Although these questions apply to all expats, this post is specifically written for Americans living away from home.
Watching your other foreign friends invest tax free offshore can seem attractive. Should I join them? You wonder. Living overseas is more complicated than with any other nationality due to complex IRS rules and regulations.
It is therefore important that you find an advisor that fully understands these complexities and understand your situation. If you are looking for an advisor in Asia I recommend that you get answers to the following points before you commit your hard earned savings:
1. How does the advisor or firm make their money?
If they are offering you an insurance based product, by such companies as Generali, Royal London or Zurich International they are commission based advisors. Meaning, when you initiate the investment they receive a large upfront commission. Increasingly in Asia we are also seeing large groups presenting their own products as "independent advice". These products differ widely from what is available onshore with poor disclosure and layers of hidden fees.
Yes, everyone needs to get paid for their service. Yet it is vital that the interests of your advisor is in line with yours.
While studying organizational behavior in business school one basic concept we learned in achieving appropriate motivation is to align the interest of your staff with that of the company. This is why companies offer stock options, company shares and performance related bonuses, if the company does well so does the employees.
So when looking for a financial advisor make sure their interests are financially tied to yours. Commissions lead to conflict of interest. Management fees with no lock-ins keep your advisory keen to continue working hard after you sign on the dotted line.
2. What are your total costs? Are they easy to understand?
The cost to invest is an important determinant as to whether you will make money or not. Many products in obscure islands have annual running costs of 4-5% and maybe more if the advisor is charging you a management fee.
With an average annual return of a mix-asset portfolio of 8.5%, this means you are giving them half your profit with none of the downside. Does that sound fair?
3. Is complexity really necessary and helpful?
If the investment structure and its fees are unusually complicated and hard to understand this may be a warning sign. Make sure you always read the technical guide and fine print of any investment.
With fee-based advisors the fees are simple to understand, usually just a management fee and a minimal transaction cost from a discount brokerage.
4. How liquid is the account?
All investment accounts should be 100% liquid at all times, unless of course you are in a CD or Term deposit. The only other times they are not liquid is with insurance products. The lack of liquidity is directly associated with the commission the advisor gets upfront. The non-liquid part actually does not exist and is already in the pockets of your advisor.
5. Where is the account domiciled and what type of assets does it have exposure to?
It makes less and less sense these days for American to invest offshore. I say simply: Don’t! The only offshore products most advisors have access to are insurance based investments that are not approved by the IRS, which means it is very difficult to claim on your tax return. FATCA is making the situation worse and even good reputable companies overseas are now turning away American clients.
There is one location built for Americans: USA!
Your best option is to work with an advisor that uses a US based platform that still provides you access to dozens of markets internationally, such as Interactive Brokers. It will save you a lot of headaches when it comes to filing your taxes (they even have a special download function straight into TurboTax) and is ultimately more tax efficient than your offshore options.
Did you know that an offshore fund is considered “non-compliant”, and thus always charged the short-term rate of capital gains tax, no matter how long you hold it? Stay on-shore. It is far better and easier.
6. What type of qualification and regulation does your advisor have?
It is important to make sure that your advisor knows how to best manage your savings, education and experience is an important part to this. Ideally you should ask for some type of proof of these qualifications such as a copy of their diploma a letter of certification etc. and speaking to a referral or two would also be advisable.
Is your advisor regulated? Preferably in the US. Either state or federally by the SEC is fine. We chose SEC registration which you can confirm via FINRA's Brokercheck website. An unregulated advisory or one regulated by a small "hands-off" island in the offshore business will raise the risk your advice is poor.