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IMPORTANT
WARNING:
The contents of this article and the attached report
have been compiled in good faith by Investorsoffshore.com
to provide assistance to investors, but do not constitute
investment advice or recommendations. Investors should
not rely upon the information given in order to choose
types or routes of investment but should make their
own independent enquiries before making choices. Investorsoffshore.com
has taken reasonable care in researching and presenting
the information herein but makes no representations
as to its accuracy and accepts no liability for actions
taken or not taken as a result.
For the domestic investor, the choice of online brokers
seems almost endless; for the expat, whose somewhat
unusual situation allows for a greater flexibility of
investment choice and possible advantages in terms of
taxation, the choice seems to be less broad, but is
growing by the minute, as onshore brokerages recognise
the potential of the expanding 'globetrotting' mass
affluent market, and offshore brokers recognise the
need to provide their clients with up-to-the-minute
facilities.
Country-specific
online brokerages should not be completely ruled out,
as it may be that the trading account that you opened
in one country can still be accessed and traded from
another. Residential information is asked for when opening
an account, but cannot be checked every time an investor
logs on.
Information
about residence and eligibility can usually be found
on the company's website, or through a customer service
representative, but if in doubt, you should seek professional
advice.
However,
offshore investment, and by extension, offshore brokers,
reap the benefits of less restrictive regulatory regimes
in many cases, and can therefore, at least theoretically,
provide the internationally minded investor with a broader
and more interesting range of investment options. In
most cases the reality hardly matches up to expectations
at present, but presumably this will change rapidly
as brokerages compete on the international market.
Most offshore
brokers offer equities listed on the major stock exchanges
(although the majority at the moment seem to focus on
the US market), and both US listed and offshore mutual
funds. Some cater to the more experienced investor,
offering options and futures in addition. Domestic investment
tends to be more limited, both in terms of markets available
and riskiness, which provides the investor with an overarching
'umbrella' of support if things go wrong, but at the
same time, means that potentially more profitable avenues
can be closed to him.
Using an
offshore broker could also be advantageous in taxation
terms, depending on your personal circumstances. Some
types of security give better tax performance when bought
offshore. By using an offshore broker, you may also
be able to escape stamp duty in those countries that
still apply it. Most shares however are listed on high-tax
country stock exchanges, and dividends are usually paid
out of taxed income in the country of main listing,
so wherever you are, you will not be able to receive
dividends gross.
So. Sold
on the idea of an offshore broker? There are a number
of good offshore brokers out there in a variety of jurisdictions
that will be able to cater to your needs, hopefully
consulting with you if that's what you want, and tailoring
investments to your openness to risk and eventual goals
(i.e. do you want to retire to a sandy beach somewhere
on your investment income, raise capital to start the
newt breeding farm you've always dreamed about, or just
make pots of money…?) But if you want to get in
there and do it for yourself, you can, just as much
as you can with an onshore e-brokerage.
A note
of caution, however. Full service brokers, whether onshore
or off, provide a level of support, advice, and, well…service
that by definition is not available from a pure internet
brokerage. The medium does not easily allow for the
same kind of personal relationship that can be built
with a traditional broker, and while the online broker
may possess exactly the same level of expertise and
background knowledge as a good full service broker,
this is less easily imparted by a website, no matter
how many bells and whistles it may have.
Good offshore
brokers, though, have always maintained a more interactive
relationship with clients, tailoring investments to
meet their residential needs and eventual goals, and
this ethos seems to have filtered down to the e-brokers,
meaning that they have suffered less than domestic online
brokers from accusations of facelessness and impersonality.
This is perhaps also linked to the fact that many of
the offshore brokerages have grown up in association
with private banking and wealth management services.
So if you
feel that at the moment, your knowledge is too limited
to invest without substantial back up, or you are particularly
sensitive to risk, it may be best to look for a full
service broker, whether onshore or offshore. Selecting
an offshore full-service brokerage does not mean that
you will be retreating to the technological dark ages,
as the vast majority of offshore brokers are web-enabled
in some way, with facilities which allow you to conduct
research, monitor your portfolio online, or at the very
least communicate with your advisor by e-mail.
However,
if you have a thorough working knowledge of international
investing, and feel ready for self-directed investment,
then an offshore or international online trading account
may be for you. When choosing an online broker, there
are many issues to be addressed, and here we will go
into some of the main areas of specific interest to
expatriate investors thinking of trading online:
- Range
of investments:
Although, as previously mentioned, most offshore online
brokers offer a range of listed and unlisted equities
and US and offshore mutual funds, it is worth shopping
around, as the choice and quality of investment options
can vary. Some offshore brokers can provide you with
access to securities on markets other than the US
markets, and others offer the more experienced investor
other investment instruments such as futures and options,
or the chance to invest in Initial Public Offerings
(IPOs).
- Hours
of Trading: As an expat, this may be an area
which concerns you more than it would do a domestic
investor trading online via a country-specific broker.
If you are frequently on the move, you may need to
order trades outside of normal market hours. Many
brokers, both onshore and off, have picked up on this,
and are making use of Electronic Crossing Networks
(ECNs) in order to offer extended hours trading to
their clients.
