The US market has a polarising effect on private wealth advisors and trustees considering the need or desire to do business with US citizens. Moreover, the Foreign Account Tax Compliance Act (FATCA) means non-US-based advisors can no longer take a passive approach to US clients.
What are the dynamics at play? There are three overarching and converging themes that influence how traditional advisory firms interact with their current clients and how they will choose their future customer base.
Regulation, the East and national debt
The first consideration is regulation, which in old-world economies has reached stifling levels. The freedoms held so dear in these countries have become entrenched in bureaucracy, leaving innovation and free trade queuing for approval. In the emerging economies the speed of change is wildly different and the optimism intoxicating – these jurisdictions may not yet have free speech, but they foster and encourage enterprise.
The second theme is the continuing rise of the East and the strength and momentum of the new- world economies. The Asia Pacific region has the second largest number of USD billionaires – 386, after the US, with 442 – but is home to more USD millionaires than any other region.
The third trend is largely a result of the economic crisis. Sovereign nations need to reduce their national debt through reduced public spending and increased taxable revenue. Many countries have promoted policing their citizens to a new level and have imposed aggressive policies to stamp out tax abuse and fraud to increase their tax take.
The effect on foreign advisory firms
Apply these themes to the US and you can see why doing business there requires proper consideration. Legal and regulatory risks, together with the aggressive stance of the US Internal Revenue Service, mean many foreign advisory firms refuse to act for US taxpayers. The UBS and Wegelin & Co cases emphasise the risk of doing the wrong sort of business with US-connected individuals. However, an estimated one in three European families have a US citizen as an extended family member, so you cannot simply ignore the US market; you need to make a conscious decision to embrace it or reject it. Remaining passive is no longer an option. The reach of US filing obligations through FATCA will create a burden on trustees, foreign agents and wealth-advisory businesses that not only represent people in the US but hold US assets. The incentive for compliance is the threat of a 30 per cent withholding on all US-related transactions. These US tax code requirements and deadlines add to the burden of dealing with US clients even if you understand the intricacies of the financial reporting needed, and even if you accept the legal and regulatory risks and obligations.
Despite UBS’s USD780 million fine (imposed by the Department of Justice (DoJ) in 2009 for helping US individuals evade tax), its Securities and Exchange Commission-registered business grew 20 per cent in 2012, reaching USD4.6 billion. On the other hand, Credit Suisse (Switzerland’s second largest bank) wound up its US cross-border business last year due to being part of the DoJ tax fraud investigation. Boston Consulting found that 70 per cent of North American offshore assets in Switzerland have left the country since 2009, and the rest is being fought over by those advisors willing to act for US clients. Worldwide, the wealth of North American millionaires is expected to hit USD4.5 trillion by 2016. The old economies may be suffering and may not have the same growth as the emerging ones, but there is still great opportunity in the US for those with the appetite.
Many people find that the confluence of the macro themes makes the difficulty and risk of business either in the US or with US persons abroad too great compared to the less regulated, growing markets in the East. However, for those willing to embrace the US, it still offers real opportunities. You now need to decide if you are in or out.