Ten disruptive technologies\that will reshape the world\of financial planning
Welcome to the first digital \edition of International Adviser, \introduced by editor Mark Battersby\\\\\\\\\\\\\
We have a great new line-up of content in our first digital edition of International Adviser, which is more relevant than ever before.
The analysis in Your Region is designed to catch some of the key recent moments that have shaped what is going on at a local level.
Our Best Practice section shines a light on the different types of remuneration models used by advisers across the world, complete with financial planning perspectives from three different jurisdictions.
We pick through the welter of regulatory changes to make sense of how these authorities are increasingly monitoring the way advisers and providers are working, wherever they are in the world.
There is also an intriguing twist revealed about UK inheritance tax in the Tax Matters section and our Masterclass is a technical run-through of the non-dom changes now the Finance Bill has finally been voted through.
So, plenty to get to grips with in a much more interactive way than before.
Mark Battersby, editor, International Adviser
Offshore bond boost \banishes brexit blues
Despite continued uncertainty surrounding the UK’s exit from the EU, Mark Battersby finds \reasons to be cheerful as there are signs of a renaissance for offshore bonds in the region
‘Compared with regulatory upheaval overseas, the outlook for steady growth is clearer in the UK’
Sean Christian, managing director, Canada Life International
As the headlines focus on the twists and turns of the Brexit talks, is there reason to be cheerful about offshore bond sales into the UK, and could there even be a renaissance for this long-standing HM Revenue & Customs-approved tax wrapper?
‘Increased investor confidence and the pension legislation reforms make offshore bonds an attractive tax-efficient option’
Peter Kenny, managing director, Old Mutual International
While the answer to this question is not clear cut by any means, some important trends have been highlighted by leading figures within the international life industry, including Canada Life International’s managing director Sean Christian.
‘There is a greater demand for value-for-money retirement solutions. The breadth of our investment capabilities means we can address these needs’
Martin Gilbert, chief executive, Standard Life Aberdeen
Christian said the UK has “great potential to grow after a few years of flat sales”, as the UK tax burden is not decreasing while the average wealth of clients in its target group is going up.
Combine this with the fact that people are living longer, limits on the size of pension pots and estate planning gaining serious traction, and the outlook for the UK’s take-up of offshore bonds starts to look far rosier than the prospect of “the regulatory upheaval and uncertainty in many overseas markets”.
Also expected to fuel demand for offshore bonds are the new rules for taxation of non-domiciles. These were delayed by the snap UK general election in May but came into effect in September. The regulation will be backdated to 6 April, which was the original implementation date.
The Isle of Man and Dublin-headquartered life office, which focuses on the UK market for offshore bonds unlike some competitors, trumpeted its market share of 28% in the first quarter of 2017, which was up from an average of just over 24% in the 12 months previously.
Other key players within the significantly consolidated UK offshore bond space are Prudential International, Standard Life International, Old Mutual International and Utmost Wealth Solutions (formerly known as Axa Isle of Man).
In the latest spate of M&A activity here, Friends Provident International was sold by its Aviva parent to RL360°, Aegon Ireland is in the process of looking for a buyer and, in due course, Old Mutual International is expected to be part of a planned public flotation.
But further consolidation would not be good news for anyone, according to Christian. He said: “Competition is necessary to ensure the industry continues to develop and push boundaries and I would not like to see the number of major players serving the UK market reduce any further.”
Growth in take-up of UK offshore bonds is fuelled by prospect of regulatory upheaval in many overseas markets
Peter Kenny, managing director of Old Mutual International, explained that while the number of offshore bond providers may have decreased significantly during recent years, a greater market share has been acquired by the leading companies.
Kenny’s company launched a new offshore bond aimed exclusively at the UK sector earlier this year. In a market that has seen few such innovations in recent times, this adds to the view that there may be a renaissance of sorts under way here.
