James Covell didn't set out to develop a roster of international clients. They just sort of showed up.
They started arriving in 2008. Back then, Covell, an RBC Wealth Management advisor based in New York, had a busy practice helping executives of public companies manage the proceeds from the exercise of their stock options. Then something unexpected started happeningas the operations of companies he worked with became more multinational, so did his advisory business.
First, as his U.S. clients were relocated overseas, those clients sent money back home to their U.S. RBC accounts. Then, foreign executives who worked with his clients' companies in places like Brazil and Mexico asked for help in both exercising their options and managing the proceeds. As referrals flowed in, international clients and their U.S.-based assets became a growth area for his practice, which today manages upward of $1 billion in assets. "As their business is getting bigger, I'm getting bigger," Covell says.
It turns out that Covell's unintentional international expansion strategy was being replicated throughout RBC-U.S. Over half of RBC-U.S. advisors have some kind of international business managing money for a foreign client, according to a survey the firm did last year. Most of that business was built in exactly the same way as Covell's wasword of mouth, expansion of existing relationships and foreign relocation of U.S. clients.
It's a strategy that, although not as flashy as opening physical branches in foreign locales, is turning out to be a highly lucrative and less risky way for U.S.-based broker-dealers to access one of the fastest growing sources of wealth in the world. Aiding the strategy is the fact that foreign investors want at least some of their money parked in the United States.
"The U.S. market is the largest and most successful capital market in the world," says Chet Helck, CEO of Raymond James' Global Private Client Group. "It's larger than the next several combined. There's a great deal of interest in investing in this country."
This is fortunate for financial advisors since, while the United States is still home to the majority of the world's wealth, the number of high net worth individuals in Latin America and Asia is growing at twice the rate of North America. So is their total wealth. By 2015, the assets of high net worth investors in the Asia-Pacific region are expected to grow as much as 9.8%, compared with 5.7% in North America, according to RBC Wealth Management and Capgemini's World Wealth Report 2013.
"Going back over the last three years, the emerging markets have been the growth story and the developed world has not," says Ricardo Morean, director of International Advisory at RBC. "If you are going at 50 miles per hour to enter that market, you need to accelerate to make sure that you can get there faster and take advantage of that opportunity."
But gaining fast access to foreign wealth at its source has been a bigger challenge for firms than some had anticipated. In 2009, Morgan Stanley announced it was gunning for double-digit growth outside the United States. Four years later, in May of this year, it sold its India wealth management unit to Standard Chartered. The unit accounted for less than 5% of the firm's total revenue from India in 2012, Morgan Stanley said at the time. About a month before, the firm sold its Europe, Middle East and Africa division, which had around $13 billion in assets, to Credit Suisse.
Last year, Merrill Lynch sold all of its international wealth management division to Julius Baer for $2 billion. It was reported that Merrill's parent, Bank of America, did not consider the business, which oversaw around $90 billion in assets, mostly in Europe, to be generating enough revenue. And in 2009, Edward Jones sold its British advisory arm after two years in the red.
"The emerging markets especially are very volatile markets," says Helck of Raymond James, one of the U.S.-based firms embracing a domestic approach to international growth. "If you go in at the top and pay a big price and the market rolls over on you after a few years, you don't do enough business to amortize your cost."
That's why firms are taking advantage of new technology, communication and online tools, which have shortened the relative distance between the U.S. office and the international client, to mine the foreign market from right here at home. "When I started in the business, you'd have to get on a plane and travel. It's the only way you would do business. That's not so anymore," says Frank Amigo, who manages Raymond James' south Florida complex from Miami. "[Foreign] clients doing business in this country have easy access to their funds now. They can go online and review things. They are a phone call away."
"It's really about bringing international home," explains Mary Zimmer, head of RBC's International Wealth-USA, a role she took in 2010 when RBC's international division was decentralized and responsibilities added to RBC's U.S. Wealth Management business. "Our whole business is now becoming a global business. You're seeing the globally mobile investor."
Bringing it Home
As the benefits of home-grown foreign expansion became increasingly apparent over the past few years, firms instituted corporate realignments and formalized programs to capture the opportunity. Raymond James, for instance, which has a handful of offices in Latin America, created its Global Group in 2009 with three advisors focused on managing U.S. assets of foreign clients. In just three years, the Global Group has quadrupled both revenue and the number of advisors. The group now makes up almost a quarter, 23%, of the revenue for the south Florida complex.
At RBC, the U.S. expansion is multi-stage. The first move was to roll the International Wealth division into RBC's U.S. Wealth Management group in 2010. The second was the creation of the domestic International Advisory Group, a cadre of advisors who focus exclusively on foreign clients who want to invest with RBC in the United States. Zimmer tapped Morean to head that division out of Miami. RBC has since hired two dozen internationally focused advisors. Right now, the IAG targets the Latin American market, but eventually, it will coordinate with RBC offices in China and Southeast Asia as well.
RBC's most recent step was to establish the International Financial Advisory program to help its domestic advisors like Covell, for whom foreign clients are a large, strategic part, but not necessarily a majority, of his practice (as they are for IAG advisors). The idea for the program came about after last year's survey found that over half of RBC's 2,000 domestic advisors had a smattering or more of international business.
RBC wants that number closer to 100. Zimmer and others felt that it was risky to have so many advisors dealing with rules and regulations governing international clients without having a proper framework for monitoring and growing that business. The firm has sent word down through branch managers that any advisors who have a strategic portion of international business (10% to 20%) should apply to become part of the IFA program. Covell, who has helped to develop the program and is himself an IFA advisor, regularly consults with Zimmer on how to collaborate with the firm's 160 offices in other countries to better understand and serve his clients abroad.
