The compliance officers at many mutual fund companies seem to believe that the Patriot Act (which was supposed to deter and punish terrorism, and strengthen U.S. measures to prevent, detect, and prosecute international money laundering and financing of terrorism) made it illegal to let people living outside the United States buy U.S. mutual funds – even if they are American.
They are wrong.
But since the lawyers make the policies for the mutual fund companies, individual investors have little recourse. In some cases, mutual fund compliance departments make the decision that the added regulatory overhead costs, possible fines and penalties, and the knowledge required to handle international accounts isn’t worth the effort, so they simply say “no.”
This means that by virtue of being an American living overseas, you may not be able to join the 52,000,000 other Americans who invest approximately $30 trillion in mutual funds.
Unfortunately, offshore funds aren’t a viable option for law-abiding American citizens. Offshore funds won’t sell to an American, and even if they did, you would expose yourself to a huge amount of tax risk for buying non-U.S. funds.
What is a good alternative to a mutual fund?
Exchange Traded Funds may be a good alternative to provide diversification to an investment portfolio. ETFs trade like a stock, and there are many types that track a specific index (like the S&P 500), a commodity (like gold), a sector of the market (like health care), or any of hundreds of other different categories. Investors benefit by getting instant diversification and quick trade executions. Sophisticated investors can sell short and buy ETFs on margin. Since ETFs trade in a different way from open-end mutual funds, Americans living overseas have no problem purchasing them.
Professional management
One benefit of mutual funds is that they may be professionally managed. You can also have ETFs with a professional manager. Many people hire money managers to trade portfolios of ETFs for them. Instead of the client making the day-to-day decisions, the professionals handle the account.
Learn more about mutual funds and ETFs by reading The Retirement Planning Book, which can be downloaded for free at www.profile-financial.com.
Douglas Goldstein, CFP®, is the Director of Profile Investment Service, Ltd., which specializes in helping people who live in Israel with their US dollar assets and American investment and retirement accounts. He helps olim meet their financial goals through asset allocation, financial planning, and using money managers.
Published March 23, 2015.