Most everyone would agree that owning international investments through a managed investment vehicle (e.g. ETF/Mutual Fund) within your U.S.-based portfolio can be a good way for investors to diversify their holdings and take advantage of global opportunities.
But investing in foreign managed investment vehicle using an account based out of a foreign country opens investors to a whole world of varying standards, experiences, and regulations. There is no global investment standard or agency to oversee investment practices or regulations and offer insights as to how one environment compares against another.
Thankfully however, Morningstar, the independent global investment research institution publishes a comprehensive biennial report on this topic known as the Global Fund Investor Experience Report.
Since 2009, Morningstar has produced the Global Fund Investor Experience Report to compare investors’ experiences in 25 countries (26 in 2019) across North America, Europe, Asia, and Africa. Each nation is scored on four dimensions plus an overall score. The four dimensions are:
Based on the scores from each dimension as well as the overall score, this study ranks each nation from top to bottom on a grading scale that includes Top, Above Average, Average, Below Average, and Bottom. So far, no country has received an overall score in the Bottom ranking.
The rankings are accompanied by a discussion of how the current year’s rankings compare to the rankings from the previous year’s study. (In 2020, the Report only included results and rankings for fees and expenses.)
Based on data from 2017, the last time the report has been provided summarized data, the U.S. ranked in the overall top spot for investor experiences. Among other countries, Australia and the UK ranked Above Average, while Canada, Germany, Hong Kong, and Singapore ranked Average. Five European countries ranked Below Average: Belgium, Finland, France, Italy, and Spain.
The U.S. outperforms on the basis of low fees and outstanding disclosure requirements.
The U.S. ranks top in the disclosure dimension. Not only are U.S. disclosures always required, it only takes an average of 33 days for U.S. funds to release portfolio holdings disclosures after they’ve been adjusted. In Hong Kong, which received an “Average” ranking in this category, it takes almost four times as long—an average of 113 days.
Many European countries also rank “Average” in the disclosure category. Although most European Union countries use the Key Investor Information Document (KIDD) as a template for their disclosures, the standards vary by country. Additionally, the language in European disclosures is notoriously difficult for investors to read and understand.
Australia ranks poorly in the disclosure category because it is the only country that does not require disclosure of the holdings in a particular fund. Despite this, about 50% of portfolio managers in Australia do release disclosures voluntarily.
As of the 2017 Report, the U.S. only ranked Average in the sales category. This may be because many professionals in the U.S. are only held to the suitability standard rather than the fiduciary standard. For example, broker-dealers and insurance companies, which are not always held to a fiduciary standard, are able to sell funds to U.S. investors. (It’s also rare for insurers to sell funds in other countries.)
With that being said, clients working with financial advisors who hold themselves to a fiduciary standard (e.g., CFP® or GFP professionals) should expect a better-than-average experience in the U.S. investment environment.
Australia ranks Top in the sales category. Reforms brought upon as a result of the 2018 Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry coupled with the earlier Future of Financial Advice (FOFA) reforms that became mandatory for Australian financial advisors in 2013, now mean all financial advisors must act in their clients’ best interests. Australia has also banned commissions on fund sales, so Australian investors pay for advice directly and all fees must be disclosed.
Both the U.S. and Australia were ranked Top in the fees and expenses category. Fund expense ratios are relatively low in both countries compared to other countries (especially in Asia). For example, “Taiwan's asset-weighted median fees for fixed-income funds are the highest among markets in this study.” One reason for this is that Taiwan is heavily concentrated in funds invested in expensive markets, such as emerging-market debt.
Fund fees in both the U.S. and Australia are typically unbundled which, according to Morningstar, may promote more transparency and orderly fee competition. Additionally, “the U.S. and Australian markets are closed to funds domiciled elsewhere.” It’s important to clarify that this doesn’t mean you can’t invest in foreign companies, rather it’s difficult or impossible for investors from overseas to invest in locally available mutual funds/ ETFs.
Importantly, this study does not account for platform fees or trading fees. U.S. investors have been the winner of a price war that has resulted from trading fees being eliminated on stock/ETFs trades at most major U.S. brokerages. No major U.S. custodian charges platform fees. In Australia however, both of these fees are regularly charged and at higher levels. Typical platform fees range from 0.2 - 0.4% of the total account balance and trading fees range from $9 - $49 per trade.
It’s important to keep in mind that this study is based on managed/mutual fund data. The study does not include data for ETFs. ETF usage and product availability is much greater in the US than it is in other countries, which is advantageous to investors as ETFs are inherently free of sales and distribution charges, which can make them significantly less expensive than many share classes of mutual funds.
The U.S. was ranked Below Average for regulation and taxation in 2020. Morningstar considers single independent regulators to result in better investor experiences. Unfortunately, the U.S. has an outdated and complex regulatory system.
Although it has attempted to regulate mutual funds for a longer period of time than many other countries, the U.S. does not benefit from the streamlined regulation systems that other countries—most notably in Europe—have adopted more recently. In fact, the UK was the first country ever to receive a Top ranking in regulation and taxation, which it earned in 2020.
Additionally, the U.S. has complex and, in many cases, punitive tax regimes for citizens and permanent residents who invest in foreign mutual funds outside of U.S. brokerage accounts. On the other hand, the U.S. does not mandate that investors pay taxes on “paper” gains, only on realized gains. This is a huge advantage for U.S. investors.
High-net-worth individuals who are relocating to or leaving the United States have much to consider in terms of their tax consequences. At Arete Wealth Strategists, we support and serve cross-border citizens. We educate on tax implications for their relocation decisions, as well as how to optimize tax mitigation strategies for clients who need them.
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