ECNs are
computerised trading networks or markets used to display
and execute limit orders, and in a very real sense,
they bring the exchange to the user. Participants submit
their orders, and matched orders are executed at the
mid-point of the bid-ask spread. Electronic Crossing
Networks such as Island, Instinet, Redibook, Brut, Archipelago,
and E-Crossnet, to name but a few, look set to become
a permanent part of the investment landscape, and the
fact that they provide low cost execution and anonymous,
direct access to the markets, as well as more flexible
trading hours than the legacy exchanges means that their
popularity with online brokers continues to increase.
As usual,
however, there are risks, and it is important to at
least be aware of these before deciding whether you
would prefer to establish an account with an offshore
broker offering extended hours trading. During standard
market hours, trading takes place on a variety of exchanges,
as well as through market makers and ECNs, but during
extended hours sessions, all orders are processed through
the designated ECN (if they are processed at all), which
if it is part of a trading network, may also offer access
to prices available on other participating ECNs, but
will not necessarily do so.
There are
also limitations imposed on the type, size and time
limits of orders which can be placed during extended
hours sessions; most ECNs will only accept limit orders;
there is usually an upper limit on the size of the order;
and not all security types are available outside of
standard trading hours - usually just NYSE and NASDAQ
securities. Generally, the lower level of trading activity
characteristic of an ECN may result in lower likelihood
of trade execution, wider spreads, and greater price
fluctuation.
Perhaps
partly due to these risks, and also because of their
status as relative newcomers, the vast majority of Electronic
Crossing Networks do not yet allow individual investors
to trade with them directly, and at the moment, they
can only be accessed through brokerages offering extended
hours trading. This may change in future, however, as
several of the networks have expressed an interest in
making their services available to retail investors.
At the time of writing, none has yet set a timetable
for that change.
- Commissions
and Fees: When choosing a broker, as with
any service, it is always wise to compare commissions
and fees - some may charge a percentage per trade,
while others have a standardised minimum fee per transaction,
and the amount can vary. Also, look for 'hidden' charges,
such as account opening and administration charges,
and bear in mind that some online brokers may charge
for additional facilities (such as checking or quotes)
that are offered free elsewhere.
- Account
Type:
Consider the type of account that you will need, as
some (but not all) offshore online brokers offer margin
accounts, which essentially means that you do not
need to have the full amount in your trading account
in order to make a trade - the broker will make you
a loan, using securities already held in your account
as collateral. You will usually have to sign a separate
agreement for this, and obviously investing with borrowed
money is more risky if things go wrong, but the obvious
advantage is that with a margin account, if you need
to, you are able to leverage purchases and buy a greater
amount of stock.
- Execution
and Settlement: You should also look into
efficiency of execution, and the timing of settlement
after a trade has been executed. Where trades are
processed electronically, execution time can be a
matter of seconds, but with brokers that do not offer
extended hours trading, an order placed outside of
standard market hours will remain pending until the
markets open again. For settlement, the industry standard
at the time of writing is T+3 (or three business days
after trade execution), but many brokers require that
the full amount needed is in your trading account
prior to placing the order, so it is always best to
check. The majority of offshore online brokerage accounts
at present are denominated in US dollars, although
some do accept deposits in other currencies which
will then be converted, but again, if you have specific
currency requirements, you should be able to find
something to suit if you shop around.
- Due
diligence: In the course of researching for
this special report, two distinct types of offshore
online brokerages emerged- those that are subsidiaries
of, or online services offered by, traditional full
service brokers, and those that are standalone services,
established with the express purpose of offering international
online trading. Once again, which of these you prefer
comes down to personal choice. You may feel more comfortable
trading with an organisation whose name you have heard,
and who has a history of providing financial service,
or you may want to take advantage of the fact that
a newer company may be more flexible, and able to
provide newer and more technologically advanced services
because their main and only focus is online trading.
It is really a matter for you to decide, and once
again, it is recommended that you take decisions of
this nature with the advice of a qualified professional.
However, whichever way you decide, always make sure
that there are investor protection measures in place,
so that your assets are cushioned should anything
untoward happen (other than fluctuations in the market,
of course!)
- Residential
Restrictions: The offshore brokers that exist
are located in a variety of different jurisdictions
(at the moment, there seems to be a bias towards the
Caribbean, but this may change in the future). It
is worth considering, in terms of your personal circumstances
(i.e. nationality, country of tax residence, and investment
requirements) which jurisdiction is best suited to
your needs. Many online brokerages place residential
restrictions on the use of their services, and at
the moment, citizens and residents of the United States
in particular are poorly served, due to the comprehensive
and restrictive nature of US taxation and regulation.
As you
can see, then, there are many points to be considered
before you can make a final decision about which offshore
online broker is suitable for you, but to make things
a little easier, InvestorsOffshore has surveyed a cross
section of online brokers offering services for international
investors, addressing the issues mentioned above, and
rating the user friendliness of their websites and the
helpfulness of their agents and customer service representatives.
This rating is not intended as a comment on any services
other than those just mentioned, and the information
provided is the result of research and enquiries as
opposed to trading experience with any of the brokers
surveyed.
Please
click on the links below for detailed information about
each broker.
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