Index Investing for Expatriates

It isn’t easy to find low cost investing options if you’re an overseas expatriate. 

Opportunists from groups like Zurich International (Friends Provident) sell costly products to financially uneducated expats…because they can.  If you’re involved in an investment plan that penalizes you for taking money out (not a tax penalty but an investment service penalty) then you’re among the many unfortunate souls overseas getting fleeced.

With other popular overseas investment product groups like Tie Care (which kick you in the groin with a 5.75% sales fee) or Raymond James (often charging an unnecessary “wrap fee”) you’ll end up with actively managed mutual funds that compound the bruising. 

Academic studies all point to the overwhelming odds of underperformance when buying such products.  And for expatriate Americans (who are taxed on their global income) actively managed mutual funds aren’t tax efficient.

So why don’t Tie Care and Raymond James (not to mention the shadier sales folk at Zurich) sell products supported by academic evidence? 

Why don’t they build portfolios of low cost index funds, when the odds of an actively managed portfolio beating a fully indexed portfolio over 25 years are less than 1%?

 

 

Five   Years

Ten   Years

Twenty   Five Years

One Active   Fund

30%

23%

12%

Five   Active Funds

18%

11%

3%

Ten   Active Funds

9%

6%

1%

Source:  Allan S. Roth, Professor of Behavioural Finance, University of Denver’s Graduate Tax Institute

 

Here’s the answer: 

Unfortunately, products that are better for you (low cost indexes) aren’t profitable for investment firms to sell.  But the small costs of you appeasing a salesperson can be devastating over the long haul. 

Over a lifetime of investing, you’ll likely end up with half of what you deserve.  And you can’t afford that.

 

So what can you do about it?  If you’re American, you could use:

  • Assetbuilder – a financial service company in the U.S. which builds indexed portfolios for Americans. 
  • Vanguard  – another excellent option, but if you don’t have an account with them already (before leaving the U.S.) you won’t be able to open one with them.
  • RW Investment Strategies – based in Maryland, Robert Wasilewski builds indexed portfolios.

If you’re from another country, you’ll need to find an overseas brokerage giving you access to the Toronto Stock Exchange, New York stock market or London Exchange.  From this point, you could buy exchange traded funds, as I’ve described in my book, Millionaire Teacher.

To open such an account, you may need to take a trip to a neighbouring country, open the account, and wire your savings.  Not every country has such brokerages available.

 

Non American expatriates in South East Asia might need to take a trip to Singapore to open their account. 

You don’t have to live in Singapore to open such an account with a Singaporean brokerage.  If you can visit Singapore for an afternoon, you can do this. 

These links should be helpful for the following expatriates:

 

There are far too many people in the world of banking and finance who make small fortunes off the backs of ignorance. And that’s not cool.

And once you understand how to create low cost investment accounts, do the right thing.  Share your knowledge with others. 

 

 

 

 





Andrew Hallam

I’m a financial columnist for Canada’s national paper, The Globe and Mail, as well as for AssetBuilder, a financial service firm based in Texas. I’m also the author of Millionaire Teacher: The Nine Rules of Wealth You Should Have Learned in School (2nd Ed. Wiley 2017) and The Global Expatriate’s Guide To Investing: From Millionaire Teacher to Millionaire Expat (Wiley 2015). My mission is to educate, motivate and inspire people on basic retirement planning and best practices for investing, using evidence-based strategies. I’m happy to comment on your questions. However, please read the Terms of Use, Privacy Policy and the Comments Policy.

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25 Responses

  1. DIY Investor says:

    Thanks for the mention. My sense is that the indexed approach is spreading at a decent rate. I am disappointed that so many young people are staying out of the market and I think one reason is that they saw their parents do poorly trying to pick stocks and time the market. Until this message gets into the schools even as an alternative way to invest for the long term there will be an issue with people failing to prepare sufficiently for retirement. One point that is not generally appreciated is that the longer you wait to invest the greater the risk you have to take to reach a goal.

