10 minute read
Wealth Management
The Value-Add Of A US-UK Cross Border Wealth Manager
The role of a wealth manager is much more than attempting to choose the best performing investments each month, quarter or year. It is about structuring and managing a diversified portfolio that helps you reach your individual financial goals and objectives. In the case of a US person living abroad, it is doing this while also navigating the potential pitfalls that exist when you are an expatriate.
The success of an individual’s investment journey represents a collection of everyday financial decisions that impact the bigger picture. It does not only involve decisions to help achieve various short-term and longterm wealth goals. A good wealth manager will help to ensure that the everyday decisions support (and don’t detract from) a cohesive strategy seeking to maximise the chances of completing your investment journey successfully.
Published research by Vanguard estimates that a good wealth manager has the ability to add around 3% in net returns for clients through suitable asset allocation, cost-effective implementation, disciplined rebalancing, behavioural coaching, asset location and a tax-efficient spending strategy(1). This quantifiable value is not something that can be expected annually, but instead is likely realised in a lumpy fashion over time. In reality, the most significant opportunities to add value do not present themselves consistently, but intermittently over the years, and often during periods of both market highs and lows. In fact, behavioural coaching seems to be the biggest contributor to that value-add figure. According to the National Bureau of Economic Research (NBER), the average length of a business cycle is just under 5 years(2). Over 30 years of investing, that equates to roughly 6 cycles. Based on Vanguard’s findings, if a client invests $1m over 30 years, partnering with a knowledgeable wealth manager over those years may potentially translate to much more than an additional $1.43m available for retirement income, legacy goals or other personal priorities.
Below is a non-exhaustive list of the five main benefits you may receive by working with a wealth manager who understands US-UK cross border financial planning issues. They will:
1. Help You Remain Focused On The Things That Matter Most To You
Over the short-term, markets will display volatility and different types of investments will perform better than others. If your portfolio is designed to deliver performance according to your individual needs, your very personal goals, time horizon and risk tolerance, and at the same time is also simple enough to understand, then it can be a lot easier to stay in your seat during periods of volatility. A good wealth manager serves as an objective party to hold your hand and help you steer clear of some of the behavioural biases that can often derail the success of one’s investment journey. They will also regularly review your situation and the economic environment and proactively recommend adjustments as appropriate. They will help you maintain control over your financial future in a clear and concise way.
2. Allow You To Maximise Your TaxAdvantaged Savings Opportunities On Both Sides Of The Pond
It is always beneficial for an individual to utilise tax-advantaged savings opportunities as part of their broader wealth plan. However, for individuals with ties to multiple jurisdictions, knowing where to place your savings to achieve your stated goals in the most tax-efficient manner becomes quite complicated. A knowledgeable wealth manager will help to outline the most relevant savings opportunities available in both the US and the UK, and will recommend the appropriate funding strategy over the course of the tax year.
Most individuals living and working in the UK pay more taxes to HMRC than the IRS. Ensuring that these excess Foreign Tax Credits (FTCs) are used smartly can be very valuable. Consider an additional rate taxpayer working in the UK for a number of years and subsequently retiring back to the US. Contributions made over their UK working years could receive 45% tax relief in the UK. Using FTCs, those contributions may become after-tax dollars for US purposes. When that individual retires back to the US, generally distributions are taxable in the US as opposed to the UK under the US-UK tax treaty. With proper planning, it may be possible to distribute the individual’s UK pension assets in the US with little to no additional cost to them for US tax purposes.
Individuals who have charitable giving inclinations for a portion of their wealth can benefit from a dual qualified Donor Advised Fund (DAF) and receive both a US and UK tax deduction. Tax benefits are received today and (under current tax legislation) you remove assets from your taxable estate. These assets grow tax-free within the DAF and the decision on where you want to donate funds can be made at a future date allowing the total funds you eventually donate to continue growing tax free until the point of distribution.