“We recently launched the Select Bond in the UK and we are experiencing somewhat of a resurgence in this market,” Kenny said.
“There are a number of contributory factors, such as the increased investor confidence reflected in the upward trend of UK platform sales during the first half of 2017.
“The pension legislation reforms that have reduced annual subscription allowances in the UK also make offshore bonds an attractive tax-efficient option for surplus funds.”
Utmost Wealth Solutions has also formally added its single premium Dublin-based offshore bonds to its current Isle of Man-based range, and, meanwhile, Standard Life announced its offshore bond was to be made available on the UK insurer’s adviser platform business Elevate in “direct response to demand from advisers”.
Standard Life International’s chief executive Michael McKenna highlighted how “offshore bonds can play an important part in a portfolio, particularly at the decumulation stage when the efficient use of tax allowances in the bond can support both effective tax planning for income and for estate planning”.
The next level
The £11bn ($14.1bn) mega-merger Standard Life completed in August with Aberdeen Asset Management has the potential to push life products, including offshore bonds, to an exciting new level within the retirement space, according to Martin Gilbert, chief executive of Standard Life Aberdeen and its asset management business, Aberdeen Standard Investments.
“The gradual withdrawal of government and companies means the onus is increasingly on individuals to fund their retirement, meaning there is a greater demand for suitable, value-for-money pre- and post-retirement solutions. The breadth and depth of our investment capabilities means we will be able to build products to address these needs.”
These indicators all point to a potential uplift in the fortunes of the UK’s offshore bond business across many fronts.
As policing of regulation steps up around the world, which of the following scenarios is most likely?
- A significant cull in the overall numbers of financial advisers
- A small reduction in the overall numbers of financial advisers
- No change in the overall numbers
- Most financial advisers surviving and a small rise in overall numbers
- Most financial advisers thriving and overall numbers growing significantly
The future of fees
In the first of three articles looking at how firms can thrive amid ongoing regulatory change, Phil Billingham sets out a road plan for adviser remuneration, and three IFAs from across the globe give their reactions\
The debate around the right type of remuneration for financial advisers, notably fees versus commission, is an emotionally charged one.
Traditionally, the message has been that fees are good and commission is bad. Hence, all advisers should charge fees. The implication is that if you don’t, you must be a crook or at least a commission-hungry salesperson.
I’d like to step back, take a look at some of the parameters and think about what the future may hold. First, we need to be clear that there is only ever client money, from which all our income derives. This is especially true if your ‘offering’ is the provision of advice.
Selling is completely ethical, as long as it is absolutely clear to the client what is happening and how you are getting paid
If your ‘offering’ is that ‘I sell as much XYZ product as I can’, then XYZ must pay you. But who does that? Selling is completely ethical, as long as it is absolutely clear to the client what is happening and how you are getting paid.
Models and the regulator
Second, what is the likely regulatory environment? Currently, there are three basic ‘models’:
1. Traditional commission. The advice is ‘free’ but we get paid for product sales. And by ‘we’, I mean all of us who grew up with this model in place.
2. The commission disclosure model. It’s still commission but it must be disclosed to the client in both % and cash terms.
3. The UK, Australian and soon to be South African ‘RDR’ model. Clients choose to pay a ‘fee’ which can be taken out of the product. The main difference – so far – from model 2 is that it’s bottom-up. The client tells the provider what to pay. If there is insufficient ‘perceived value’ there is no entitlement by the adviser to the payment. It is at the client’s discretion and can be switched off.
We need to be clear that regulators prefer model 3, and prefer model 2 if they can’t yet get model 3.
Having been in this business for 35 years, and worked under all three models, I believe there are real commercial advantages in operating ahead of current regulatory rules.
We kept being told ‘clients will not accept disclosure’ and ‘clients won’t pay fees’. Both these statements have proved to be false.
The most profound advice I ever heard was to set up a practice where ‘clients would cheerfully pay our fees’. The genius of that word ‘cheerfully’ is easily underestimated. Take the 'cheer' factor test (right).