  2. Chris the Truck Driv says:

    Hi Andrew, I went to a Raymond James Broker here in Sacramento, Ca about 6 months ago just to see what he had to offer! Raymond James has talk shows on the weekends all over the US and when I'm TRUCKING I listen to Talk Radio! I was almost convinced…but after seeing his fees which are over 2% annually I said GET ME OUT OF HERE! On another note….I have decided not to invest any monies in my Employers 401(k) program because even though the Funds offered by John Hancock are not as high as Raymond James they are still well over 1%. So I'm gonna continue to Stack my Roth IRA with low cost Vanguard Funds and follow your Rebalancing strategy. I want to invest more in the Markets at the age of 41…..for some reason I'm still confused as to what the best option would be! I'm doing as you know 5000 every year in my Roth but I want to double that amount somehow…say 12000 annually….any ideas Andrew? Please have Fun and Drink more Beer! Sincerely Chris the Truck Driver…PS…That Duplex I told you about is in a Bad part of town so I don't think it would be a good buy.

  3. Jeff says:

    Hi Andrew. Following the link to the Australian expat advice, I see you recommend ISHG bond fund, and the iShares website indicates these pay a monthly distribution. I live in Singapore, and OCBC Securities charge $10 every time they process a NYSE-listed dividend. I decided against the Vanguard Bond fund because it also paid a monthly dividend, meaning (after the 30% US tax) the $10 fee would wipe out the payment. Funds like VWO, VEA, VTI pay quarterly dividends, which involves less of a hit – $40 instead of $120 per year.

    I decided to go with 2 total return bond funds listed on SGX – DB x-trackers US Treasuries and US TIPS (KF5, KF7). They aren't traded often, so bid-ask spread is high, but I buy and hold so not such a problem. I would be interested in what other readers suggest re Bond funds available in Singapore, either on SGX or other exchanges, taking into account the various expenses involved.

    For interest, does DBS Vickers charge an admin fee for each dividend handled? (OCBC also charge $2 per month per counter custodian fee).

    • Hi Jeff,

      Fortunately, DBS charges no such fee. It sounds like you have made a solid decision though. Well done. Gotta watch the banks, don't we?

      Cheers,

      Andrew

  4. Strudels says:

    Hi Andrew,

    I'm a 31 year old newbie who found your blog and now plowing through your book (kindle) after researching my financial advisor's 'Zurich Vista' recommendation. Having done the math I was shocked and went online to research their offer and obviously didn't go for it. Thank God for your posts. I'm now wrapping my head around my options.

    I'm German (haven't lived there for over 10 years, no idea when/if I'll return) and just relocated to Singapore (LOVE the tax, especially the capital gains tax).

    Two quick questions:

    1. Is opening a discount brokerage account at DBS Vickers still the best option here in SG, as I bank with Citi?

    2. Any specific reason you recommend to trade stocks from the Singapore, New York and Canadian stock markets? You recommend in another post to invest in your country origin index – is there a particular reason to, say, choose Canadian vs German?

    Thank you, for opening my eyes and giving me the courage to tackle this by myself.

    Cheers!

    • Hi Strudels,

      I think DBS is a great option, but you could do the same thing with a Citi brokerage, so that would be a good option for you. In my book, I recommended a home country stock index, an international index and a bond index. Through Citi, you could buy a German index (off the NYSE) an international index (same) and an international bond index as well (off the NYSE). I am soooo glad that you dodged the Zurich bullet!

      • Strudels says:

        Thank you so much Andrew!

        I've been looking into Singaporean broker fees, Citi Bank & DBS Vickers and am bit confused about the fees headed my way:

        Brokerage fees, in what currency?

        If I'm investing in an index held by the NYSE, will these be bought and paid out in USD? Does this mean the bank will charge me FX fees on this? Would I be better served to hold a USD account as well, to exchange my SGD into via a potentially cheaper exchange service?

        Custodian Fees, something to worry about?

        I'm unfamiliar with custodian fees – Citi charges custodian fees for units held in U.S. Markets (which I assume will be all of my indexes, even if they're say a German bond index) at a rate of 0.02% of my monthly average balance, up to a max of USD 100 every six months.

