Why Foreign Banks Are Shunning American Millionaires

Affluent Americans need not apply. That’s what some of the world’s largest wealth management firms are saying in anticipation of Washington’s implementation of the Foreign Account Tax Compliance Act, which seeks to prevent tax evasion by Americans with offshore accounts. HSBC Holdings (HBC), Deutsche Bank (DB), Bank of Singapore, and DBS Group Holdings (DBS) all say they have turned away business from U.S. clients. The attitude of American regulators is “Draconian,” says Su Shan Tan, head of private banking at Singapore-based DBS, Southeast Asia’s largest lender. “I don’t open U.S. accounts, period.”

The 2010 law, to be phased in starting on Jan. 1, 2013, will mean additional compliance costs for banks and fewer investment options for U.S. citizens living abroad. Known as Fatca, it requires financial institutions based outside the U.S. to obtain and report information about income and interest payments added to the accounts of American clients. The Internal Revenue Service held a hearing on the rules on May 15 and could change some aspects of the law.

Jim Spellman/WireImage/Getty ImagesNo longer a U.S. citizen, Saverin may save on his Facebook tax bill

Penalties for not complying will be stiff. Non-U.S. firms that don’t make ­required disclosures will be subject to 30 percent withholding of certain dividends, interest, or proceeds from the sale of assets they or their customers receive from U.S. sources, according to Richard Weisman, Hong Kong-based head of law firm Baker & McKenzie’s global tax practice. “Overwhelmingly, financial institutions outside the U.S. don’t like it, for obvious reasons,” says Weisman, calling the withholding tax a “stick” the U.S. is wielding. “The U.S. is outsourcing a tax-compliance function, which is enormously expensive.”

The U.S. government needs to be tougher on offshore tax crimes than it has been, says U.S. Representative Richard Neal, a Massachusetts Democrat and one of the sponsors of the legislation. Fatca, introduced after Zurich-based UBS (UBS) said in 2009 that it aided tax evasion by Americans and agreed to pay $780 million to avoid prosecution in the U.S., is already helping to improve banking transparency, he says. “The IRS should know what money is being held offshore and for what purpose,” Neal says. “I don’t think there’s anything unreasonable about that.” UBS hasn’t taken U.S. clients at its offshore wealth management units since 2008.

Bank of Singapore, the private-banking arm of Oversea-Chinese Banking Corp., has declined to accept millions of dollars from Americans because it doesn’t want to deal with the regulatory hassle, according to Chief Executive Officer Renato de Guzman. “It’s too complex, too challenging,” he says. “You probably should have a dedicated team to handle them or to understand what can be done or what cannot be done.”

Some U.S. citizens are sidestepping the new tax reporting concerns—and possibly saving money—by renouncing their citizenship. A record 1,780 gave up their U.S. passports last year, compared with 235 in 2008, according to the IRS. One of them was Eduardo Saverin, the billionaire co-founder of Facebook. The move may reduce his tax bill as Facebook completes an initial public offering that values the social network at more than $100 billion. Brazilian-born Saverin is a resident of Singapore.

If Americans choose to bank with a non-U.S. firm such as HSBC, their investment choices are limited. At the HSBC branch in the bank’s Asia regional headquarters in Hong Kong, Americans can only make savings deposits. HSBC decided last July that it would no longer offer wealth management services to Americans from locations outside their home country after tax authorities stepped up a probe of the London-based bank’s U.S. clients. Americans would be “better served” by private bankers in the U.S., Goh Kong Aik, a spokesman for the firm in Singapore, said in an e-mail.

Royal Bank of Canada (RY) says it sees a chance to pick up customers turned away by other banks. “We are one of the few wealth managers to hold a Securities and Exchange Commission license offering U.S.-compliant investment advice in Switzerland and London,” says Barend Janssens, the Singapore-based head of the bank’s wealth management unit for emerging markets. The bank sees “an opportunity in accepting tax-compliant U.S. persons as clients outside of the U.S.”

The growth in wealth in Asia makes it easier for banks to refuse Americans. Asia has the world’s ­fastest-growing number of people with more than $1 million in investable assets, according to a report last year by Bank of America and Capgemini, a management consultant. The number of millionaires in Asia climbed 9.7 percent in 2010, to 3.3 million, higher than the 8.6 percent growth in North America. The combined wealth of Asian millionaires increased to $10.8 trillion, topping Europe for the first time, the report said. At industry meetings he attends in Singapore, not accepting U.S. clients is “quite a prevailing sentiment,” says de Guzman of Bank of Singapore. “We have enough business in Asia, so we don’t want to make our lives too difficult.”

