American citizens living abroad face many complicated investing and compliance issues (such as finding an American expat brokerage firm). Careful attention must be paid to the selection of investments, filing a U.S. expat tax return, dealing with the Foreign Account Tax Compliance Act (FATCA), and understanding country of residence tax rules. Savvy American expat investors ultimately realize that building wealth through U.S. financial institutions is the most tax-compliant solution. Unfortunately, many traditional U.S. brokerage firms and banks restrict the financial accounts of American expats with permanent residence in another country.
The Brokerage Account Closure Problem1 for American Expats
It is getting harder and harder to find an expat-friendly broker. International brokerage firms such as Morgan Stanley, Merrill Lynch, UBS and Wells Fargo are restricting business with American expat clients.2 When these firms discover a customer no longer physically resides in the United States, they may freeze their brokerage accounts or force American expats to liquidate their investment holdings. Not using an expat-friendly brokerage firm can be disastrous from a tax and long-term financial planning standpoint.
U.S. expat brokerage account restrictions vary between brokerage firms. Some firms let clients keep their existing brokerage account once they have moved overseas but will not permit clients to open a new brokerage account due to residency in a foreign country. Other firms request that expat clients close all their existing U.S. financial accounts when discovering a client has an international address. The American expat account restrictions may even be different for taxable and retirement accounts (IRAs, Roth IRAs and 401(k)s). Every online expat broker is different!
Brokers enforce these international account restrictions in a variety of ways. Some non-U.S. residents have reported that they cannot access their U.S. brokerage account when they attempt to log in from a foreign IP address. Other U.S. banks focus more closely on the foreign address listed on the account. Sometimes an investment advisor must report that they have an American expat client to their compliance department. Regardless of how the financial institution finds out, the account may ultimately face an international brokerage account restriction and the investor will need to find an expat-friendly broker. Fortunately, there are many excellent investment custodian/investment brokerage options for U.S. expats.
Reasons Behind American Expat Brokerage Account Closures
There are several reasons for these U.S. expat brokerage account restrictions and no single factor is solely to blame. The primary rationale is likely a combination of increased U.S. regulation of financial institutions and a perceived compliance risk that U.S. banks have about operating in certain foreign countries. This is especially true of the larger financial institutions that offer commercial and investment banking services. They do not want to expose these core banking functions to undue regulatory oversight by servicing U.S. expat retail clients.
There is no U.S. law that says American expat brokerage accounts must be frozen or shut down when moving abroad. The decision to freeze an account is an internal financial institution policy. Rather than complying with these new international regulations, many U.S.-based brokers (such as UBS, Wells Fargo, Merrill Lynch and Morgan Stanley) have decided it is easier to close or freeze American expat brokerage accounts. 2019 Brexit concerns increased these complexities for many U.S. brokerage firms serving U.S. expats. However, this response has caused countless headaches for American expat investors who need a reliable place to grow and protect their wealth.
Special Case – American Expat Inherited IRA Accounts
One area where expat brokerage account restrictions are particularly burdensome is related to inherited IRA accounts. Oftentimes a parent or other family member living in the United States may pass away while the beneficiary of their IRA is an American living abroad. Many brokers will not open an inherited IRA account due to the foreign residency, which in an extreme case may force a taxable liquidation for a beneficiary that lives overseas.
Transferring inherited IRA assets to an American expat may require a special procedure and extensive communication with an investment custodian. A specialized American expat financial advisor can add tremendous value when opening an expat-inherited IRA account and can develop a more suitable international investment strategy.
2018 EU Regulations and U.S. Expat ETF Trading
Since 2018, another issue affecting U.S. expat investors is the EU MiFID II regulations—a legislative framework designed in part to protect investors. These new EU regulations affect what are called PRIIPs (packaged retail investment and insurance-based products) and KIDs (key information documents). The law imposes requirements that investment funds distributed to retail investors must produce specific EU-compliant fact sheets and disclosures.
Very few publicly traded U.S. investment funds (such as ETFs and mutual funds) have produced these EU specific documents as of November 2022. Major U.S. custodians such as Charles Schwab, Fidelity, TD Ameritrade, and other brokers who facilitate the purchase of these investments are complying with MiFid II in different ways. Some firms have stopped accepting EU resident clients (even U.S. citizens living abroad). Others concluded that direct sale of U.S. ETFs to EU residents is not permitted under the MiFID II rules and have further restricted U.S. expat accounts. With these constant changes, it may be advisable to work with an American expat financial advisor.
Best Brokerage Options for American Expats
So how should American expats deal with this account restriction issue? What is the best online expat broker? Companies focused solely on brokerage operations (i.e., do not have significant commercial banking operations) have been able to continue working with American expats. The internal legal structures of these financial institutions have allowed them to comply with international regulations related to working with clients in multiple countries, and as a result, they choose not to restrict American expat brokerage accounts.
Having a brokerage account frozen or closed when living abroad may finally be the impetus to seek out a specialized American expat financial advisor who understands the unique cross-border tax and investing issues that global families face. Americans living abroad must pay close attention to their personal finances and understand how multiple tax jurisdictions interact. With careful planning and the right advice, American expats can invest in a compliant and tax-efficient manner through multiple expat-compliant investment custodians.
As a trusted fiduciary, Cerity Partners strives to provide the most appropriate advice for our international and American expat clients, always putting their interests first. We explore the custodial options available to you and guide you to make informed decisions. As an American expat financial advisor, we invite you to meet with us to discuss your unique needs and to learn how we can add value to your financial situation.
References:
1 https://advisorhub.com/morgan-stanley-dropping-wealth-customers-overseas/ 2https://www.ftadviser.com/pensions/2017/09/06/investment-options-for-american-expats/