        DBS Vickers charges custodian fees quarterly, SGD 2 per counter per month, capped at SGD 150 per quarter – I'm assuming here they refer to a counter as an index I might hold?

        TL;DR: worth getting a USD account in Singapore to invest from and should I be worried about custodian fees?

        Thank you!

  5. Jeff says:

    Hi Andrew,

    You're right about the banks – and your comment spurred me to look at a few others. In fact, it looks like DBS also charge a dividend handling fee. Their fee page (http://www.dbsvonline.com/english/Pfee.asp) shows a minimum USD4 for each US dividend collected on behalf of Singapore investor (actual amount = 1% of dividend, with max of USD40). So far, Stan Chart seems to be only one that doesn't charge.

    Jeff

    • Interesting!

      So if you get paid a $500 dividend, the bank reaps $5. Gotta love the banks eh? I wonder what happens if you call the bank and just say "no". It might be worth trying!

      • Jeff says:

        Yes, I'm planning on contacting OCBC to point out how attractive some of the other providers are and see what their response is.

        Doesn't sound much when you put it like that. However, if that $500 is paid out in 12 monthly dividends, say $45 each month, then (after US tax) you have $30. The bank takes minimum fee of $4 (every dividend, each month), which is 13% of all your after-tax dividends. When I get to the stage that my monthly dividends are $500+ I may not see it as such a big issue 🙂

        • You've given me something to look into though. My dividends are roughly $50K per year. I could suggest moving my business. Funny that I have never seen it on any statements. I even did the math on how much I should be receiving and it appeared correct. I guess I should see if this is something new.

          • Hey Jeff,

            Isn't the dividend handling fee just for Hong Kong stocks? http://www.dbsvonline.com/english/Pfee.asp
            I looked over the site again, and just did some math on my latest dividends. I can't see this fee deducted from my dividends.

          • Jeff says:

            AT the top of the page, there is a link for Singapore Investors and HK Investors. I clicked the SG Investors link, and about half way down the page they've got a 'US Stocks' heading – that's where I saw the "Dividend Collection" fee. I may misunderstand it – it may only apply to certain kinds of investors. (Or, like the custodial fee, they may waive it if you have a certain level of business). It's funny, before making my first comment, I searched OCBC's website for info on the div fee. I couldn't find it, but was sure I'd seen it when I first opened the account a few years back. I emailed my broker – his reply was 'Yes, the fee is still there, but it's not shown on the new website". So much for full disclosure!

  6. Liz says:

    Andrew, your insight has been such a financial enlightenment for me. I was very concerned when, after finding your blog, that I realized we'd fallen for the Friends Provident trap. While we unfortunately have a chunk of money tied up with them for many years (75% surrender rate), we are able to withdraw a small amount (at a loss) which we will be relocating in our new indexing strategy. I am thankful we found out about this now, not years down the road. Your book was priceless.

    With respect to setting up index funds, I am an American citizen abroad in Chile. I do maintain a US address, bank account, credit cards. Do this mean I can set up a Vanguard account or should I look at the other above-mentioned options.

    In your book, you had also mentioned about splitting into three different funds (bond, international and the general US index). Chile does have an ETF being traded. Is that something to look at or should we first focus on setting up the other investments.

    Thanks for your help and advice again.

  7. Daisy says:

    Hi Andrew

    I stumbled upon your blog last night while googling for the best mutual funds in Singapore, then from your blog I learned that investing in index funds was the safe and assured way to go! I was so fascinated by your blog posts that I stayed up reading them until 3.30am last night! Then I remembered what I read from a book I have by Adam Khoo (a famous Singaporean who made his first millions when he was 26). Like you, he was (and maybe is still) frugal when it comes to spending money, and he was all for investing in index funds as opposed to mutual funds.

    I'm going to Kinokuniya to buy your book, can't wait to learn more! However, in the mean time I was wondering if you could help me out a little. My situation is as follows:

    I am a 25yo third-culture Indonesian who has spent most of her life in various countries overseas. I'll be starting work in Singapore soon, but it will only be a 6-month contract. I don't know where I want to live after that (although I'm looking at either staying in Singapore, or move to Australia or New Zealand). I don't know where I want to retire either (my citizenship is Indonesian but I do have NZ permanent residence and I have spent the majority of my life in NZ although most of my family and relatives are in Indonesia).