The bottom line: To avoid increased reporting costs and potential penalties, many foreign banks are restricting their dealings with U.S. clients.

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As World Millionaires Multiply, Singapore Holds Its Lead

By Venessa Wong

Singapore seems modest by some measures: Median income among working households was only about S$5,700 (about US$4,500) in 2010, according to the Singapore Department of Statistics. Yet in this small island nation of only 5 million, known for extravagant shopping, high-end restaurants, and draconian chewing-gum laws, nearly one in every six households has more than $1 million in assets, making it the densest population of wealthy households in the world, according to a new report by Boston Consulting Group.

As the financial markets improved last year, global wealth grew in nearly every region in the world. The fastest, at 17.1 percent, came in the Asia Pacific region (excluding Japan), followed by North America at 10.2 percent. "Global wealth is at an all-time high," says BCG Senior Partner Monish Kumar.

According to BCG's study, global assets under management grew 8 percent, to $121.8 trillion, about $20 trillion above the level during the depths of the global financial crisis. The number of millionaire households grew 12.2 percent, to 12.5 million, and although they represented only 0.9 percent of all households, they held 39 percent of global wealth.

BCG looked at 62 markets covering more than 98 percent of global GDP and measured assets that included cash deposits, money market funds, listed securities held directly or indirectly through managed investments, and onshore and offshore assets—but not wealth attributed to investors' own businesses, residences, or luxury goods.

Wealth in North America, the world's richest region, had the largest dollar-value gain: $3.6 trillion. The U.S. remains home to the most millionaire households—5,220,000 (up 10.7 percent from 4,715,0000 households in 2009)—although the share was only 4.5 percent of all households, BCG data show.

While China and India are driving wealth creation in Asia, Singapore also grew at a fast pace. The number of millionaire households in Singapore jumped about 38.6 percent in 2010, to 170,000, from nearly 123,000 in 2009, according to BCG data. The country has had the largest proportion of millionaire households for several years, and the share continues to grow: Singapore's millionaire households increased to 15.5 percent of total households in 2010 from 11.4 percent in 2009.

The rise is due to Singapore's expanding economy, which has grown mainly on such exports as consumer electronics and pharmaceuticals, as well as financial services. Real GDP growth averaged 7.1 percent per year from 2004 to 2007, according to the CIA World Factbook and reached nearly 14.7 percent in 2010—faster than China's 10.3 percent growth rate.

Among Singapore's well-known billionaires are Wee Cho Yaw, chairman of United Overseas Bank Group (UOB), as well as the families of the late real estate mogul Ng Teng Fong and financier and hotelier Kho Teck Phuat. Still, many of the country's wealthy are not tycoons but entrepreneurs and affluent immigrants, says Tjun Tang, partner and managing director of BCG in Hong Kong. Other billionaires include philanthropist Richard Chandler in New Zealand and real estate developer Zhong Sheng Jian in China.

City-states such as Singapore, along with other small countries and administrative regions with a high density of millionaire households, such as Switzerland, Qatar, and Hong Kong, tend to be hubs of commerce and finance and have greater economic generation within a smaller population, says Tang.

Another factor driving wealth: Singapore's investor scheme, which grants permanent residence to certain investors, says Tang. According to the website of Janus Corporate Solutions, people can "invest [their] way to Singapore permanent residence" by investing more than a certain minimum in a new business startup or Global Investor Program-approved fund or in expanding an existing business in Singapore.

With this wealthy population comes a relatively high cost of living. In a 2010 cost-of-living survey of 214 cities by consulting firm Mercer, Singapore is the 11th most expensive city in the world for expatriates, on a par with Oslo and more expensive than New York City.

Mercer also gave Singapore high scores in its 2010 quality-of-life study of 221 cities: It was the top-scoring Asian city, followed by Tokyo.

The economic trends remain a concern around the world, yet BCG expects that with strong capital markets, GDP growth, and increased savings, global wealth will grow at a compound annual growth rate of 5.9 percent through 2015. Singapore has already led with the highest proportion of millionaire households for several years. With the Asia-Pacific region's share of global wealth expected to increase to 23 percent in 2015, from 18 percent in 2010, Tang says, "the trends seem to be in Singapore's favor."

Click here to see the countries with the highest proportion of millionaires.

Wong is a lifestyle and real estate reporter for Bloomberg Businessweek.

