible and reliable resources to turn to when seeking information for their clients. After all, any misinformation perpetuated by an advisor could trigger unfavorable tax obligations or other financial mishaps, resulting in the loss of reputation, and/or risk of legal action from a client.
While it may seem that there is a high barrier to entry into international and cross-border financial planning due to a dearth of qualified experts on the subject, there are many resources available to financial advisors that deal with financial services in different countries. Below are some useful resources where advisors can find out more.
- Global Financial Planning Institute (GFPI; https://www.gfp.institute/)
An organization I’ve established specifically to support the advisor community in this regard, the GFPI offers education, tools, resources, and a community for cross-border financial planners and other financial services professionals. Among its offerings is a Global Financial Planning Master Class that considers cross-border issues in a 10-week webinar format.
- The Society of Trust and Estate Practitioners (STEP; https://www.step.org/)
STEP sets international trust management and estate planning standards, educates member practitioners, and upholds its standards. Additionally, it seeks to inform public policy on best practices in international estate planning and helps connect families with practitioners. They’re based in the UK but have chapters all over the world.
- Association of International Certified Public Accountants (AICPA; https://www.aicpa-cima.com/)
The AICPA provides education, support, and advocacy for accountants around the world. In particular, it confers the Chartered Global Management Accountant (CGMA) certificate to accountants with a specialization in global accounting.
- California Society of Certified Public Accountants (Cal CPA; https://www.calcpa.org/)
Cal CPA hosts an international tax conference with a focus on personal financial concerns. Like the AICPA, they also provide education and support for accountants, particularly those serving clients in California, where many expats live.
- The Internal Revenue Service (IRS; https://www.irs.gov/)
The IRS is the primary source for information on international tax laws and treaties, including the Foreign Account Tax Compliance Act (FATCA) and the Foreign Banks and Financial Accounts Reporting (FBAR) rules.
The “Big Four” routinely write white papers on issues relevant to cross-border financial planning and other financial services, particularly given their focus on financial planning with Fortune 500 countries that often have cross-border expatriate executives. These white papers help professionals digest the relatively sophisticated and dense language of the laws and treaties.
- Other cross-border specialist service providers
Cross-border financial planners should develop relationships with other financial service professionals who specialize in this space. Tax and immigration attorneys, CPA firms, bankers, brokers, and others who serve cross-border clients have a wealth of experience and resources that can greatly inform financial planners.
Developing And Maintaining Competence
To be clear, advisors may be perfectly well-intentioned in attempting to serve their international clients in a compliant manner; however, unless they are well versed in the international issues facing their client, they run the risk of leading their client through certain pitfalls and proffering less than what the CFP Board’s Code of Ethics and Standards of Conduct would define as “competent” financial advice.
A CFP professional must provide Professional Services with competence, which means having the relevant knowledge and skill to apply that knowledge. If the CFP professional is not sufficiently competent in a particular area to provide the Professional Services required under the Engagement, the CFP Board’s Standards Of Conduct indicate that:
The CFP professional must gain competence, obtain the assistance of a competent professional, limit or terminate the Engagement, and/or refer the Client to a competent professional. The CFP professional shall describe to the Client any requested Professional Services that the CFP professional will not be providing.
Without awareness of the issues and pitfalls, additional facts to gather, compliance and licensing requirements; having appropriate E&O insurance; being able to locate suitable products and service providers; knowing the relative pros and cons of each country’s financial systems; being able to obtain foreign investment information; and having access to global performance reporting tools, how can a financial planner possibly serve the client competently, compliantly, and professionally?
Cross-border planners must work to develop and maintain their competence. This is no small task. Given the complexity of this area, most planners focus only on a single country or region of countries with similar financial and political systems. To get started on this journey, planners can consult the website resources in the preceding section. Other opportunities include attending foreign financial planning conferences, earning a CFP in a foreign country or counties, reading books on cross-border and country-specific issues, and joining a professional network of other planners and professionals.
A cross-border financial planner may serve clients even more effectively by partnering with other financial service professionals who serve cross-border clients. Depending on their client’s specific needs, a planner may choose to establish ongoing working partnerships with CPAs, attorneys, bankers, or others. Such partnerships allow the planner to quickly refer clients to these individuals when necessary, and in turn, these professionals may also refer prospective clients back to the planner.
Larger financial planning firms may choose to hire one or more specialists onto their staff. For example, a financial planning firm that consistently serves clients in the “Pre-Move” or “Acclimation” phases may benefit from keeping an immigration attorney on retainer. Such a firm would then be more of a one-stop-shop for clients as they grapple with both the legal and financial aspects of their transition.
Generally speaking, the presence of in-house specialists enhances working relationships among the financial service professionals as well as between the professionals and the clients. On the other hand, in-house specialists are also generally more expensive to the firm relative to external partners.
Given the challenges in obtaining knowledge and education specific to international and cross-border planning, the scarcity of specific resources available, the planning pitfalls, the liability exposure, the need to devise a profitable business model, and the difficulty of finding a custodian or product provider who will actually work with your client in the first place, it is safe to say that not all financial professionals are adequately prepared to serve international clients.
Whether it’s a foreign citizen in the US or an American abroad, the financial advisory landscape for any international client requires significantly more preparation than for a domestic client. To act in accordance with the CFP Board’s definition of competence, it is the responsibility of international and cross-border advisors to stay up-to-date on wealth management issues pertaining to international and cross-border clients and to understand the challenges of working with this group in the first place.
Despite these challenges, though, people around the world are more mobile than ever, fluidly changing locations for both personal and professional reasons over the course of their lives, leading to an abundant niche of opportunity for the financial advisor willing to develop the requisite competence required to serve these clients. There is already a large expat community around the globe, and this community only appears to be growing larger at an accelerating pace.
Moreover, these well-traveled clients tend to be wealthier than the average person and more in need of financial planning. Developing competency in cross-border financial planning may therefore be well worth the effort for financial planners hoping to work with this growing client base!