    I have the following questions that I hope you can help me with:

    1) Would index fund investing be profitable for a 6-month horizon? If not, what is the minimum of time required for it to be profitable?

    2) Taking my situation into account, if I were to start investing $3000 in index funds with DBS Vickers, is it best to use the $3000 to purchase one index first or split them immediately to my desired allocation? If the former, should I buy $3000 of the international index first?

    3) Assuming that I will be staying in Singapore for the next 2 years, but not knowing where I will live afterwards, if within 12 months I can allocate my portfolio to 20% bond index, 40% local index, and 40% international index, which country's bond index should I buy and which country's equity local index should I buy? Should they be the Singaporean index for both the bond and equity?

    4) Does liquidity matter when choosing which index fund to purchase?

    Thank you so much in advance.

    Daisy

  8. Stephen Maine says:

    Hi Andrew,

    We currently have a portfolio with Friends Provident valued at US $ 105,000. We contribute US $ 1500 to it per month at present. It is about US $3000 down on what we have contributed. the more I read the more annoyed I become about the charges. We have been told we would lose 10,000 if we quit now. I have a trading account with Internaxx Belgium offshore trading house so can invest free of tax. Would it be worth our while to quit FP now an take the loss of 10,000. We have 10 years to run on FP.

    Thanks

    Stephen

    • Hi Stephen,

      I'm sorry to hear about Friends Provident dilemma. It sounds like you would lose 10% if you cut your losses and paid the penalty. That's going to hurt. But on the flipside, you could save about 3 percent (compounding) per year in fees over the next decade. With a low cost portfolio of exchange traded funds (properly diversified) you would make up that $10,000 deficit in about seven to eight years, because of the compounding benefits of the higher returns over time. Don't worry about whether the account is "up" or "down" currently. If you sell in a down market, you will be able to buy in a down market. If you wait for the account to break even, you'll then be buying in a slightly higher market as well. It's a bit like selling your house and moving across the street. If your house is worth less than you paid, you will likely pay less on the house across the street as well. See if the account you mentioned will allow you to buy low cost exchange traded funds. If so, I think you should cut your losses and move that money. Good luck!

      • Stephen Maine says:

        Hi Andrew,

        Thanks for taking the time to reply. Two final questions:

        1. If I cash in the FP plan is it better to put the whole lot into 3 or 4 diversified ETF"s straight away or to 'drip'-feed it in. I am a bit concerned about say putting 50,000 dollars into a tracker ETF in one go

        2. If a tracker index remains static or even falls over a 10 year period, how do you actually make money. For example the FTSE 100 in the UK was higher 12 years ago than it is now?

        Thanks

        Steve

        • Hi Stephen,

          To answer your first question, from a future financial point of view, it's unanswerable without seeing the future. If the markets dip over the next 12 months, you would be better off dripping in. If they don't, you'd be better off with a lump sum investment now. Use your personal comfort level. I would drop it all in now (especially because market levels aren't particularly high) but you might be uncomfortable with that and choose the other option. That's fine.

          As for your second question, the FTSE 100 may be lower than it was 12 years ago, but an investment in a diversified, rebalanced portfolio of ETFs with dividends reinvested (and the FTSE counting as your home country index) is MUCH higher than it was 12 years ago. Don't forget that you are reinvesting dividends, and rebalancing with bonds, allowing you to buy more of your dropping stock indexes when stocks fall and selling off pieces of them when stocks rise (you could do this annually). I have written about this each time I make a purchase as well, under MY MONEY. You can see it at the top of my home page selections.

  9. Zach says:

    Hi Andrew,

    I read your book earlier this year and loved it. I'm a 27-year-old expat American teaching in Hanoi, Vietnam. After saving up some cash, I started looking around for some ways to get involved in index funds. Talked with a local financial adviser here who tried to sell me on the Friends Provident International Zenith "life assurance" policy. While I was looking through their brochures, I immediately balked at the fees you described above. However, I'm wondering about taxes. Because the account is offshore, the financial adviser stressed to me that my savings would grow tax-free.

