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Investors Offshore Editorial, July 2013
19 July, 2013
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 brokers in low-tax jurisdictions recognise the need to provide their clients with up-to-the-minute facilities.
Many 'offshore' brokerages now offer facilities for trading in an extremely wide range of instruments, including tax-exempt trading on most stock exchanges around the world, and some or even all of futures, options, forex, bullion, commodities, CFDs, silver, treasury and investment-grade corporate bonds, bank CDs, unit trusts, ISAs, ETFs and even individual funds.
Offshore brokerage accounts are now usually conducted through secure multicurrency platforms which can be accessed online or by email, fax or phone. Many brokers provide clients with research, analytical and charting 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 is often not checked every time an investor logs on. Information about residence and eligibility can usually be found on a company's website, or through a customer service representative, but if in doubt, you should seek professional advice. The facilities available through domestic brokerages tend to be more limited, both in terms of markets available and riskiness, mostly for regulatory reasons. This may provide 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 her.
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.
Using a broker in a low-tax jurisdiction can 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. Many shares however are listed on high-tax country stock exchanges, and dividends are often paid out of taxed income in the country of main listing, or are subject to withholding tax. So wherever you are, you are unlikely to be able to receive dividends gross.
A word of especial warning in relation to the USA: for many years, investors, whether US citizens or otherwise, have used offshore brokerages to trade US stocks and other financial assets, either directly in their own name or through an offshore trust or foundation. As part of President Obama's attack on 'offshore', there are numerous pieces of legislation which are making this technique much less attractive, especially for US citizens.
In particular, the FATCA rules (Foreign Account Tax Compliance Act) included in the Hiring Incentives to Restore Employment (HIRE) Act of March 2010 will tilt the playing field towards the IRS quite significantly when they come into operation in 2014. Its provisions include: 30% withholding on US source payments to foreign financial institutions, foreign trusts, and foreign corporations that do not agree to disclose their US account holders and owners to the IRS; requiring taxpayers to disclose their foreign accounts on their US tax returns; increasing the statute of limitations to six years for failure to report certain offshore transactions and income; clarifying when a foreign trust is considered to have a US beneficiary; and treating substitute dividend and dividend equivalent payments to foreign persons as dividends for purposes of US withholding.
Despite the IRS, perhaps you are still 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 moneyâ€¦?) 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, wellâ€¦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:
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 NYSE Arca (formerly ArcaEx, an abbreviation of Archipelago Exchange), BATS ECN, Direct Edge ECN, Instinet, Liquidnet, NYPPex, Pipeline, ITG, SIGMA X and Track ECN have become an entrenched 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. At the top end, in terms of volume traded, it is the ECNs which have led to the development of the notorious 'dark pools' of trading and liquidity which make regulators nervous, since they are not transparent. A study by the TABB Group concluded that dark pools accounted for almost one-third (32%) of trades in 2012.
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 â€“ often 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 moved towards making their services available to retail investors.
Recently, direct access trading has emerged, allowing investors to cut out the middle man and trade directly with market makers across high-speed computer networks, which has the advantage of higher speed of execution and, as a consequence, ensures that the trader more often gets best price; even online brokers, particularly those aimed at novice traders, can at times suffer from painfully slow order execution. However, direct access trading costs can soon mount up, and traders can be expected to pay DAT firms commission, as well as numerous other fees, such as software fees, and account inactivity fees if the userâ€™s trading activity falls below a set level. Another thing to consider is that by removing the broker from the equation, DAT users are effectively fending for themselves and this form of trading is only recommended for the serious and trader with the requisite level of expertise (and money!).
Regardless of whether you choose to work through a domestic brokerage or an offshore one, it is essential to carry out very thorough due diligence in advance. While the brokerage will definitely be applying KYC (Know Your Customer) rules to you, it is important that you apply KYB (Know Your Brokerage) rules to them.
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. The InvestorsOffshore Services Directory offers details for a number of prominent offshore brokerages such as FINANCIAL PACIFIC at http://www.investorsoffshore.com/html/plazas/plaza_equity.html, but please note that inclusion on the plaza does not imply any approval or recommendation on our part. It is essential that you do your own due diligence on your brokerage of choice, as described above.
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