Jul 22, 2022
By John McNertney, CFP®

Your US investments: why you should never own another US mutual fund

For US investors, living in the Golden Age of Fintech makes living abroad easier than ever if you plan ahead

When I answered the call that came to my desk last October, I was surprised when an American CPA was on the other line:

"Hi, you don’t know me, but I have a problem, and I think you can help me. I hear you understand how to invest for Americans in Portugal. Can we talk?"

Now, this is a surprising call. Accountants are a very self-reliant lot, and as a rule, quite smart. So, unless confronted by an unusually challenging question, they do not seek counsel from CFPs (Certified Financial Planner®).

What was the problem? It’s an investment problem that is unique to Americans living in Europe, and the problem involves buying mutual funds. Normally, this is not only quite easy, but millions of Americans do it every day inside of their retirement accounts... Nearly half of average Americans contribute to a 401k, mutual funds are typically the best way to do it. For the American in Europe, however, this is a no- no. And if you ignore this, there can be consequences. However, like many challenges, there are opportunities that can be found if you plan ahead.

Some background:

Prohibited investments for Non-Resident US investors

In 2018, EU Parliament passed the "Markets in Financial Instruments Directive". This results in an across the board ban on the sale of US financial instruments to European residents. According to these new laws, all sales of investment products to retail investors needed to also be supplied with a "key information document"(KID), whose purpose is to help them better understand the product before they buy it. But US Mutual funds and ETFs don’t provide these, as a rule so they’re not allowed to sell them in Europe.

Obviously, violators are penalized, and so US investment firms have complied with this, stopping all sale of all these products. Where do we go from here? Well, my CPA is interested in knowing this, too.

Enter: Financial tech

As I write this, in the summer of 2022, we are in the golden age of financial technology. Think about it... 20 years ago, if you the costs were still fairly high for buying individual stocks, and so you would have spent a bundle trying to "build your own mutual fund". (also, raise your hand if this sounds like fun to you!). So naturally, you would have been smart to choose a few good mutual funds and ride out the investments for the next decade, two or until whenever the time came to fund your next big goal. Nowadays, technology has totally changed the landscape: After a few decades of gradually reducing the cost-to-trade, most of the big US companies have brought the price of trading effectively to zero.

So now... The question isn’t "can we?" but rather: "HOW do we", and indeed, there isn’t a better time for my CPA to have his question effectively answered. The answer is "Sim, nós Podemos!" So, I would only say this, for any expat who is eying the abundant benefits of a new life abroad... Plan ahead, do your homework, and turn that problem into an opportunity!

John McNertney, CFP®
CEO at Green Ocean Global Advisors