    So, first question:

    Does the fact that offshore accounts like FPI grow tax-free in any way offset the high fees they charge? I'm guessing you'll say no, but I'm wondering how the math breaks down.

    Also, when I started reading about the virtues of index funds and, in particular, Vanguard, I tried to set up an account through their website, but they said they only do it for people living in America. I'll be going back to the states this Christmas and am thinking about just transferring my savings here to my bank account in the states, and setting up a Vanguard account while I'm home.

    So, second question:

    Is there any problem with an American citizen maintaining a Vanguard account while being resident overseas? Will I be able to continue contributing to the account through bank transfers from my account in Vietnam? I don't want to wait every two years or so for a visit home in order to add to my savings.

    Thanks,

    Zach

  10. tradewinds says:

    I think there are a few very important additional things for expat investors to consider when choosing investments. I have become aware of these over the years, but many people even financial advisers seem unaware of the issues.

    I use Expat to mean Canadian, British, Australian, New Zealand, South African living in Hong Kong or Singapore.

    Problems to consider before purchasing US domiciled stocks, funds or ETFs.
    1. You will incur quite high withholding taxes (30%) on dividends and distributions.

    2. You must fill in W8-BENs detailing your address every couple of years (it gets annoying). Some brokers also send numerous inappropriate tax forms that take hours to decipher, they often are completely irrelevant, but they send them just in case.

    3. If you die, the US government will take 35% of your US assets (over 60K) in an estate tax. Even if you have a joint investment account with your wife for example, the US government with take 35% of the total assets (over $60K) should either of you die.
    This is the “special” treatment the US gives non-resident aliens (i.e. people who have no connection with the US).
    There are two ways around this. One way is don’t buy US domiciled stocks or funds. Another way if you must buy US domiciled stocks or funds is to set up a company e.g. BVI etc to hold the assets. This way the shares in company can be transferred to your beneficiaries without incurring the estate tax.

    4. The US is almost broke, who better to rip off with retrospective tax laws (e.g. capital gains) than non-resident aliens, since they do not vote. Whatever you think of the US, this is a risk that is being discussed by high end investment advisers and bankers around the world.

    5. Choosing a US domiciled fund makes no sense for most expats living in Hong Kong or Singapore. Most of these funds are aimed at people living in high tax jurisdictions. They are not tax efficient for expats in Hong Kong or Singapore. A US fund will see a Singapore stock X with a yield of 5% and US stock Y with a yield of 5% as being the same, all other things being equal. However the Singapore stock has negligible withholding tax while the US stock has a 30% withholding built into it. A high tax investor will end up paying the 30% on either stock so the stocks are equal with respect that investor, and a fund that is designed for those investors. However for Singaporean or Hong Kong people the Singapore stock has a high real yield and all other things being equal should be added to the fund instead of the US stock.

    So you are better off avoiding US domiciled funds and choosing Luxemburg, Irish, Cayman domiciled funds. However do your own checking on how it applies to you and seek advice on this, which I might add is very hard to come by.

    • All true, which is why Canadian domiciled ETFs can be better for expats…especially swap based products offered by Horizon, where no dividend taxes would need paying. The counter-party risk, of course, is there with the Swaps. But considering they’re backed by the National Bank of Canada, the risks are low.

      Are you an expat? If so, what ETFs are you buying?

  11. $te says:

    Hi Andrew,
    I have just finished your excellent “Global expat guide..”, great job!

    I’m here writing cause I could not locate myself in the categories you mentioned.
    I’m a countryless nomad, european citizen working in Asia for now, without any idea on where to retire (not my home country for sure).
    How do I replace my home country exposure?
    Is it right to assume that to stay as global as possible I should stick with USD (also my salary currency) and hence build a portfolio heavy on US market?

    Thanks for your inputs, you really put my planning into practice.

    P.S: Interactive Brokers has opened a separate branch in Hong Kong, it should be a full HK broker regulated by HK laws.

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