Q70 – Can I Have Foreign Clients As An RIA?

Also available as podcast (Episode #70)

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Can I Have Foreign Clients As An RIA?

The feasibility of serving foreign clients as a Registered Investment Advisor (“RIA”) does not differ significantly from the challenges of doing so under a broker/dealer affiliation.  What is similar under both approaches is the Anti-Money Laundering (“AML”) regulations that must be followed.  The RIA model nonetheless provides an opportunity for more flexibility due to the availability of solution providers that have built out the needed resources to support RIAs seeking to attract and service foreign clients.

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Full Transcript:

Can I have foreign clients as an RIA? That is today’s question on the Transition To RIA question & answer series. It is episode #70.

Hi, I’m Brad Wales with Transition To RIA, where I help you understand everything there is to know about why and how to transition to the RIA model.

If you are not already there, if you head to TransitionToRIA.com, you can find all of the resources I make available from this entire series in video format, podcast format. I have articles, I have whitepapers. And again, if you are a podcast person, go to any major podcast platform and search for the “Transition to RIA Podcast,” where you’ll find all of the episodes you can listen along too. Again, TransitionToRIA.com.

On today’s episode, we’re going to talk about a question I don’t get asked a lot, but it does come along. It in part relates back to some of my early, early days in the industry where I briefly held a few roles in compliance. Some of that was in the AML area, the Anti-Money Laundering area.

AML is what deals with whether you can have foreign clients as an advisor, in this case, as an RIA. That’s what we’re going to talk about today. If you were to become an RIA, can you service foreign clients?

That could be a situation where you have foreign clients now and you’re maybe at a wirehouse or some sort of broker deal arrangement and you want to transition into the RIA model. Or maybe you don’t currently have any foreign clients, but want to know if it is something you could start doing if you transitioned to the RIA model.

The first thing I want to talk about is to define foreign clients. There are essentially three categories of foreign clients, arguably in increasing order of risk.

First are ex-patriots, or ex-pats. If we’re using that term within the United States, ex-pats are U.S. citizens that, for whatever the circumstances, live in another country. They are U.S. citizens, they have U.S. documentation. It just so happens to be that they live in another country.

Ex-pats can be considered a foreign client in the sense that they do not have an address here in the United States, but, again, they are U.S. citizens. They are arguably the lowest on the scale of risk, but we’re going to get into what may or may not be acceptable here in a few moments.

Next are non-U.S. citizens, but who reside here in the United States. They generally must produce foreign documentation to prove their identity, but they live here in the United States. They are arguably more risky than ex-pats.

Finally, there are non-U.S. citizens, that reside outside of the United States. They’re not U.S. citizens. They don’t live here. In this case, they might want to do business with you, and you are in the United States.

You might be thinking, do advisors really have these kinds of clients?

I’ll answer that in part with two extreme examples I’ve come across over my career. These are niche practices, so you don’t typically see this sort of thing, but they do exist.

The first example is a practice whose entire niche is on expats, specifically US teachers that live and teach abroad. They might be teaching, for example English as a second language.

The advisor built an entire niche around those individuals. And then by extension, some of the schools the teachers worked at had foundations, which he worked to have as clients as well. That’s his entire business model.

He is the only advisor I know of with such a niche, but it comes with challenges as well. Even though he’s an expert on it, even though he’s created a niche around it, there are still challenges which we’re going to talk about here in a moment.

The other example is a practice that is entirely focused on government members of the United Nations. Their clients are UN ambassadors, representatives, etc. of foreign countries. As you can imagine, this practice is in New York City. Their entire clientele is various diplomats from different countries.

You might think such clients are less risky as they’re all formal delegates to the UN. But the reality is they can be deemed to be very high risk because, as the term goes, they are politically exposed people. Which further calls into question where their money comes from. In a worst-case scenario, they’re potentially accepting bribes, and so the money they have is illegitimate.

I’m not painting a brush and saying all diplomats from foreign countries are doing such things, but it does happen, so there are additional risks involved.

Those are two extreme examples. But you might have a circumstance where you’re not carving out a niche for it, but you come across a client that fits one of these definitions and you want to open an account for them. Or maybe you want to niche down a little into this type of clientele.

