Carlie: Welcome to another episode of the Expat Focus Podcast. I’m your host Carlie, an Australian expat in France, and today I’m joined by Tom Zachystal. He’s the President of IAM, a California-based investment management and financial planning firm that specializes in services for US expats.
Now, Tom has been advising US expats for over 15 years, and he has first-hand experience of the challenges of managing your finances when you live abroad because he spent ten years as an expat himself. Tom is also the current President of the Financial Planning Association of San Francisco, and he’s a Chartered Financial Analyst and a certified financial planner. So you know that what he has to say today comes from a pretty solid place. Tom, thanks for coming on the show.
Tom: My pleasure. And thanks for the terrific introduction.
Carlie: Tom, before we get stuck into some of the financial issues for US expats to consider, tell me about some of your own time overseas.
Tom: I was originally an engineer by education, a civil engineer, but I worked in the oil industry for a company called Schlumberger, internationally. I started in Canada for them, but I spent a couple of years in Nigeria, a couple of years in Holland, and then shorter stints in Middle East and South East Asia, Russia, a few parts of the world. So it was a fun time for about ten years, and then I went through a career change, like many of us do, and ended up in this business.
Carlie: Wow, that sounds like it would have been such an exciting time. Tom, do you have a favorite country, of all the places you lived?
Tom: Well, I think every country is different. Some, you wouldn’t call them favorites but they were very interesting. But probably I would say Indonesia was really my favorite. I just love the people and the place, and I’m a scuba diver, so it’s great for diving, and such diversity amongst all the islands that make up the country.
Carlie: Would you say that any of your expat experiences led you to financial planning or was that a totally separate career choice?
Tom: I guess in a sense the fact that I had a lot of time when I was in the oil industry – a lot of time was spent waiting around for other things to happen, and so I had time to study for the licenses, and the CFA and CFP qualifications. So in that sense it helped me out. And also, in the oil industry, a lot of us made decent money, and we invested it, and I guess that’s where the bug started. So to that extent, it certainly helped.
Carlie: And Tom, from a financial adviser’s perspective, what do you see as a pressing issue for US expats right now?
Tom: There have been a number of issues for years. Probably most expats are familiar with the difficulty for US citizens to open bank and especially brokerage accounts, either offshore or even if their country of residence sometimes, because of the fact that they have this ongoing tax-reporting burden to the US government, to the IRS.
But there are some other things that have come up just recently. One has to do with some pretty severe currency fluctuations as a result of the political climate in places. Like with Brexit in the UK, the pound has dropped substantially, which can be good or bad depending which side of that you’re on. If you live in Mexico, the peso has also dropped as a result of this and the general strengthening in the US dollar. So we’re seeing some of that now.
But probably the most pressing issue that I’m seeing right now is the fact that US brokerage firms have started closing accounts for US expats. That’s something new, it’s been building up, it has to do with FATCA as well. So it’s been building up over the last five years as FATCA’s been implemented, but it’s really come to a head just in the last few months or a year.
Carlie: So run me through why firms are closing these accounts of US expats.
Tom: There are a couple of issues. Probably the big one though is FATCA, and for most people, what FATCA means is it’s [difficult] to go through them to deal with financial institutions in their own country. So FATCA is a tax reporting regime that was implemented by the IRS to try to find money launderers and people who are US citizens hiding money offshore. And through a sort of carrot-and-stick method, what it does is it compels non-US financial institutions to report to the IRS on their US citizen clients. So that’s why it’s made it difficult for them to have local accounts, for expats to have local accounts. But the other side of FATCA is that most of the agreements – and these agreements between countries are reciprocal.
So for example, a country like Mexico has insisted that if they’re going to report on US accounts held in Mexico, then it has to be reciprocal. They want to hear about the US accounts that their Mexican residents have, because possibly there might be some local tax consequences to that. And that’s what’s being implemented now. So the US brokerage firms are having to report to other tax authorities in other countries, and they don’t want to do that necessarily, and so sometimes they prefer to close those accounts.
Carlie: It’s interesting that FATCA is a key part of this, Tom. It actually came up in my chat recently with Anthony Parent from IRS Medic. And he was speaking about how to avoid disaster with the US tax system when you’re a foreigner in the US, an expat in the US. So FATCA is making things difficult not just for foreigners in the US, but actually US people who are overseas, US expats.