The most profound advice I ever heard was to set up a practice where ‘clients would cheerfully pay our fees’
A painless transition
In summary, there is good news and bad news. The bad news is that if you don’t yet use a fee-based model, but you plan to spend at least another five years in the business, you will end up doing so.
The good news is that this is good news. Firms in the UK and Australia that have already made this transition report: higher client retention; higher underlying income streams; higher profitability; more referrals from other professionals; and higher capital values on exit.
While not dismissing the impact of this drift in regulation in contributing to the ‘advice gap’, the focus of this article is simple: how can financial advice firms survive and thrive during these periods of regulatory change?
The first thing to look at is remuneration. If we are in control of that, if we buy ourselves the time to implement in a way that suits us and our clients, then the more successful, the more profitable and the less painful the inevitable transition will be.
Continued on page 4
All in the blend
The active versus passive debate presents \a dilemma, but Clive Moore believes idad \has found a formula that delivers the best \of both worlds\\\
Thanks in part to a welcome focus on reducing costs for investors, passive investments – mainly in the guise of ETFs – have become a more popular recommendation for advisers and portfolio managers in recent years. In addition, a protracted period of the average active funds underperforming has exacerbated this trend.
The aim of this article is to examine whether passives are the best option for investors, or whether active management is actually now a better approach.
Why has passive investment become so popular? It offers investors low-cost access to financial markets, instant diversification and predictable, benchmark-like performance.
Passive, capitalisation-weighted strategies are effectively momentum-based and naturally, in a self-fulfilling way, they tend to do well in rising markets, led primarily by a concentrated number of stocks.
A good example of this was the telecoms, media and technology bias in the run-up to the 2000 correction.
‘With active, if you pick the right funds, it is possible to outperform in both bull and bear markets. A case of having your cake and eating it’
Clive Moore, managing director, idad
Also, the concentration of risk in financials and property-related stocks ahead of the 2008/9 crash. Prior to each of these extreme sell-offs, passive investments outperformed active strategies as a rule.
However, just as passive strategies are forced buyers of overpriced assets during bubble scenarios, they also become forced sellers when the tide turns – capturing all of the risk, all of the time.
By way of contrast, active managers have the flexibility to pick cheap and undervalued sectors and high dividend yielders. They can also use cash when valuations look stretched. They therefore should be able to perform better during market shocks and in the immediate aftermath as investors seek to buy value when recoveries gain traction. This was seen after the problems in 2000 and 2008.
Another point to consider is the role of the financial adviser or portfolio manager in using active funds. With passive investments, the best you are going to get is the index return minus the charges.
With active funds, if the portfolio manager picks the right funds, it is possible to outperform in both bull and bear market scenarios. A case of having your cake and eating it.
The best of both worlds
Passive funds can be an ideal tool for portfolio managers to gain low-cost, efficient exposure to particular asset classes, but they do have significant pitfalls. Actively managed funds will generally cost more, but this extra cost should be outweighed by the value brought by the manager.
At 8AM Global the funds consistently deliver strong performance for investors as a result of the active manager input, but we believe that for a complete investment solution the addition of passive funds to the mix will add real value both in terms of cost reduction and performance.
The Global Cautious and Global Balanced portfolios 8AM Global is managing for idad incorporate a blend of the manager’s best actively-managed funds as well as low-cost passive funds. The methodology allows us to deliver global investment exposure while also managing the level of risk to investors.
The portfolios are run in such a way that the performance will be achieved within controlled volatility bands, meaning investors in the portfolios will retain a suitable risk profile regardless of market conditions.
Timing it right
So which strategy is better – active or passive? Our conclusion is that if one wants to build a comprehensive investment portfolio to meet investor requirements, a blend of active and passive strategies is the way forward.
