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Wealth Manager: Vestra's US head on trans-Atlantic opportunities

Wealth Manager: Vestra's US head on trans-Atlantic opportunities

Taking up American football may be going above and beyond the call of duty, but Vestra US director Paul Nixon believes rival wealth managers are missing a trick by ignoring the transatlantic private client market.

For Nixon, a keen amateur player for the London Warriors, the decision was straightforward given the opportunity set and the firm is already taking on clients that have been ditched by the mainstream banks ahead of the Foreign Account Tax Compliance Act (Fatca) coming into force next year.

The group launched Vestra US Wealth Management in May as a dedicated business designed to provide a range of investment and tax planning services for wealthy individuals with an American connection.

‘We’ve been contacted by US citizens in London that have been rejected by UK banks, and others that have just been sent a letter by their existing banking providers saying they’ve got 30 days to move their account,’ he says.

‘We have seen a lot of kneejerk reactions since the announcement of Fatca but I don’t think anyone can ignore it. And if you can do the reporting required by the legislation why not build a service proposition around that?’

While the business case for launching a dedicated US division may be straightforward, getting into the position to offer a service is anything but.

Vestra first started looking at the opportunity in late 2009 and carried out years of preparatory work before feeling ready. Nixon joined the firm in December 2008, initially to focus on UK-resident non-dom clients, an area in which he had built up considerable experience.

He started his career as a graduate trainee at a high street bank, where he worked across a number of departments, including a nine-month secondment to Miami, which whetted his appetite for dealing with offshore and international clients.

After gaining a range of investment management and financial planning qualifications, he later moved to another financial institution to specialise in this field before being recruited by Vestra.

 

The firm hired Neil Williams, who co-heads the US business, in 2009 and the pair were the most obvious candidates to run the new division.

‘Neil had a lot of experience in running US insurance-dedicated funds and the fact he was still running them and I had worked in Miami and had done a lot of work with international clients meant we had a complementary set of skills,’ Nixon says.

‘We did a review of the market in 2010 and we could see the opportunities around Fatca. In our opinion, there is a lot of misunderstanding around Fatca, with people saying it suddenly introduced a lot of reporting requirements.

‘US passport holders have always had a reporting obligation, whereas Fatca has extended the reporting obligation to institutions with US clients. Fatca is legislation aimed at assisting the IRS to gather information from institutions, the legislation is not aimed at individuals at all.’

The firm chose to launch Vestra US Wealth Management as a separate company, but much of the infrastructure was already in place. Nixon says that given Vestra is a young company approaching its fifth birthday, its IT systems are modern and already capture all the information needed to meet the requirements of the legislation. It is also not saddled with years of legacy business.

‘Our legal advice said the best way to structure a service offering would be as a separate entity and we keep all our client data and files ring-fenced, which also makes our reporting that much easier.

‘We still use Vestra’s resources, such as compliance, finance and HR, as well as its investment research and process, and have taken the Vestra ethos of transparency, service and communication – we’ve just made it US compliant,’ he says.

‘On the back of client demand, we ended up obtaining a Securities and Exchange Commission (SEC) licence, which shows we are committed to the American market, as we are both SEC and Financial Conduct Authority (FCA) registered.’

 

Between the idea’s conception and the launch of the US division, Nixon and Williams carried out extensive research into the US regulation (the US tax code has around four million rules, anecdotal evidence suggests) and developed a whole raft of specialist contacts.

‘We have spent the last two years understanding the systems and reporting requirements. We also spent a lot of time internally ensuring we were compliant.’

Externally, the pair have built relationships within the London-based US/UK advisory group, which consists of specialist lawyers, accountants and wealth management firms, with Nixon saying ‘it is a fairly small community and we know each other well’.

‘We get a large amount of business through referrals from professional intermediaries and it is so important to have the client, the wealth manager and their professional advisers, particularly accountants and lawyers, all working together.’

The complexities of the tax rules certainly should not be underestimated and the cost of making a mistake can be high, with the US authorities taxing any undeclared gains punitively. The sheer reach of the rules is also an eye-opener.

Nixon says that while Fatca may be targeted at institutions rather than individuals, it has certainly focused the minds of affluent clients with transatlantic connections that had previously not reported their affairs, whether by accident or design.

This has resulted in a number of clients coming to the firm with non-compliant portfolios, as a whole range of commonly held tax-incentivised savings wrappers are not recognised by the US.

‘ISAs are liable to US taxation, they view it as a straightforward investment account,’ he explains, by way of example. UK-domiciled traditional unit trusts and collectives are also taxed aggressively, he says.

‘The most common errors are holding UK or offshore collectives. There are extremely complex tax rules around passive foreign investment companies (Pfic),’ he adds.

‘The US does not recognise offshore bonds as a life policy, so they effectively become a collective and with pensions it can depend on how they are funded and what type of plan it is.’

 

The rules around enterprise investment schemes (EIS) are similarly complex so it rapidly becomes apparent why Nixon stresses the need to work closely with specialist accountants and lawyers.

‘If you don’t get the tax planning right you can end up paying exceedingly high levels of taxation,’ he adds.

‘Losses on Pfics, for example, cannot be offset against other gains, but the tax on unreported gains can be up to 100%, which can wipe out a multi-year investment.

‘Another complexity is that a lot of US citizens that have been resident in the UK for over seven years will have reporting requirements to both the US and UK tax authorities, and many will still be holding US mutual funds.

‘These are non-compliant in the UK because they are non-reporting funds and this can mean people unwittingly build up a large tax liability and have to pay interest on that.’

If that is not enough, there is the flipside of the complexities faced by ensuring that UK clients that are moving over to the US are not walking into a tax minefield.

When we met, Nixon says the firm had just helped a British couple who were moving to California.

They carried out the restructuring of the couple’s portfolio and through their network of contacts were able to ensure they had trusted advisers in place Stateside, by using their connections to provide them with a number of legal and accountancy experts close to where they will live.

But just how big is the high net worth transatlantic market?

Nixon says from his own experience that anecdotally, it seems to be expanding. He says that whereas many Americans would come over for three to five years, often working in the City, a seemingly growing number are now getting married over here, having children and putting down roots.

‘There does seem to be more of a community than previously and that backs the case of us launching a dedicated US division,’ he says. 

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