Tom: Yeah, that’s right. It’s specifically – there are some reporting requirements, but also, specifically, right now, with this issue of brokerage firms closing accounts – for example, Merrill Lynch has sent out a letter to I think all of their US expat clients under a certain threshold, telling them that their accounts need to be moved. And that always isn’t such an easy thing to do.
And there is another aspect to it as well, which, it’s not just about FATCA, but there’s also – what comes up is what’s called the Know Your Client rule.
And then there’s a further issue with mutual funds – so US mutual funds are considered investment companies under the law, and as the phrase go, they have to be registered where offered. And if a person lives in another country, they’re offered in that country, and so what some companies have started doing in the US is they’ve realized that all of a sudden they shouldn’t be allowing non-US residents access to US mutual funds, and so in some cases the mutual fund gets frozen, in the sense that it can only be liquidated but it can’t be added to or changed for another fund.
Carlie: So if I am a US expat, what does this mean for my finances that I might have back home or my investments back home in the USA?
Tom: So if the mutual fund – because a lot of people are still invested in mutual fund… as a registered investment adviser, we’ve moved away from mutual funds, towards things like exchange-traded funds, more passive products, or individual shares. But to the extent a person is invested in US mutual funds, they may have this problem with freezing of the fund, in which case their only alternative is to reinvest the money eventually into something that trades on an exchange, like an ETF or shares of a company.
If the issue is your account is being closed actually, well, then, you can distribute the money. You can take a check or have the money wired. And this might work if it’s a taxable account. But if it’s a retirement account like [IRA], then it’s a real problem, because there are tax consequences, and possibly early withdrawal penalties. And in fact, we’ve seen some of that happen already. So that’s a little different there, and you have to find another custodian or another firm to deal with in that case, and do a rollover or a transfer to an [IRA] account with that new custodian.
Carlie: Tom, these rules, the FATCA and KYC, are they intended to make things difficult for US expats or is this just an unfortunate situation because of how countries need to report to each other now?
Tom: Well, FATCA specifically I think is a consequence of the fact that some time ago the IRS… no doubt many people have heard about this issue with UBS in Switzerland, an how a lot of Americans were hiding money in Switzerland. And the IRS found out about this, and then they decided, well, there’s probably a lot more of that money out there that hasn’t been taxed, and we’d like to tax it. So they’re really after the money launderers and the tax cheats. But 99% of the US expats are just normal people, and unfortunately they get caught up in this web.
Carlie: What do you find the common course of action is for US expats who need to do something because they’re receiving a letter telling them their US account is being closed?
Tom: Well, the first thing is hopefully they do something. Because what I’ve also seen is that people do nothing. They get this letter, they ignore it, they figure nothing can happen, they’re busy, and then all of a sudden they get a check from their brokerage firm. And if that check is from a tax-deferred account like an [IRA], well, then it’s a distribution, and it could be a very large distribution with substantial tax consequences. So if that happens, then they still have some options. You can do what’s called an indirect rollover, to another firm. You have 60 days to do that; possibly you could get that extended. So there are still some options, even if that happens.
But obviously that isn’t a very good situation. So people really need to deal with it when the letter comes. And quite often, the only alternative they really have is, if it’s a taxable account, possibly they could move it to their own country into some account. But if it’s a tax-deferred account, like an [IRA], a [Roth], a 401(k), then they need to find another provider for that, they need to find another place to park that tax-deferred money, or they need to commit to the fact that okay, they’re going to take this massive distribution and there’s going to be tax consequences to that.
Carlie: Is it only Merrill Lynch that has been sending these sort of letters?
Tom: It isn’t, but I’ve seen – I would say that at least now, and what I’ve seen in the last few months, possibly the last year – is that Merrill Lynch has the broadest policy, they seem to be sending letters to all their US expat clients, I think under a certain account threshold. But I’ve also seen letters from, let’s say, Charles Schwab, which is a discount brokerage firm. They’ve sent letters to people in five countries, just recently. I remember New Zealand was one, I think South Africa was another. I can’t remember the others. Dominican Republic. So for other firms it’s sometimes country-specific. But Merrill Lynch seems to have adopted a blanket philosophy. And the other one is Fidelity has been doing this for a long time.
