Choosing a brokerage firm for investment is the first thing you need to decide before taking action. You can not control the stock market and stock prices. However, choosing the right brokerage firm can minimize your investment expenditure. I took my lesson by trial end error three years ago. I decided to invest in US capital markets via ETFs as my investment strategy. On the other hand, I had no practical knowledge of investing in foreign financial markets at that time. So I decided to go with a domestic firm rather than an international one. However, this decision cost me too much. I paid eight times more for each transaction and higher for money transfers. It would help if you also decided on other vital issues before choosing a brokerage firm. Let’s start with the most apparent problems.
Language barrier
Thanks to the ICT revolution, anyone with an internet connection can access world financial markets. You do not have to work with a domestic broker. You can invest through an online foreign brokerage firm. However, you may have to communicate in one of the major languages to benefit online international brokerage firm’s services. For instance, English speakers have plenty of options. If you have a language barrier, you should stick with a domestic brokerage firm. Eventually, you have to ask some questions to the customer service to solve an issue.
Reliability
My goal is to get my financial freedom. Hopefully, I will invest for a very long time in line with my plan. Choosing a brokerage firm is essential because it will be my long-term partner. It must be reliable and have an excellent service record. Changing a long-term partner is like a nasty divorce. For instance, I tried to transfer my assets from a domestic brokerage firm to Interactive Brokers two years ago. I waited eight months, but it didn’t work since there was no well-defined system for transferring existing assets from my ex-firm to a new one. Eventually, I had to liquidate my assets. Yes, that costs me a lot.
How to fund your account?
Money transfer poses a significant problem using an overseas-based brokerage firm. More precisely, transferring money to the foreign bank account of the brokerage house at an affordable cost is critical. Technically, you can send money to any part of the world with the Swift (Society for Worldwide Interbank Financial Telecommunication) method. However, the Swift solution is expensive for small-scale retail investors.
After a year-long trial and error process, I learned that you could fund your account in Turkish Lira at Interactive Brokers with zero cost. Then you can convert it to the dollar with little extra money. For curious readers, you can wire the funds to another bank account in Turkey for free if you use your employer’s bank. Anyway, suppose you try another bank cost is still negligible. Interactive Brokers supports 24 currencies. If you are living one of those, you can enjoy the method.
I also have investment accounts at TD Ameritrade. It focuses only on US capital markets. Therefore, I do not have the luxury of sending funds in domestic currency. However, there is still a better option than swift. You can use a Wise multicurrency account. Wise provides real bank account numbers in your name in many currencies. In this case, I connected my Wise dollar account to my investment account at TD Ameritrade. Then I can transfer funds via the ACH system for free.
Transaction costs
The other critical element for choosing a brokerage firm is transaction costs. Less is better. If you live in an emerging market economy, the financial sector is not as mature as in developed economies. In practice, it usually means domestic brokerage firms charge higher commissions. Because when we work with domestic companies, we actually pay commissions twice. They typically work with international brokerage firms since they don’t have an independent technical infrastructure. So prices include costs of infrastructure providers plus a profit mark-up. In industrial economics, it is called double marginalization. If we remove the middleman from the chain, the price will decrease. Also, you can access a much more comprehensive product range and services.
In case of death
There is a disadvantage when you work with US-based brokerage firms. You invested in US financial assets. Suppose your time is up. So what is going to happen? According to US legislation, a US-based brokerage firm is not responsible for tracking inheritance and gift tax. According to the procedure, our relative has to apply to the brokerage house to transfer financial assets. In this case, the brokerage house seems to be requesting a document from our relative on whether the requirements of the US Internal Revenue Service (IRS) legislation are fulfilled. According to US tax legislation, inheritance and gift tax due on the death of a non-resident alien is 40%. This rate is valid if the deceased person’s assets are over $60,000. Otherwise, there is no inheritance and gift tax. For detailed information, you can check this link. With the agreements it has signed with 15 countries, the USA provides more favorable conditions for the citizens of this country in terms of inheritance and gift tax. Unfortunately, Turkey is not among them.
How to minimize taxes by choosing a brokerage firm
Ireland does not tax foreign investors’ capital gains and dividend income. There is no inheritance or gift tax as well. Ireland’s tax treaty with the US states that dividend income from US financial assets is only subject to 15% tax. Therefore if you buy an Ireland-domicile ETF, your heirs will not be taxed in Ireland on your death. This is the way I prefer in terms of tax within the framework of my investment strategy in foreign markets. In other words, I invest indirectly through Ireland-domicile ETFs via London Stock Exchange instead of investing directly in the US markets. To do that, you have to work with a firm accessing UK capital markets.
In conclusion, choosing a brokerage firm is not simple as it seems. You must consider reliability, language skills, money transfer issues, and commissions. Let’s not forget the taxes. If you want to increase the return on your investment, you have to minimize tax expenses. More extended the investment period, those issues get more critical.