In the infamous words of Yogi Berra, “It’s like déjà vu all over again.” An issue that resurfaces every year or two is back and causing confusion and anger among clients of certain US brokerage firms. Just this week. I received multiple calls from individuals who were told that their US brokerage firm will no longer service their accounts and that they have 90 days to find a solution, or else. I’ll get back to the “or else” shortly.
This comes on the heels of a huge announcement made by Wells Fargo, the 3rd largest bank in the US, a month ago. Diana Britton of WealthManagement.com writing on the issue quotes Jim Hayes, head of Wells Fargo Advisors and the wealth and investment management client relationship groups; “Within the WIM client relationship Group, we also want to focus on our core business, which is serving clients who primarily reside in the US. As such, we have decided to exit the international segment of our business. Because this segment requires different processes, approaches and infrastructure maintenance, we have determined we will simplify the business.”
Please don’t jump to the “it must be antisemitism” conclusion. As Hayes says, it’s much more difficult compliance-wise to deal with these accounts and apparently it’s not financially worth it to keep them.
Britton continues and quotes Barbara Herman, a senior vice president at Diamond Consultants, who says, “A lot of the big firms are moving away and making it more difficult to work with clients overseas because there’s a level of risk associated with it. You’ve got money laundering rules, all kinds of federal rules that you have to be mindful of. Then you also have rules in the local country – the client’s local country – to deal with that can oftentimes make it difficult to work with a client in another country. It can be fraught with challenges that create legal exposure as well as financial risk.”
What to do?
The “or else” mentioned above should be taken very seriously. Failure to act can be incredibly costly. Why? There are two major reasons.
1. Somewhere in the letter it says that failure to comply gives them the right to liquidate the portfolio. A few years ago I met with someone who figured they didn’t really mean it and boy was he wrong. By having the account liquidated he incurred a huge capital-gains tax bill.
2.Because the firms also retain the right to send all your shares to a transfer agent. What is a transfer agent?
Without getting into the nitty-gritty of how this business works, transfer agents are used by publicly-traded companies to keep track of the individuals that own their stocks and bonds. The problem with having your shares sent to a transfer agent is that to release the shares back to you is a very onerous project, sometimes requiring a Medallion signature, something that is not so readily available in Israel. There are costs involved as well.
If you need money quickly, forget it. In a pre-COVID world it took many months, and now it can take over a year to get your shares transferred into a brokerage account.
A few years ago a couple came in who had never opened up the mail they received from their brokerage firm. Well, one month they decided to look and they saw a monthly statement that showed a value of just a few dollars. They were panicked and figured their money was stolen. What happened? They received a letter politely asking them to move their account somewhere else, and if they didn’t by a specific date, all securities were going to be transferred to the agent. And sure enough that’s what happened. They owned somewhere near 30 stocks. Needless to say, it took more than a year, and almost a $1,000 to get all these shares booked in a brokerage account.
The knee-jerk reaction of many is to bring the money to Israel. That can be a bad decision. Firstly, because US citizens are severely limited in how they can invest locally in Israel without incurring high taxes due to PFIC issues. Second, if the account in question is a retirement account like an IRA, moving it to Israel will almost certainly be considered a distribution and there could be a huge tax bill involved.
There are some US brokerage firms that specialize in working with US expats. There are certain Israeli Facebook groups that can be searched for information on who these firms are. There are also local professionals licensed both in Israel and in the US, who have arrangements with US brokerage firms who can handle these accounts. Take these letters seriously but don’t panic. There are good solutions available.
The information contained in this article reflects the opinion of the author and not necessarily the opinion of Portfolio Resources Group, Inc. or its affiliates.
Aaron Katsman is the author of Retirement GPS: How to Navigate Your Way to A Secure Financial Future with Global Investing (McGraw-Hill). www.gpsinvestor.com; [email protected]