3. Provide Assistance In Structuring Your Wealth In A Way That Minimises Expenses Including Income And Estate Tax Obligations
Despite all of the complexities associated with cross border taxation, there are many opportunities to minimise tax obligations associated with your wealth plan, and subsequently maximise after-tax rates of return if you structure your wealth properly. The cost of investing is much more than the expense of the assets that you own. It is the total of transaction costs, annual fund management fees, any fees paid to enter or exit a particular investment, custodial fees, annual taxes paid and annual tax compliance reporting fees. The higher those total fees, the higher the hurdle rate before your investments
become profitable. Some people may think the best way to lower costs is to choose the lowest asset management fee. However, it is important to understand what tangible value you are getting for that fee. Is your portfolio diversified in a way to mitigate market risks and help meet your goals? What fees are you paying on transaction costs or bid/offer spreads on fixed income? Any fees paid that do not offer value will create cost drag to your net performance. Is it possible to lower your foreign financial reporting requirements to the US government and still invest tax-efficiently in both the US and the UK? A knowledgeable wealth manager will minimise the annual costs that arise from all aspects of investing to effectively lower your hurdle rate for profits. In addition to lowering the overall hurdle rate to make investments profitable, it is important to aim to take advantage of all wealth transfer opportunities as well in order to limit any potential estate tax obligations down the road. A knowledgeable wealth manager will help you structure your wealth in a way that will maximise what will be available to pass on after your death. Many non-domiciled individuals in the UK have the opportunity to consider utilising excluded property trusts before becoming deemed domicile to prevent the differential between the US and UK inheritance bands from being taxed (a potential savings for some of up to c.$4.5 million under current rules) and seek gifting opportunities to move assets between spouses when only one spouse is a US person.
4. Seek To Mitigate Foreign Currency Risks In Your Wealth Portfolio
Many people with financial lives in multiple jurisdictions don’t fully understand the role that foreign currency plays in helping create a secure financial future. Generally, the greatest exchange rate risk within portfolios lies in fixed income investments and cash. Understanding how to structure your assets in a way that supports your broad goals and objectives, minimises costs and matches the currency of your fixed income and cash investments with the currency of your liabilities can be incredibly valuable for the long-term. This helps safeguard the buying power for current or future income needs. Proactive adjustments to the structure of the wealth portfolio are able to reflect any inevitable changes in plans and intentions over the years.
5. Maintain A Disciplined Approach To Your US And UK Year-End Financial Review
When advising Americans living in the UK, there are two year ends to account for when reviewing a client’s financial situation. Often, year ends will result in much more certainty with respect to year-to-date cash flows. Leading up to the end of the US and UK tax years, potential bonus pools, windfalls, market movements and other financial transactions can be looked at and examined to understand what tax planning and investment opportunities, present themselves. Looking at each year end in isolation can result in missed opportunities, so working with tax advisers and wealth managers who understand cross border issues can ensure you are reviewing both year ends concurrently and provide the optimal ability to take advantage of any available opportunities. A prime year end planning item is looking for rebalancing opportunities that will help offset realised capital gains and losses as well as looking to ensure that you take advantage of both spouse’s UK capital gains allowance where applicable. Additionally, when one spouse is a lower rate taxpayer, reviewing that assets are placed in their name to benefit from lower UK tax rates on income and gains over time, can maximise use of UK basic rate bands and potentially save a material amount of tax for individuals.
In short, it is an investment in, and of itself, to find yourself a good wealth manager with whom to partner. It is an investment that can almost certainly pay dividends if you find one that suits your holistic global needs. The most successful partnership will be one that affords you the ability to focus on what is most important, living your life in the most meaningful way possible for you.
Further information please contact Andrea Solana: andrea.solana@masecopw.com Risk Warnings and Important Information: Nothing in this article constitutes investment, tax or any other type of advice and should not be construed as such. The information in this article is provided for information purposes only. You should consult with your financial adviser before making investment decisions. All investments involve risk and may lose value. The value of investments can go down depending upon market conditions and you may not get back the original amount invested. Your capital is always at risk.
Information is based on data which MASECO considers reliable, however, MASECO gives no assurance or guarantee that the information is accurate, current or complete and it should not be relied upon as such. Information about tax benefits is based on our understanding of current tax law and practice (which may be subject to change). The levels and bases of, and reliefs from, taxation is subject to change. However, MASECO Private Wealth is not a tax specialist. We recommend that anyone considering investing seeks their own tax advice. The tax treatment of any investment or particular strategy will depend on the individual circumstances of each person and may be subject to change in the future. The information contained herein is subject to copyright with all rights reserved.
MASECO LLP (trading as MASECO Private Wealth) is established as a limited liability partnership under the laws of England and Wales (Companies House No. OC337650) and has its registered office at Burleigh House, 357 Strand, WC2R 0HS. For your protection, telephone calls may be recorded.
MASECO LLP is authorised and regulated by the Financial Conduct Authority for the conduct of investment business in the UK and is registered in the US with the Securities and Exchange Commission as a Registered Investment Adviser.
The partners are Mr J E Matthews, Mr J R D Sellon, Mr D R B Dorman, Mr H Q A Findlater, Mr T Flonaes, Ms A L Solana and Mr N B Tissot.
References
1. Vanguard Research. Putting a value on your value. March 2014. 2. https://www.nber.org/research/businesscycle-dating.
