American Expat Financial Problem: Brokers and advisors outside the United States do not understand how U.S. taxation works, and most brokers and advisors in the U.S. do not understand the special issues of Americans abroad. How can I choose a proper advisor?
Recommendation: Seek out the advice of a “fee-only” Registered Investment Advisor with experience working with expats.
Fee-only advisors are compensated only by their clients. By not taking commissions or maintaining fee splitting agreements with fund companies and brokerages, the potential for conflict of interest between the client and advisor is reduced.
Why Registered Investment Advisors (RIAs)? RIAs are legally bound to act as fiduciaries to their clients. That is, they have a legal obligation to put the clients’ interests ahead of their own. Brokers are not RIAs and do not have a fiduciary obligation to their clients.
What to avoid? Avoid relying on investment advice from advisors such as stock brokers or insurance agents, who are compensated by selling products through commissions and fee sharing agreements with the issuers. In these situations, the advisor is likely to recommend investments based on the size of their potential compensation rather than the quality of the investment and strategy. Additionally, investors should be especially careful when considering investments registered in “off-shore” locations. There is a high incidence of fraud among these operations. Even legitimate investment schemes in these regions typically lack investor safe-guards that exist in the U.S. Finally, understand the tax rules regarding investments outside the United States.
Managing One’s Own Investments
Modern information technology and the internet have made “do it yourself” a serious option for those expats who are prepared to make a substantial and ongoing time commitment to learning the applicable taxation issues and the theory and practice of sound portfolio management. Accounts can be established at a discount broker in the U.S. and securely managed over the internet from anywhere in the world.
If going it alone, expat investors should focus on simplicity:
- Mimic a “lazy portfolio” like the one offered by David Swenson, the head of the Yale University Endowment in his book Unconventional Success
- Be sufficiently diversified
- Avoid investing in funds that supposedly “only go up” like Bernie Madoff
- Pay attention to the tax consequences of investment decisions
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