Smart, Low-Cost Investing for Asia's Non-U.S. Expats
While Americans are taxed on worldwide income and assets and are actively discouraged from holding investments outside the United States, non-U.S. expats can often realize substantial tax benefits from investing in offshore markets.
Non-U.S. expats are typically not taxed by their country of citizenship on income and assets held outside their home country. Additionally, many Asian countries do not tax expats on their investments and income earned beyond their borders. This creates a substantial benefit and a huge incentive for non-U.S. expats to move their investments to one of the offshore centers. Doing so allows them to save tax and to potentially access a greater array of investment opportunities than exist in either their home country or the Asian country where they work.
The Problem of "Cowboy" IFAs
Until relatively recently, the only way expats could gain access to the offshore markets was through armies of lightly regulated or unregulated independent financial advisors (IFAs). These IFAs, who had varying degrees of experience and professionalism, acted as a direct sales force for the various product providers located in the offshore markets. Unfortunately, what expats saved on home country tax, they typically more than paid away in fees on high-cost, complicated, non-transparent investment products. In some cases, they were subject to outright fraud and embezzlement by "cowboy" IFA outfits.
Fortunately, expats now have better options. The rise of global brokerage platforms such as Internaxx, Interactive Brokers, and Saxo Bank afford Asia's expats the opportunity to build low-cost, globally diversified investment portfolios in a highly regulated environment. Expats retain the tax benefits of investing outside their home countries without incurring excessive fees or enduring poorly regulated financial salespeople masquerading as advisors.
Five Advantages of a Global Discount Broker
Here are some of the key benefits of using a global discount brokerage platform such as one of the above:
- Lower product fees: The typical offshore mutual fund has high annual expenses running up to 2% and more. Additionally, there can be front-end fees of between 3% and 7%. Insurance-linked investment products can be even more expensive, with several layers of fees that can total 4% or 5% annually, not including front-end fees, which are often hidden in the bid-offer spread.
Using a global broker, expats can build diversified portfolios with exchange-traded funds (ETFs) and lower-cost mutual funds for fees that range from 0.15% to 0.25% on the lower end. This savings on product and portfolio fees goes directly into your pocket.
- Greater product choice: Global brokerage platforms provide an integrated platform that makes it easy to trade global investment products on multiple exchanges and assets denominated in multiple currencies from a single account. For example, Interactive Brokers allows you to trade on over 120 exchanges around the world, providing direct market access to stocks, options, futures, forex, bonds, and ETFs from a single account that can be funded in multiple currencies.
In contrast, most IFAs provide access to the same high-cost funds and insurance-linked products from a relatively small number of offshore fund and insurance firms. It's unlikely that you'll ever see one of these product salespeople recommending a diversified portfolio allocated among low-cost ETFs.
- No lock-in or surrender fees: Many insurance-linked investment products sold in the offshore market impose a surrender fee that can last five to seven years or, in the worst cases, many more. Lengthy lock-in periods are designed to ensure the product provider is reimbursed for the commission it paid to the IFA who sold you the product. This locks you into a high-cost product, and since the IFA has already been paid, there is little incentive for ongoing advice.
There are typically no surrender fees or lock-in periods with investments or portfolios designed with ETFs on global brokerage platforms.
- Low trading/switching costs: With many offshore product providers, and particularly with insurance-linked products, there can be substantial costs or limitations on switching funds. This can be a significant impediment to rebalancing an investment portfolio. At a global broker, investments can be bought and sold cheaply with no restrictions, which greatly reduces portfolio management costs.
- Easy to integrate with a true advisory service: The traditional IFA financial service model is really a sales-driven model where IFAs act as a direct sales force for a relatively limited number of product providers located in the offshore markets. Products are sold on a commission basis, which incentivizes the sale of high-commission products and provides little incentive for proper ongoing investment management and advice. The more high-commission products sold, the more commission earned by the IFA. As a particularly unfortunate example, see the International Adviser magazine article "Figures Reveal Huge Scale of LM Fund Sales," which suggests that the brokers pushing the now failed LMIM fund received up to 4–5% in upfront commission on each sale.
A global brokerage platform provides an effective, low-cost alternative for those who want to build and manage their own portfolios, but it also provides a good alternative for those who don't really have the time, knowledge, or inclination to do it themselves.
Rather than paying high fees to access products, you can focus on getting proper investment and financial advice geared to your long-term financial well-being. Portfolios can be built on a global brokerage platform for a fraction of the cost of portfolios constructed from the typical investment products sold in the offshore markets. This low-cost access to products can be coupled with an advisory service that helps you devise and manage a globally diversified investment portfolio. The benefits of this approach are lower fees and ongoing advice aligned with your long-term interests.
Consider Your Options
The next time you receive a cold call or email from someone pitching an offshore product or financial service, consider your options.
This is an updated version of a blog that appeared previously on www.crevelingandcreveling.com.
Looking Past the Sales Pitch: Analyzing an Offshore Insurance-Linked Investment Scheme
Are ETFs Safe for Expat Investors?
The Cost of Expat Investment Advice: Do You Know What You’re Paying?
Expat Investment Advice: Seven Things Expats Need to Know About Investing
About Creveling & Creveling Private Wealth Advisory
Creveling & Creveling is a private wealth advisory firm specializing in helping expatriates living in Thailand and throughout Southeast Asia build and preserve their wealth. The firm is a Registered Investment Adviser with the U.S. SEC and is licensed and regulated by the Thai SEC. Through a unique, integrated consulting approach, Creveling & Creveling is dedicated to helping clients cut through the financial intricacies of expat life, make better decisions with their money, and take the steps necessary to provide a more secure future.
Copyright © 2019 Creveling & Creveling Private Wealth Advisory, All rights reserved. The articles and writings are not recommendations or solicitations, and guest articles express the opinion of the author; which may or may not reflect the views of Creveling & Creveling.