So, the question is, can you do that as an RIA?

If you’re currently in a wirehouse world or independent broker-dealer world, your first thought might be, “Can I get this approved?” A broker-dealer must approve it in part because a broker-dealer has to formally “supervise” their registered representatives, which you would be one of.  If you go to them and say, “Can I open this account for this client that’s in Argentina”, they may or may not approve it.

There is a lot of risk opening accounts for foreign clients. There are specific rules, AML, Anti-Money Laundering rules regarding what firms are responsible for. There have been a lot of large fines over the past decade or so, hundreds of millions of dollars, that regulators have assessed onto firms to say, “You did not follow these AML rules as well as you should. You did not identify these bad actor clients that came along. You did not identify that they had illicit money that they were depositing in your account.” There is a lot of risk involved with it.

So the question is, does a broker-dealer want to approve when you come along and say, “I have a prospective client from Argentina. I’ve never dealt with this before. Can I open the account?” It will more than likely be that broker-dealer will say, “No, we’re not going to allow that.”

As your own RIA, you might not have a broker-dealer affiliation.  Any of you that have listened to many of my episodes would know that as an RIA, you absolutely can continue to service commission business if you have a need to do so, in a so-called hybrid arrangement. I’ve done all kinds of episodes on that. You can learn more about that.

So, it’s not to say that in the RIA world you might not still be attached to some sort of broker-dealer in some capacity. But, let’s say you are 100% fee-only and you don’t have any broker-dealer affiliation at all. Well, if there’s no broker-dealer, then there’s no broker-dealer you must go to for approval on this sort of thing.

However, if you want to open an account, there’s still two approvals that must happen.

First, is your RIA comfortable with this? If you own your own RIA, you can make that determination yourself, but know that you have responsibilities. Are you comfortable with that?

Next, even if you as the RIA are comfortable, you still need your custodian to agree to open the account for that client.

Your custodian has no formal “compliance responsibility” for your RIA. It is your responsibility as the RIA to manage your own compliance. I’ve done a lot of episodes on how that process works. A custodian has no responsibility for that. However, a custodian does still have AML responsibility. Because the account is being opened on their platform, they are holding the assets, they have AML responsibilities.

Two main criteria you’ll have to be familiar with, and to get your custodian comfortable with are knowing the client and knowing their source of funds.

First is to know your client. We’ll go back to the example of you wanting to open an account for someone in Argentina. There’s a big difference if the story is, “Someone from Argentina called me up. I’ve never met them before. They would like to open an account here in the U.S.”

It might even be legitimate. Maybe they want to move assets out of their home country, or they feel the U.S. is a better place to invest.  But such a scenario is vastly different than, “This is my old college roommate. I’ve known him or her for 20 years. They are now an expat living in Argentina because of X, Y, and Z. I’ve known them for a very long time, and they’ve chosen to now live in Argentina.” That is a very different know-your-client scenario.

The other variable that must be understood is the source of their funds.

If that random person from Argentina calls you up and says, “I have $1 million that I would like to invest”, you don’t know that person, you don’t know where they got the $1 million.

You would arguably ask, “What is your source of wealth?” You’d probably say it more eloquently than that, but that’s what you’re getting at. Whatever answer they give, the problem is, even if it sounds legit, even if it sounds reasonable, how would you know? You don’t know this person. You’re likely not familiar with the local Argentinian economy to know if what they are saying is reasonable or not.

Again, very different from the old college roommate scenario where you might know what sort of work they do, how long they’ve been doing it, and what their net worth is likely to be as a result. Understanding a client’s source of funds is very important.

Any custodian will have to be able to get comfortable with, at a minimum, that you know your client, and you know what their source of funds are. Even if you get past that though, realistically, will you be able to open an account for that client?

With some custodians, it’s pretty much a hard stop. They say, “We’re not in that line of work. It’s not going to work for us.”

Keep in mind how a custodian generates revenue, which I did an entire episode on. Being a custodian is a very low-margin business, which they must make up for with massive scale. If you take on what are arguably higher-risk clients, there’s going to be higher risk to the custodian to make sure they are fulfilling their AML responsibilities. They do not want to be on the receiving end of massive regulatory fines. It must be worth it to them.

