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Financial > Tom Zachystal

Tom Zachystal

Why Your Brokerage Firm Is Freezing Your Mutual Funds (And What To Do About It)

  Posted Monday March 21, 2016 (17:04:36)   (7187 Reads)

Tom Zachystal

Over the last six years or so the US Internal Revenue Service’s initiative to catch tax evaders, known as “FATCA”, has inconvenienced thousands of law-abiding Americans living outside the United States by making it more difficult to open and hold both US and non-US bank and brokerage accounts.

FATCA, or the Foreign Account Tax Compliance Act, has gradually been implemented by US and non-US financial institutions and has resulted in the closure of many US brokerage accounts held by non-US residents. This is because in most instances FATCA has been implemented as an Inter-Governmental Agreement (IGA) that involves information sharing between the United States and another country with respect to financial accounts in one of the countries held by residents of the other country.

Although the FATCA initiative started in 2010 it has only recently been implemented in many cases due to numerous legal challenges, technical delays, and the re-writing of certain provisions. As an example, Mexican banks and brokerage firms have only started FATCA reporting on their US-related accounts in September 2015. So in many instances it is only now that many US citizens living abroad are starting to feel the effects of FATCA.

A related issue has recently popped up, as if FATCA reporting itself isn’t enough of a pain, in the form of US brokerage firms freezing their expat clients’ mutual funds. “Freezing” means that the owner of the mutual fund can still sell it and withdraw the money from the account but he or she cannot re-invest in another mutual fund. Also, automatic dividend re-investment in the mutual fund typically stops because this is also a form of purchasing additional fund shares.

The reason for the freeze is that mutual funds are considered to be investment companies under US securities regulations. As such, they are required to be registered where they are offered. They are considered to be offered wherever the mutual fund purchaser lives. Since typically US mutual funds are only registered in the USA, the mutual fund companies do not want to get into trouble with non-US securities regulators who may have similar registration requirements and so they are no longer allowing non-US residents to purchase mutual funds that are not registered in their country of residence.

This registration requirement has always existed for mutual funds but it has largely been ignored because before FATCA implementation it was unlikely that non-US securities regulators would find out that residents of their country were holding mutual funds in their US accounts. With FATCA now being implemented US brokerage firms and mutual fund companies are afraid that this will no longer be the case and so better safe than sorry and hence the freeze.

So there are now three issues pertaining to US brokerage accounts for Americans living abroad:

First of all, the brokerage firm might want to close the account altogether. This is happening gradually as many US brokerage firms work their way through their client accounts and determine which clients live in countries that require FATCA reporting and then decide whether the account is large enough to bother with doing the reporting. This process is taking some time since many non-US residents use a US address on their brokerage account but inevitably the brokerage firm will find out that the person actually lives outside the USA and will take action.

The second issue is the more recent one in that even if the brokerage firm does not close the account they will freeze any mutual funds held within the account, in many cases without informing the account owner.

The third issue is that if the brokerage account is a managed account the company providing the investment management services may no longer be able to do business with the non-US resident – either because they use mutual funds as investment vehicles or because they do not want to do FATCA reporting.

At IAM we do not use mutual funds as investment vehicles for any of our clients since we believe that funds add an extra layer of fees, sometimes 1% or 2% extra, without delivering additional value as compared to a portfolio consisting of low-cost exchange-traded fund (ETFs) and individual shares, bonds, and other investments.

If you are a US expat looking for a managed investment account solution or other financial advice please contact us through Expat Focus.

If you are a US expat and prefer to manage your own investments but have traditionally used mutual funds then we suggest you consider looking into switching to lower cost exchange-traded funds or any other investment that trades on an exchange.

Tom Zachystal
Tom Zachystal, CFA, CFP is President of Individual Asset Management, a Registered Investment Advisor specializing in investment management and financial planning for expatriates.

Individual Asset Management is a U.S. Registered Investment Advisor; Tom Zachystal is a Chartered Financial Analyst, and Certified Financial Planner™ professional with over ten years expatriate portfolio management and financial planning experience. He has clients on four continents in over a dozen countries and is one of the original members of the Expat Focus Trusted Partner Network, a small group of financial advisors selected specifically for their professionalism and integrity. His services include: US or offshore investment accounts, IRAs, 401ks, portfolio/investment management, UK SIPPs, retirement planning and other financial planning services for US citizens living abroad or residents of any nationality living in the US.

Contact Tom for a free, no-obligation discussion of your financial situation if you are a US citizen living abroad or a foreign national living in the USA.

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