Advisers and investors should view these strategies as complementary, not competing. At idad the only side we take in this debate is the side of the investor – and their interests are best served by a combination of the right investment approaches at the right time, management of costs and a clear focus on maintaining a suitable risk profile.
The Global Cautious and Global Balanced portfolios give advisers the comfort and security of knowing their clients will be exposed only to an appropriate level of market risk and they will benefit from the experience and expertise of the 8AM Global fund management team. All of this is available within one, easy-to-buy fund structure.
Mark Battersby takes a look at key regulatory changes that are leading the way for the financial services industry across the globe, starting with the Isle of Man’s 2017 Roadmap\\\\\\\\\\
One of the most seismic changes in the regulatory space that is widely affecting international financial services is the Isle of Man Financial Services Authority’s 2017 Roadmap, which sets out a new regulatory framework for insurance business.
There will be policyholder specific commission disclosure from 1 January 2019 across all markets where international life companies headquartered on the island are active, though the regulator backtracked on an earlier deadline of 1 January 2018 for generic key information commission disclosure.
Key industry players in UAE have foreseen the direction of travel and adjusting their business strategies accordingly
The biggest fallout will be for expats based in the UAE. The key players in the industry have foreseen the direction of travel in this market and have started adjusting their business strategies accordingly.
One of the UAE’s own regulators, the Insurance Authority (IA), announced in August plans to tighten capital requirements for licensed brokers and to set out new reporting requirements for them to disclose all commissions in financial statements to the IA.
‘There are predictions of a 50% cull in the number of financial advisers in the Middle East, many of whom have been heavily dependent on upfront commission payments’
This move mirrors what happened in the UK before its RDR regime went live, aimed at encouraging full accountability on the remuneration brokers receive ahead of an as-yet-unspecified timetable for the introduction of disclosure to clients in this market for the first time.
Logic suggests that the Middle East will follow the Isle of Man regulator’s 1 January 2019 commission disclosure deadline, but chances are there will be further twists and turns in the regulatory journey before greater clarity prevails.
In the meantime, it is predicted there will be a 50% cull in the number of financial advisers operating in the Middle East, many of whom have been heavily dependent on upfront commission payments.
Leading UAE adviser Mondial chief executive Sean Kelleher, who has already made significant changes to his business model, told International Adviser that the transparency issues being tackled by the leading regulators of the world, such as properly documenting and making sure clients understand what they are buying, “are all becoming our issues in the UAE, and that is a good thing”.
UK limbo period ends
Back in the UK, the Finance Bill, delayed since the snap general election earlier in the year, finally got voted through. As a result, the non-domicile threshold was reduced to 15 years out of the past 20, down from 17.
With the limbo period for financial advisers and clients now over, and the new non-dom rules backdated to 6 April 2017, much of the industry seems to view the regime as fair and reasonably well balanced.
In a separate issue, the UK’s HM Treasury decided to make pension transfers into recognised overseas schemes a statutory right. HM Revenue & Customs also set out new guidelines as to how people can downsize their home but retain the value of their previous residence for inheritance tax reduction purposes.
HMRC’s guidelines here prompted international accountancy body the ICAEW to brand them “only slightly less impenetrable that the legislation itself”, which raises the question of whether these regulations should have ever seen the light of day.
Spotlight on Europe
In Europe, as the Brexit negotiations continue to absorb significant resources the busy regulatory agenda continues, including the European Insurance Distribution Directive, Priips and the General Data Protection Regulation.
One spotlight in the European Commission’s activities is its planned tax haven blacklist due to be finalised at the end of the year and possibly four kinds of sanctions targeted at these jurisdictions.
The commission’s Tax Code of Conduct Committee is scheduled to come up with a provisional blacklist by the end of September, with the 28 European Commission member states giving the final rubber stamp of approval before the list and potential menu of sanctions gets up and running.
Finally, mention should be made of new regulatory authorities coming on stream in South Africa and Hong Kong.