Carlie: The obvious question, Tom: Is this issue something that your firm assists clients with?
Tom: Yeah, it is. And we help people, actually, in two ways. Obviously, we’re happy to take this business. This is what we do – 90% of our clients are US expats. We can accommodate people living almost anywhere with taxable or tax-deferred accounts. But some people are not going to be our clients, they prefer to manage their own money, and if that’s the case, then I’m happy to direct them to a brokerage firm that will accommodate them at no charge. So either way, we’re happy to help people deal with this.
Carlie: Tom, is this the biggest concern on the financial front for US expats at the moment?
Tom: Well, I think if this is affecting you and you’ve gotten the letter, then it’s probably a pretty pressing matter, and it may be a big concern. If you haven’t gotten the letter, then obviously there’s other things you’re thinking about. You might be thinking about currency fluctuations, for example, or possibly the political climate – the advent of populism is affecting investment markets substantially, things like that. So it really depends on a person’s particular situation.
The other ongoing issue that comes up is – and some of it is related to currency fluctuations as well – if people are retired overseas, well, then their situation may be changing if they’ve been affected by these currency fluctuations negatively, maybe they’re thinking about whether they still have enough money left to last them through retirement in that other country. So things like this come up, but I would say if you’ve received one of these letters or you are in the circumstance of having to deal with this account closing issue, then it’s probably a pretty pressing issue.
Carlie: Sounds like something that, especially when you have investments and significant finances back in the USA, you should really be aware of.
Tom: That’s right. And you might want to take a proactive approach. What I suggest people do is call up their brokerage firm in the States, and… a lot of people are using US addresses on those accounts, and that’s another thing. Maybe they just haven’t been found out. But it’s an obligation of the investment company in the US to know where their clients actually do live. Some people are using mail forwarding addresses, some people are using friends’ addresses in the US. I think it’s going to be harder and harder to maintain these.
So one thing that people can do is be a little proactive, if they do have a US address or if they haven’t received a letter, they might want to call their broker up or their brokerage firm or their investment adviser, and just say, “Hey, what if I moved overseas to such-and-such a place? What would happen? Would that be an issue?” So that’s one way of dealing with it. I would say be wary of using these mail forwarding addresses, especially… probably at some point you’re going to have an issue with that. Also, some people are using addresses in states that have a state income tax, which brings up another issue, because US expats typically are subject to US federal tax but not state tax, because they don’t live in the States.
But if you’re using an address in a state that does have a state income tax, then the 1099 forms at the end of the year are going to the state tax authority, and sooner or later they’re going to want to know where their tax dollars are. So that’s another issue that comes up as well.
Carlie: You’ve kind of answered the question for me. Does it solve your problem if you just pretend that you’re not overseas?
Tom: It has solved the problem, and for many people it still does, but I think the system is working through it. Here’s a great example: I had a person call me up, a US expat in Singapore, and he had been contacted by I forget which brokerage firm in the States, and he was using a US address on the account, and he’d had that account for a while. And basically he got a letter, or maybe it was a phone call, that said, “We’ve been tracking your IP address when you’ve been logging into your account, and we notice you’ve been logging in from Singapore for the last two years, and unless you can prove that…”
Carlie: Oh, gosh! [laughs]
Tom: “… you’re actually a US resident, then we’re going to have to close your account.” So they are looking into this, because these brokerage firms have this obligation to report to the other country’s tax authority now. So it’s really their problem. And they’re going to find ways to deal with that. I would say that being a little proactive – and you want to know what your situation is, you don’t want to be worrying about this – then it may not be an issue.
Like I say, some of these firms have country-specific policies, it may not be an issue for you. But it’s nice to know where you stand, because once you get this letter, there’s typically… I’ve seen a month, sometimes 90 days to move the account. So you don’t want to be scrambling at the last minute.
Carlie: Tom, thanks so much for making us aware of this issue for US expats. I’m sure many will take action after hearing about this, to see what their status is.
Tom: My pleasure, Carlie. Nice talking to you.
Carlie: Well, that’s it for today. If you’d like to discuss this episode, ask questions, or share your own experience as a US expat, please head over to expatfocus.com, and follow the links to our forums or Facebook groups. Also, remember to check out our previous episodes at expatfocus.com/podcast. They’re also on iTunes. And I’ll catch you next time.