International Rules Apply
Going forward, RBC-U.S. advisors who are not part of the IAG group or are not in the IFA program will not be allowed to handle accounts of foreign investors. The goal is to make sure international clients have access to specialized resources and attention, which is necessary for the high level of rules and regulations that come with this client niche. "We're starting slow, making sure we have the right training and process for supporting them and making sure that they understand the countries," Zimmer says.
Foreign investors can't buy certain types of U.S. investments, like Reg-S bonds and some mutual funds. However, they are allowed to buy some investments (like funds registered overseas) that U.S. investors cannot purchase, so advisors must be well-versed in those legalities before they begin.
In addition, U.S.-based advisors can only manage money that foreign clients have earned in the United States or have transferred here. Otherwise, they need to be licensed by the regulators in the client's home countrysuch as Mexico's Secretaría de Hacienda y Crédito Público or the Prudential Regulation Authority in the United Kingdomor they must hand off the business to a local office in-country. It is extremely rare for an advisor to pursue a foreign license due to the approvals required, costs and restrictions that such licenses inevitably place on their U.S. practice, Amigo says.
But even when dealing only with U.S.- based assets, advisors have to jump through several regulatory hoops in addition to standard FINRA and firm rules for new accounts before they can take a foreign investor's money. The Patriot Act and anti-money laundering rules have increased the number of questions that an advisor must ask and the level of due diligence an advisor must perform on non-U.S. citizens.
"It's getting more complicated," Zimmer says. "Regulators have raised the bar, and our firm has raised the bar. You have to have systems and processes that are proactive."
When explaining a client's source of wealth, for example, "you don't just write 'inheritance' and move on," says Sonya Gelb, an advisor who works with Venezuelan clients in Raymond James' Miami office. "They want to know who they inherited it from and how did they make their money."
Because the rules are so strict around whom an advisor can bring on, advisors focused on cultivating foreign clients have to rely on referrals to grow their business, so it helps to have a network. Gelb, for example, was born in Miami, but her mother was Venezuelan. Understanding the nation's culture and language has allowed her to expand her international business while avoiding regulatory landmines. "It would be very difficult to just make a cold call to somebody who you don't know or haven't been referred to," Gelb says.
Learning Local Laws
Although assets being managed by U.S.-based advisors are mostly custodied in the United States, in U.S. dollars, and subject to FINRA regulation, advisors still have to understand the rules and regulations of the home country because it will affect how they gain access to the client and his or her money. For example, foreign clients are not required to have a U.S.-based proxy when transacting business with U.S. advisors. However, some countries, such as Brazil, have stringent rules about how clients can move money in and out of the country. In Venezuela, it is illegal to move any money out of the country. The Venezuelan bolívar is traded on the black market, so Gelb can only handle her Venezulean clients' U.S. assets that are already here, or are generated here. Frequently, trying to work around those home country rules and understanding how they impact U.S. assets requires bringing in outside assistance to understand the diverse markets, Amigo says.
For instance, many clients come to Gelb looking to safeguard assets and protect their wealth because they fear the Venezuelan government could nationalize their business or that inflation could devalue their assets. "They're afraid of what the administration could do," Gelb says. "Our clients have been focusing on preservation of capital."
On the upside, there is a growing arsenal of products reserved exclusively for foreign clients that are not available to U.S. clients. Special offshore mutual funds registered in places like Luxemboug don't automatically withhold for tax purposes 30% of any dividend income, as U.S. registered investments do, on dividend payments to foreign investors.
"Back in the day, we were really limited with what we could do for our foreign clients. Only a handful of products were suitable and available," Amigo says. "So it's not as complex today. The complexity has gone from investments to planning."
Bringing in Specialists
Planning becomes important for international advisors because a lot of clients are interested in setting up trusts for their children or family in the United States, and need help sorting out the names and titles on their U.S.-based assets. Understanding all of that usually requires bringing on an estate planner, Amigo says. "The most important aspect of practice management for an advisor handling foreign clients is to have a good understanding of the procedures and the tax ramifications in the United States. They also need a good network of attorneys and CPAs," he notes.
To help with holistic planning, advisors use estate planners like Ruben Gotleib of Miami-based Gotlieb & Associates, who specializes in foreign wealth. Gotlieb, whose mother was born in Costa Rica, and his team are familiar with the individual laws of most of the countries in Latin America. "There are multiple jurisdictions, multiple family members, multiple asset types, and it can get complicated," Gotlieb says. Part of his expertise is being able to understand the tax laws in clients' home countries so he can determine whose name to keep trusts or titles under because even U.S. trusts can be taxed heavily by a client's home country.
You've Got Mail
Firms must also exercise discretion depending on which country they are working in. Some countries have less secure postal systems, for example, and a letter from a U.S. wealth management firm can draw prying eyes. In some cases, Chris Lucy, a managing director in Accenture's wealth services unit, counsels firms to mask any physical mail. The firm will use a white envelope without any obvious branding and the client will set up a company, like a trust, where it can hold assets and receive sensitive mailings about those assets so that no individual names are used.
"The [emerging countries] clearly have a lot of geopolitical risks," Lucy says. "The physical mail requirements and issues associated with that have diminished in recent years with the rise of digital access as regulators have become more comfortable with not issuing paper statements."
That means international advisors spend lots of time communicating by phone or online with their clients. Gelb contacts her clients almost daily. For the extra effort, international clients often bring additional rewards. Most advisors are able to focus on fewer clients who have more assets. At RBC, advisors who have a substantial portion of international business have an average production around $1 million, while the mean production for domestic advisors is around $600,000.
"It requires an additional layer of knowledge and skill sets to compete in markets that are different," Helck says. "But it will give our firm another pathway to growth going forward, and it's part of our strategic plan to build that out."