In the case of South Africa, after almost a two-year delay, president Jacob Zuma finally signed the Financial Sector Regulation Act (2017) into law, establishing two new regulators – the Financial Sector Conduct Authority and the Prudential Authority.
In Hong Kong, the newly launched Hong Kong Insurance Authority released life premium figures for the territory for the first time, and within two years will take over direct regulation of insurance intermediaries from three self-regulatory organisations.
Rules of inheritance
There are some valuable UK IHT \benefits of being Italian, French, \Indian or Pakistani. Alex Ruffel, \a partner at Irwin Mitchell Private \Wealth, explains four tax treaties that \are worth their weight in gold for those clients wishing to take advantage of them\\\\\
The general rule is that if a person is domiciled in the UK, all of their assets are within the scope of UK inheritance tax, which is charged at the rate of 40%. However, if they are not UK-domiciled – a ‘non-dom’ – only their UK assets are covered by UK inheritance tax.
The meaning of ‘domicile’ deserves an article on its own but, in essence, a person is domiciled in the jurisdiction that is their permanent home, regardless of their citizenship or place of current residence.
There is also a special deeming provision: if a non-dom has lived in the UK for 15 out of the past 20 consecutive tax years, they are deemed domiciled in the UK for tax purposes.
Take, for example, Jurgen, who is a German citizen who has lived in the UK for 16 years. He is deemed domiciled and, when he dies, UK inheritance tax can apply to all his assets in the UK and elsewhere.
‘Domicile is key. A person who wishes to use one of the four treaties must maintain their non-UK domicile under the general law’
This is an issue faced by many long-term UK resident non-doms but a lucky few escape it due to tax treaties between the UK and certain other countries that predate the deemed-domicile rules and effectively override them.
There are only four such treaties – with France, Italy, India and Pakistan – but they are extremely valuable.
A tax toolkit for non-doms
Neil Chadwick looks at controversial non-dom regime changes in the finance bill, asks how they might adversely affect long-term UK expats and suggests top tips to shield clients from the taxman’s wrath\\
On 6 September 2017, the UK government issued the Finance Bill 102 2017-19, which, subject to Royal Assent, confirms that most of the provisions for the taxation of non-UK domiciles (non-doms) – previously dropped at short notice due to the general election – will be introduced retrospectively from 6 April 2017.
These changes have clearly been met with very mixed views as, on the one hand, long-term UK expats looking to return to the UK as non-doms were hoping the legislation would remain in the long grass indefinitely. However, those that had already restructured their affairs to be ‘finance bill friendly’ will be relieved that their efforts were not wasted.
‘The objective is to gradually erode the rich vein of tax benefits for long-term non-doms, while at the same time preventing a mass exodus’
A fine balance
The objective of the UK government is to gradually erode, where possible, the rich vein of tax benefits that can be achieved through long-term non-dom status, while at the same time preventing a mass exodus.
The complexity and amount of all the relevant legislation prohibits a detailed analysis of every change and so, to illustrate one of the key differences, the focus of this article will be on UK inheritance tax (IHT) only and specifically the following new rules:
• deeming an individual to be UK domiciled for all tax purposes once they have been resident in the UK for 15 of the previous 20 years; and
• a new deemed domiciled rule for individuals who were born in the UK with a UK domicile of origin on their return to the UK.
Rules of alignment
These rules will apply to non-doms who have lived in the UK for more than 15 tax years and people born in the UK, with a UK domicile, who obtain a domicile of choice elsewhere and later return to the UK.
Such persons will become ‘deemed domiciled’ and will generally be subject to the full scope of the UK tax system.
Also, the remittance basis will no longer be available to those who are deemed domiciled.
At the same time, the existing IHT deeming provisions will be aligned with the new 15 years out of 20 rule.
