| 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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