A custodian might simply say, “The amount of risk for the amount of margin we will make on that client relationship, it’s not worth it to us.”

I have seen some custodians take an across-the-board position that they generally won’t accommodate any foreign clients.  They say, “That’s not where we have expertise. That’s not where we are willing to invest the resources to be able to do it properly. So, the answer is no.”

However, there are some specialty firms, that have shown a willingness to accommodate foreign clients. I’ve seen an introducing custodian, if you will, where the underlying custodian says, “We do not have the resources to make sure that we are sufficiently verifying a client and getting comfortable with source of funds and following all the rules. If however you work with this kind of introducing custodian, for lack of a better term, and then ultimately the assets are held by us, they have the expertise needed and we’re comfortable as long as you work through them.”

As opposed to starting your own RIA you might consider joining an existing RIA. I did an episode on that as well.  There are some RIA firms you can join that have invested the resources needed to accommodate advisors that have foreign clients. They say, “We can accommodate that. We have identified custodians that will work with us on that. The custodian is comfortable with what our process is.” So, that exists as well. There’s not many of them, but there are some.

These firms as a result must build meaningful business with foreign clients. They can’t just have three accounts and expect to hire a dozen people to monitor these sorts of things. It’s kind of an all-in approach that some of these firms have done. They’ve embraced it, and they said, “We are open for business. That doesn’t mean we will take every foreign client you might come across, but we have processes to attempt to accommodate it where we can.”

A final takeaway is, there must be enough meat on the bone. Whether you want to try to go directly to one of your custodians, or maybe you want to work with one of these solutions I’ve described, there must be enough meat on the bone.

First, how much business might you be able to bring to them? If you have $30 million in assets, that’s significantly different than if you have $800 million in assets. A solution provider might look at your $30 million and say, “We’re not going to make enough revenue off of your $30 million, to offset the risk of us trying to accommodate you and your desire to have foreign clients.”

However, if you have $800 million, solution providers might say, “We will generate enough revenue from this relationship that it makes sense for us to take on this additional layer of risk. Even though we have all these great resources, there’s always an additional layer of risk. In this case, it makes sense for us to do it.”

So, your overall size could dictate whether you will have any success and be able to explore this. If you’re brand new to the industry and you’re seeking to start up with a niche focusing on foreign clients, that will likely be very difficult for the reasons I just stated. You need solution providers to work with on this. Maybe you will one day be that $800 million RIA, but right now, you are not. It will be hard to get people to work with you and take on the risk of foreign clients if you’re not able to bring a lot of business to them all at once.

The other related item is even if you are a large RIA, if you want to dabble in foreign clients, you need to either do it or don’t do it. It’s not worth your trouble to add that one account from Argentina. It’s likely not going to be worth the extra headache for you, the extra risk for you, possibly battling with your custodian over it, possibly them coming back at some future date saying they’re no longer comfortable with the client.

There are specialty solution providers that will perhaps work with you, but there must be enough meat on the bone. If it’s just one account, unless that happens to be a very large account and you have a very good story for how you got the client and what the source of funds are, it’s not going to be worth the headaches for you.

I hope you found that helpful. You will have different challenges if you want to dabble in having foreign clients. But again, under the right circumstances, there are solution providers that may be able to support it. If you have enough foreign clients, and you are reasonable size overall, it’s possible there might be a pathway for you in the RIA model to be able to accommodate it. But just as the circumstances might be for you now, it’s not a super easy glide path. There are hurdles that you do have to jump over.

With that, my name is Brad Wales. This question doesn’t come up too often, but it does get asked. This is the sort of thing I help advisors with. “Can I do this in the RIA model? How would this work in the RIA model? Could I transition my existing practice into the RIA model?” I’m happy to have that conversation with you as well.

If you go to TransitionToRIA.com, you can find all the resources I make available. The videos, the podcast, articles, whitepapers. The easiest thing to do is at the top of every page is a contact link. Click on that and you can instantly and easily schedule time to have a one-on-one conversation with me. Whether you want to talk about today’s topic or anything else RIA-related, I am happy to have that conversation with you. Again, TransitionToRIA.com.

With that, I hope you found value with today’s episode, and I’ll see you on the next one.

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