Non-doms affected by these restrictions may use trusts to mitigate tax on their foreign assets. These structures are generally referred to as excluded property trusts. Also, although it’s beyond the scope of this article, it’s worth mentioning that the inheritance tax benefits previously associated with the use of corporate structures to hold UK residential property are no longer exempt.
‘Those that have restructured their affairs to be ‘finance bill friendly’ will be relieved that their efforts were not wasted’
The new rules treat the interest in the holding entity as subject to UK IHT. For that reason, it is important that only non-UK assets are held in excluded property trusts if the objective is to protect the trust fund against IHT.
Excluded property trusts set up by non-UK doms prior to becoming UK-deemed domiciled will also have protected status and have the ability to roll up capital gains and non-UK source income within the trust, free of tax, until the receipt of a benefit by the settlor or other beneficiaries.
While nothing is certain in politics, the general consensus is that MPs will find it difficult to justify any objection to these provisions and, for that reason, individuals that may have circumstances similar to those in the following case study should take advice sooner rather than later.
Brain \training \for the\future
In the first of a series of three articles, \PwC isolates 10 of the most disruptive technological forces that are affecting the industry and says financial advisers must adapt to the new world order or perish\\\\
Digital technology is changing the world we live in at a fundamental level. In many aspects of our daily lives and the way we conduct our business, digital technology has driven greater efficiency, improved customer experience and enabled new business models.
But the financial services industry has been at the tail end of that disruptive curve, and is only now feeling the full effect of this technological revolution.
PwC has isolated 10 of the most disruptive forces affecting the industry and the key areas for financial advisers to be aware of – and capitalise on – for the benefit of their clients.
1. Financial technology will drive the new business model
The rapid growth of a vibrant fintech sector is transforming perceptions of what financial services can deliver and how it is experienced.
Whereas customers previously accepted the limited digital offerings presented to them, they are now questioning why their financial products provide such a different experience to other aspects of their lives, or why the digital channels for managing their business’s finances are inferior to their personal finances.
Fintech is forcing the industry to change its standards, allowing advisers to join the dots.
2. The sharing economy is rethinking financial services
The interconnected nature of the sharing-economy is now having a significant impact on financial services. From the fundamentals of blockchain to crowdfunding and peer-to-peer lending, the sharing economy is changing business models and forcing a rethink of how the industry functions.
Clients and institutions are demanding a greater knowledge base from advisers and also a better suite of options, especially around life and banking products.
3. Blockchain technology will shake things up
The technology underpinning bitcoin has been talked about in utopian terms. While the short-term reality is more limited, it is opening up opportunities in cross-border payments and driving efficiency in intra-company processes such as performance reporting.
4. Digital will become the mainstream
Digital technology is going to be crucial to every financial services company’s success. Whether retail or business focused, customer-facing or back-office process, it is imperative that businesses move from a mainly analogue model to a digitally enabled organisation.
A purely digital business may be suitable for some but, for most, the best option will be a hybrid of human interaction enabled by digital technology. This presents a clear opportunity for the key advice and guidance required when considering how the delivery of international funds and other products will evolve.
5. ‘Customer intelligence’ will be a key driver
All financial services companies hold a wealth of data on their customers. This will be monetised when the revised Payment Service Directive comes into force and allows third-party access to this information. Understanding this customer intelligence and deploying it for the benefit of the consumer or business will be the key growth driver.
Crucially, this must not be an exercise in cross- or upselling but rather focused on delivering customer value. IFAs will have an important role to play when presenting options for banking products to clients.
6. AI will start a wave of ‘reshoring’ and localisation
Artificial intelligence and robotic process automation are enabling the digital business but they will also mean profound change for the financial services industry. PwC estimates that AI alone could result in a 30% reduction in the financial services workforce.
7. Cloud tech will become the dominant model
Cloud technology is driving a wave of innovation and experimentation within the financial services industry.
The ability to rapidly scale and to flex according to demand is a key advantage which companies will prioritise in conversations with advisers.