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Angel Investing: if this is Such a Hot Wealth Creation Strategy, Why Don't More Millionaires Do It

A 2006 national survey of angel investor groups actively investing in private companies revealed that 66% of their members do not actively invest because of their lack of knowledge of the process, not because the opportunity was considered too risky. When I heard this statistic and called the firm conducting the survey to confirm, I couldn't believe that was the primary reason aggressive sophisticated investors didn't invest in private companies. So many exciting emerging growth companies struggle to find growth capital from angel investors. On average, only 23% of the companies that qualify to be considered by angel investor groups actually receive investment. Although, there are many factors that drive this low percentage such as valuation of the company, structure of the investment offering, and validity of the business model, this study revealed that the biggest reason an investor doesn't invest is completely outside of the control of the entrepreneur. The potential investors simply are uncomfortable with the process of private equity investment and their desire to participate does not supersede their fear of uncertainty.

Private Equity investing is a wealth creation strategy used by sophisticated millionaires. First championed by legendary aristocrats JP Morgan and J. Paul Getty, millionaires interested in wealth creation and not just wealth preservation, understand that by buying a companies' stock at wholesale before the company goes public and then selling those stocks at retail prices produces the greatest return on investment. A $15,000 investment in Home Depot or Microsoft before they went public could be worth between $5,000,000 to $10,000,000 today.

I first became aware of the need for millionaires to learn about the private equity investing process when a few wealth managers and investors came to me seeking information on how to be an angel investor. I couldn't believe there wasn't information readily available. Yes, there were many books at the library or book store regarding private equity investing. Most are oriented toward the entrepreneur or read like a text book. I realized that very wealthy people don't want to spend hours and hours reading theory on angel investing when they could be playing golf or spending time with their family. They want to learn how to take their experiences and apply that to private equity investing. Affluent people invest in private companies to make more money, of course, but also for the gratifying feeling of being able to point to a successful company and to be able to say they were a part of that success. Entrepreneurs are visionaries and angel investors are entrepreneurs that have the capacity to catch another entrepreneur's vision and the generous nature to impart their experience and wealth to repeat their success in another entrepreneurial endeavor.

I found from talking to many investors that many of them learned about investing by doing or by being mentored by others. Unfortunately, during the dot.com bomb period, this translated into learning by losing. For investors today, that just isn't acceptable. Affluent people who want to invest in early stage companies want a way to learn about angel investing the same way they might learn about investing in real estate or the stock market. They want books that are comprehensive, yet easy to digest and apply. They want to be able to attend seminars and workshops. They want access to the specific information they need to fill a gap in their experience and knowledge as it relates specifically to the art and science of angel investing. They want to be part of a group with other investors that is informal so it is flexible, yet structured so they have planned times to meet and review and consider opportunities. They want to have access to a team to help them perform due diligence on an opportunity. Private equity investing is new for many successful men and women who aspire to take a portion of their wealth and put it at risk to get a greater reward than what they can get through traditional investments.

The Network of Business Angels & Investors (NBA&I) offers an environment for those new to the idea of angel investing to come into a community of experienced private equity investors to share their experience and to learn how to apply their experience in traditional investing and real estate investing to private equity investing. NBA&I offers its members and guests access to e-books and workshops on topics pertinent to the world of angel investing.

Angel investors are a critical source of capital for early stage companies to go from start up to bankable or VC-able. Without a thriving angel investor community to bring their capital and experience to the aid of fledgling early stage companies, our economy will suffer because there won't be small businesses to grow into big businesses. According to the same research report, angel investors invested $23.1 billion in 2005 and created 198,000 jobs. A total of 49,500 entrepreneurial ventures received funding in 2005, a modest 3.1% increase over 2004. The market is on an upswing and our economic recover can be even stronger with more investment in free enterprise and by helping wealthy investors to get comfortable with the process of private equity investing so that the number of investors that have a desire to invest and do invest grows from 33% to greater than 50%. That would mean another $10B could be invested into early stage companies adding at least another 80,000 jobs to our economy. The long term impact for wealth creation, job creation and economic growth is immeasurable.

Karen Rands spent the last 4 years, in the tough economic market, figuring out what works for the investors and the entrepreneurs and developing the curriculum necessary to educate a new generation of Angel Investors. To further her commitment to connecting investors with qualified companies, she launched the Launch Funding Network http://www.launchfn.com and acquired the Network of Business Angels and Investors http://www.nbai.net

Qualified investors are invited to join this growing national network of high net-worth individuals and sophisticated investors committed to providing experience and capital to worthy early stage companies. Entrepreneurs wishing to connect with angel investors should Register at LAUNCHfn. If you are interested in getting involved in a community of investors, please visit http://www.learntobeanangelinvestor.com to receive a free ebook: The 5 Secrets of Billionaire Investors.