The hidden cost of currency conversions

When you’re trading international stocks, it’s not only the charge for buying the shares that matter. The charge for buying the foreign currency the shares are quoted in can also be very significant.

At some stock brokers, this FX commission can be higher than the commission on stocks. And many brokers try to make their rates look better by hiding it deep in the small print or even not mentioning it at all.

This is particularly a problem in the UK, although investors everywhere should watch out for it. For example, take TD Direct Investing (formerly TD Waterhouse UK). It charges a standard rate of £12.50 per trade for international stocks. On an investment of £1,000, that’s a commission of 1.25%. But TD Direct will also charge up to 2% over the interbank rate for converting your currency – almost twice the headline stock commission.

To be fair to TD Direct, it displays its currency charges more clearly than many rivals. But while they may be transparent, they’re certainly not trivial. Charges like that will mount up pretty quickly, especially if you’re an active trader. So minimising your FX commissions is an important part of keeping your costs down and improving returns.


Fidelity expands international trading service

Fidelity, the largest US brokerage, at last seems to be making a serious effort in international markets, with the decision to open its international trading service to all account holders.

The firm has long had a decent set of overseas markets available for direct investment (as opposed to over the counter trading of foreign stocks in the US) and fees were generally not too excessive compared with peers. But the associated conditions were baffling – you needed a minimum balance of US$25,000 and over 120 trades per year or a balance of US$1,000,000. Any investor who met those criteria could and should find more suitable accounts at other brokers.

However, international trading is now available in accounts of all sizes, making it a reasonable proposition for the smaller investor. With another five markets just added (Mexico, New Zealand, Singapore, Sweden and Switzerland), it covers a good proportion of the major markets.


UK CREST personal accounts comparison table

The UK stock brokers section now also has a comparison table for stock brokers that offer personal CREST accounts. If you’re unsure what personal CREST membership is, CREST is the UK’s central securities depository and you can find an explanation of why you might want a personal account there in the notes under the table.

There aren’t that many stock brokers that do this. The table lists the six main ones; some of the other traditional full service stock brokers may offer CREST membership as well, but are unlikely to be any cheaper. Other firms will be added if I get concrete details (many traditional brokers tend to be vague about fees, operating “by arrangement”, which makes compiling comparison tables awkward).

There is also one other small update to the UK listings, with the addition of HSBC InvestDirect/InvestDirect Plus to the stock broker directory.



Standard Chartered Bank Securities Trading and other Singapore stock broker updates

There are a number of new additions and updates to the international stock broker directory. One interesting one is Standard Chartered Bank Securities Trading, which moved into the Singapore brokerage market a few months ago with an unusual product.

It offers online trading in Singapore stocks for 0.2% per trade (0.18% for those with a larger banking relationship) and 0.25% per trade (0.2% for favoured customers) for Australia, France, Germany, Hong Kong, Japan (including both the Tokyo and Osaka stock exchanges), the Netherlands, Switzerland, the UK and the USA. This has no minimum commission, which is rare in the brokerage business and attractive to customers trading smaller amounts.

There are also apparently no account and no inactivity fees, custodian fees, no dividend collection fees, no corporate action charges, making it a commendably clean fee structure. There is one catch though; currency conversions done through Standard Chartered are considerably worse than many Singapore brokers, with users reporting a margin of 2% over the interbank rate. However, you can hold and fund foreign currency accounts with the bank, so you shouldn’t need to pay this every trade, if you’re careful.


UK stockbroker accounts for non-residents

One regular question about the UK online stockbrokers list and UK international stockbrokers list is whether any UK stockbrokers will open accounts for non-residents.

Generally, many of the UK stockbrokers are not very helpful on this score, due to a combination of money laundering regulations and a tendency to regard overseas clients as a hassle. (The same problem is true for non-residents wanting to open an UK bank account.)

There are a handful of UK stockbrokers that indicate they will deal with non-residents, but investors report different levels of success opening and using accounts. It may depend on whether you are a UK citizen but non-resident, whether you are neither a citizen nor a resident, whether you are resident in the European Union (EU) or European Economic Area (EEA), whether you have a UK bank account and even who you speak to at the company.

The following firms have been reported to open online trading accounts for at least some non-residents and are probably worth investigating first:


MF Global and brokerage account security

You’ve probably seen that MF Global, one of the big brokers in futures, options, CFDs and other derivatives has gone bust. While we haven’t heard all the details yet, this seems like it might be a rather worrying case when it comes to the safety of your brokerage account.

MF Global went under because of trades it was making on its own account (known as proprietary or ‘prop’ trading). Specifically, it had bought European sovereign bonds on high leverage and couldn’t make the margin calls when these fell in value (fuller details at the FT).

This was an extremely stupid thing to do, but it was MF Global’s own bet. It shouldn’t have mattered to clients.


South Africa online stock trading from Saxo Bank

Saxo Bank is keeping very busy with new launches. After rolling out Japanese and Polish equities in the last couple of months, it’s now adding stocks and CFDs for South Africa. This makes it the first stock broker outside Africa to offer online trading in cash equities for the Johannesburg stock exchange to retail investors.

Rates look good  – 0.25% with a minimum of ZAR100 (US$12) is both cheaper than you’ll pay through other international stock brokers and cheaper than the local brokers. Unfortunately, South African investors can’t take advantage of this – due to local foreign exchange restrictions, Saxo Bank can’t offer the Johannesburg exchange to clients resident there.

It also won’t be available to Swiss residents due to client confidentiality laws there. But for international investors elsewhere, this looks like a helpful development. And the firm says more international markets are likely to be added over the next year or so – in which case, it will reinforce its position as one of the best brokers for international stock trading.

The international stock broker guide and stock broker comparison tables have been updated.


Interactive Brokers now offering Singapore stocks

It didn’t get much of an announcement given that some customers have been lobbying for it for ages, but Interactive Brokers has finally added direct stock trading for Singapore to its platform (it’s had derivatives for years, but not cash equities).

This plugs the last major gap in the firm’s line-up. There are many other exchanges that it will hopefully eventually add, but the absence of SGX was always strange and the biggest limitation of Interactive Brokers’s otherwise very good and cheap service.

Fees are extremely competitive: 0.12% with a minimum of S$3. This compares with standard rates of around 0.275% and a minimum of S$25 in Singapore; even Saxo Bank charges 0.15%. The one caveat is that, judging by the wording of the announcement, Singapore residents still won’t be able to trade Singapore stocks through Interactive Brokers (presumably it doesn’t have a full local licence).

The stock broker list, stock broker comparison tables and Interactive Brokers profile have been updated.


How fees affect investment fund returns

Most investors understand that the fees they pay to fund managers have an impact on their investment returns. But it’s easy to overlook quite how large that impact can be. It’s also easy to focus on the wrong fees – putting a lot of effort into reducing one, when it’s the other that matters more.

So exactly how much do fees matter and what should you do to cut costs? Let’s take a look at a real example.

Before we begin, let’s recap what fees we’re looking at. There are two different sets of fees that fund management firms normally charge. One is the entry fee or initial charge, a one-off fee levied when your investment goes into the fund. The other is the annual management charge, which is levied on a recurring basis.

There are some other possible fees to keep in mind. For example, an exit fee might be charged when you withdraw your money or a performance fee levied when returns pass a certain hurdle. But these are less common and so we’ll leave them out for simplicity.