Conservative PwC estimates have found that moving to the cloud could save banks with more than $1bn in assets 5-10% on their IT spend, which could add as much as 40 basis points to their return on equity.
8. Cyber-security will be one of the top risks
With increasing dependence on technology comes a growing risk from cyber-security threats. The threat now also has a regulatory angle. With the advent of GDPR firms will be at risk of major fines, in addition to the financial and reputational costs of a cyber-security breach.
9. Asia will emerge as a key centre of innovation in tech
Asia has a major advantage in shaping the future of the industry: much of its populations are underserved by financial services today, and in many instances companies and ecosystems are inventing new financial services industries from scratch.
China is a particularly good example of this phenomenon, with the absolute dominance of technology companies in providing payments systems, but the same trend can be seen in South Korea, Vietnam and many other Asian economies.
10. Regulators are also turning to technology
Regulators are leveraging technology both as a catalyst to achieve policy objectives, such as stimulating competition through fintech, and improving stability in the markets through advanced monitoring and surveillance of market activity. Technology is making regulators’ jobs more complex and increasing the speed of change, but also providing the tools with which to address those challenges.
These 10 technological forces are already having a profound impact on the industry, and that is something that is only going to increase with time. The digital age is here to stay. Advisers and their clients must adapt to this new world order – or get left behind.
United \state of \Brussels
Brian Dunhill of financial planning firm Dunhill Financial tells Eugenio Montesano how he negotiates the complicated tax issues for his US expats based in Brussels by keeping their investments stateside\\\\\
“We have many advantages as expatriates,” explains Brian Dunhill, chief executive of Brussels-based expat financial planning firm Dunhill Financial.
“There are some disadvantages, too, the biggest one being that tax reporting is very confusing. During our first meeting, all clients ask me: ‘What do I report, and to whom? My answer, invariably, is that they have to report everything to everyone. To whom do they have to pay taxes – that is the question.”
This dilemma is one with which Dunhill is confronted day in, day out in his job as a financial planner specialising in the English-speaking expatriates residing in Europe, with a core emphasis on retirement planning for predominantly American expats.
The US requires its citizens to file income tax returns and report their worldwide income regardless of where they live or how long they have lived abroad.
An expat himself, the 35-year-old was born in Brussels, where he lived until the age of 11. He then moved to the US in order to complete his education.
In 2011, he moved back to Belgium to set up Dunhill Financial. Today, the company counts assets under management of $65m and has 140 clients, 120 of whom are American.
‘Tax reporting is confusing. All clients ask me: ‘What do I report, and to whom? My answer is they have to report everything to everyone’
Brian Dunhill, chief executive, Dunhill Financial
An expat typically offsets double taxation and reduces his or her US taxes through Foreign Earned Income Exclusion (FEIE), Foreign Housing Exclusion and Foreign Tax Credit.
However, FEIE covers a limited amount of income, expense thresholds must be met in order to benefit from the Foreign Housing Exclusion and US tax limits apply to foreign tax credits. This means expats who earn more than $105,000 per year find themselves owing US tax on their income in spite of their exclusions, deductions and credits.
Moreover, US income tax returns may not be the only filing requirement for US expats. If any of their foreign accounts meet the Foreign Bank and Financial Accounts (FBAR) reporting threshold of $10,000 anytime during a year, they must also file an FBAR Financial Crimes Enforcement Network Report 114 for that year.
Dunhill’s answer to the tax conundrum afflicting US expats is to keep most of their investments in US financial institutions to avoid higher taxes charged on assets purchased outside the US – passive foreign investment companies (PFICs).
“By keeping assets in the US we are avoiding all PFICs, we are able to file US taxes very quickly by automatically getting the IRS 1,099 form, which reports income from self-employment earnings, government payments and interest and dividends, and we conventionally get all reporting standards.
