Although recent protests have drawn more international news cameras than usual, international wealth management clients have compared opening an investment account Hong Kong to having one in Switzerland, Singapore, or South Florida (Miami) for decades if not since the World Wars. While Hong Kong vs Singapore may be the most overdone comparison in Asia, this Bloomberg article on Chinese millionaires’ looking away from Hong Kong includes the following chart showing the Fragrant Harbour’s place behind Swiss banks, but ahead of Lion City and the great United States, as an offshore financial center.
Although there are many reasons you might choose to open your wealth management account in one place versus another, I wanted to list a few factors you might consider when deciding where next to open an investment account:
#1: Are you a US person?
If you are a US person (US citizen or green card holder), you CAN open an investment account outside the US, though there are reasons you may not want to. Offshore accounts are subject to FATCA (described next) and need to be reported on an annual FBAR separate from your US tax return. Second, with regard to tax reporting, most foreign banks and brokers will not issue you a 1099, which will make calculating and reporting US income taxes on your investment returns in that account that much more difficult. Third, non-US investment accounts tend to get invested in non-US funds, which not only tend to be more expensive and opaque than US standards, but may be subject to punitive PFIC tax treatment.
Short answer: if you are a US person, it is generally a good idea to keep your investment accounts in the US. Interactive Brokers is one great place to open an international multi-currency account with 1099s even if you live outside the US. While I do have bank accounts in Hong Kong or Singapore for making and receiving local payments, those offshore bank accounts are for exactly that, and hard enough to keep up-to-date on my FBARs without worrying about dividend withholding tax credit or capital gains calculations.
#2: FATCA and CRS
If you are concerned with financial privacy, you’ve probably heard about the US law FATCA and the OECD’s version called CRS. FATCA basically requires foreign banks to send information on your offshore account to US authorities, while CRS has banks in participating countries send information on your accounts in those countries to other participating countries. It is worth noting that Hong Kong, Singapore, and Switzerland all participate in CRS, while the United States does not.
I’m all for transparency and fully reporting all taxes you owe, but do feel all this cross reporting has become a bit like taking your shoes off at the airport (something which has encouraged me to fly less and take the train, even though I’m not hiding anything in my shoes). One source estimates these regimes cost global banks US$270 billion/year in compliance costs, most of which gets passed to us customers in the form of higher fees for less service, lower interest on our accounts, and far longer waits to open accounts and perform simple transactions.
CRS basically means that a government that wants to see information on your Singapore or Swiss account just as easily as they can on your Hong Kong account, while FATCA means your US account will not have to be reported to anyone outside the US. Some may see that as a reason even non-Americans might prefer opening accounts in the US to outside the US.
#3: Level of service and expertise
As mentioned earlier with regard to PFICs, US funds tend to have some of the highest standards of disclosure and the lowest fees anywhere in the world. The US has by far the largest, most diverse and most liquid stock, ETF and bond markets, to the point that many foreigners trade stocks and bonds issued by companies from their home countries in US markets. While there are issues of withholding and estate taxes to beware of, the US remains one of the best places on earth to keep a secure and well serviced account.
While all three points might seem as though I’m advocating everyone open a US account, I do open and manage accounts in Hong Kong for both US and non-US persons, the latter more for tax reasons, but for both because the US can be so big and inward looking that many American advisors forget to look at the many great investment opportunities abroad. I choose to continue living and working in Hong Kong because overall, I believe this will continue to be a great place to be invested, and I am confident it will continue to be as good as any other non-US financial center for wealth management accounts for decades to come.