“Just as importantly, clients do not have to fill in the FBAR report for accounts that are held in the US. For regulatory reasons we also feel much safer with the assets being in the US because we have all the relevant insurance on the deposits – FDIC (Federal Deposit Insurance Corporation) and on securities investments – SIPC (Securities Investor Protection Corporation).”
The fee debacle
Another reason for keeping clients’ assets in the US revolves around one of clients’ worst nightmares: fees. “It is so much cheaper to manage assets in the States than in Europe,” Dunhill says. “The same product in the US will cost a fraction of what it costs outside. For instance, in Europe I use Platform One, a UK and International platform service.
“The cheapest service they have comes at 0.3% on top of which they charge the client for every single trade, whereas all of our providers in the States give us the platform for free and charge just the trades. This means savings of up to $3,000 in fees every year on a $1m account, which is the target clientele of Dunhill Financial.”
‘It is so much cheaper to manage assets in the States than it is here in Europe’
Fatca ‘not a concern’
However, Dunhill’s prevalent rationale for keeping clients’ assets in the US is to avoid falling under the remit of the Foreign Account Tax Compliance Act (Fatca), a set of rules tackling tax evasion by US taxpayers through the use of offshore accounts, which came into effect in June 2013.
“We would prefer to be in the system of the country of residence if we could, but typically clients come around to it when we show them that the price of the same product in, say, France versus the US is twice as much.”
At the same time, even if they wanted to invest in local jurisdictions, getting around the obstacle might prove a daunting task as Fatca requires foreign financial institutions to report certain information about financial accounts held by US investors.
“A lot of French banks will tell the client: ‘You can’t have a bank account because of Fatca.’ That’s a disservice,” says Dunhill.
According to the IFA, Belgium is instead much more of an ‘expat friendly’ country. “When you talk to the head of the expat divisions at KBC or ING, they want to get as far as they can without crossing over the line to where they can get in trouble. They will help with the mortgage, the savings account, the chequing account, the insurance – all the things that are not subject to Fatca.
“That’s where the Belgian banking system has done an excellent job: they know exactly what extent they can get to before it hurts their clients. However, them too, when it comes to investment accounts, say: ‘We’re sorry. We can’t deal with it.’”
He concludes that there are 11 million people in Belgium, of which only 11,300 are American. “The four major banks are going after 2.7 million people each, not, 2,800. It’s a small demographic for them but a huge demographic for me.”
UK equity: known unknowns
Amid all the uncertainty surrounding sterling and the UK economy, what is clear is the potential that this type of environment creates for talented active managers to generate alpha for their clients
The UK economy has shown signs of slowing in 2017, with low GDP growth in Q1 and a similarly weak number (0.3%) reported for Q2. Estimates suggest weaker economic growth still for 2018, although there is considerable uncertainty in these numbers, particularly given the unknowns regarding Brexit negotiations.
‘Long term, inflation is expected to reduce as the impact of sterling weakness declines. However, there is uncertainty over the timing’
A numbers’ game
Moving on to inflation, there has been a clear spike up since Q3 2016, despite the June CPI numbers showing a slight decline to 2.6% (from 2.9%). Longer term, inflation is generally expected to reduce as the impact of sterling weakness declines. However, there is uncertainty over the timing.
Much of the inflation spike has been driven by the weakness of sterling and again there is even more difficulty than usual in predicting the short- to medium-term direction of travel in the currency.
This last issue raises a further point over the relevance and impact of UK economic growth to the overall UK stock market.
For a significant number of large-cap companies within the UK a large proportion of their earnings is derived from overseas and, as a result, they are much less affected by UK economic growth.
Such names dominate the FTSE 100 (and the FTSE All-Share) and as a result of the decline in sterling have pushed that index higher, despite concerns over the domestic economy.
Among all the near-term uncertainty surrounding sterling and the UK economy, what is clear is the potential that this type of environment creates for talented active managers to exploit share price movements and generate alpha for their investors.
‘This type of environment creates opportunity for talented active managers’
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