As the world continues to react to economic problems together, international investing has become an ideal way to expand your investment portfolio and safeguard your assets against regional instability. However, there are significant trends and factors to consider when deciding how, why, and where to put your money internationally. This is where the hidden costs of international investment come into play.
If you’re looking to invest your money overseas, here’s everything you need to know about it, especially the ten hidden costs that are involved in international investing.
What is International Investing?
As defined, international investing is a strategy that allows an investor to select global investment instruments to take part in your investment portfolio. It’s a process that gives you many investment opportunities to add new sources of return potentially. Moreover, the good thing about international investing is the opportunity you have to mitigate some investment risks that are associated with the country’s economy since it diversifies the instruments for an investment portfolio beyond the domestic investments.
However, like other types of investments, international investing may also present some risks, including but not limited to:
- Costs of foreign investments– Investing overseas can be more expensive than domestic investing. This is because of the different transaction costs, which may be higher than the local markets. From unexpected taxes to the broker’s commission, you should be aware of the possible problems of your investment abroad.
- Various levels of liquidity– There are foreign markets which have lower trading volumes for securities. Not only that but some countries may have restrictions regarding the type of securities that foreign investors like you may purchase. With the existence of these factors, you may find it hard to look for a buyer when you want to sell your securities due to the markets’ less liquidity.
- Access to different information– In some cases, the information provided by the local companies may be different from that of the foreign companies. Moreover, the preparation of financial statements of these foreign entities may be done using different accounting standards compared to some companies in your country.
- Legal remedies– When entering into international investing, seeking legal remedies as a plaintiff may not be possible in foreign countries. In other words, the aggrieved investor will have no choice but to rely on the legal solutions available in their home country.
- Market value changes– All investment markets may have to experience changes in the market value. Whether you like or not, your international investments may have to go through adverse times and long-term downturns in both foreign and domestic markets.
- Different market operations and procedures– Your home country’s trading markets may also have various operations from the foreign markets. For example, the rules and regulations for the safekeeping of investments by foreign depositaries or custodians may vary from those in your own country.
- Instabilities in currency exchange rates– These can also affect your foreign investment. The changes in the exchange rate between the local currency and that of the foreign currency may either increase or decrease the return of investment in foreign security.
- Major economic, social, and political events – Let’s face it – some economic, political, and social factors can affect the foreign market. The downside is that it can sometimes become more challenging to gather information about these variables depending on the country or region.
What are the Hidden Costs of International Investing?
Now that you know what international investing is and its associated risks, it’s time to get yourself familiar with the hidden costs that come with it. If you don’t want to deal with problems later on, then you should start appreciating the costs involved in international investing. To gain more knowledge and understanding, below are the ten hidden costs of investing overseas that you should be aware of:
- Custodial Fees
It’s a fee you’ll have to pay for safekeeping services. If you want to minimize the risk of losing your assets or having them stolen, you’ll probably ask the financial institution to hold the securities on your behalf. Thus, they’ll charge a custodial fee for the safekeeping or custody services they’ll provide you.
- Transaction Fees
These are the fees you may need to pay when you buy or sell any financial security. These are also sometimes referred to as a commission charge. For every buying or selling transaction you make, the investment manager may charge a considerable amount of transaction fee.
- Management Fees
If you want your assets to be professionally managed, you’ll need to pay a management fee. It’s a fee billed by an investment manager for the time, effort, advice, and expertise they’ve spent in selecting stocks and managing your investment portfolio. Management fees, for instance, may also include other expenses such as administration costs of the fund or investor relation costs.
- Brokerage Fees
These fees are charged by stockbrokers when they introduce a buyer to a seller in the selling or buying of financial security. These are also often called a commission charge for brokers who execute transactions on your behalf. In most cases, brokerage fees come in different sizes, including account maintenance fees, sales load fees, and many more.
- Cash payment Fees
These are hidden costs that you may have to pay to facilitate the transfer of cash into or out of your investment account. It’s commonly known as an administrative charge for cash payment transactions.
- Bid-ask spread
Usually called a mark-up, the bid-ask spread is the charge difference computed by traders between the sell and buy price of financial security. The size of this hidden cost is the measure of the size of the transaction cost and the liquidity of the market.
- Performance Fees
These are fees that the investment manager may charge to a client for managing their assets and generating positive returns. Performance fees are the opposite of management fees since the latter is billed without considering the returns. The good thing about these charges is the fact that they can be calculated in several ways, depending on your investment firm.
- Trailer Fees
Sometimes known as a rebate or retrocession, these are charges that a fund manager will pay to third party introducers for selling the fund to the investors. Trailer fees constitute payment for the ongoing investment services and advice of the advisor. These are also annually paid to the advisor so long as the investor has the fund.
- Administration Fees
Aside from investment-related activities you make as an investor, you may also be charged with some administration fees for every non-investment related transaction you have.
- Active fund manager / ETF Fees
These are the costs charged for active management and third-party structuring when you invest your money overseas. An Exchange-Traded Fund is a type of fund that manages a basket of assets which you can sell in the market. When these funds are managed, you may be required to pay an active fund manager or ETF fee to your portfolio managers.
If you want to know the best ways of transferring large sums of money to get started with your foreign investment, there are websites and other online platforms that can provide you all the options including their fees and additional related costs.
How Can You Minimize International Investing Costs?
Like most things that happen in your life, you can also take what you pay for in terms of your investments. Meaning, if your investment costs less, it may not be the right one for you. Unfortunately, buying investments at a lower cost doesn’t mean you can’t build your wealth quickly. All of these issues boil down to the different costs involved in international investing.
If you’re looking for ways to reduce hidden costs and make it easier for you to be wealthy, here’s what you need to know from the very beginning:
- Do some research– When it comes to international investing, there’s always an ocean of information to take a dip with. Thus, it’s best to do your homework and get to know the full costs before investing. Make a real effort to read the fine print, so you can easily understand the wealth of information regarding investing overseas.
- Know what you have in your portfolio– In addition to conducting some research, understanding what you have in your investment portfolio can be a way to minimize the hidden costs of investing. By this, you’ll be able to create a greater sense of transparency for all the money you may have spent for the investment.
- Think about the tax implications– If you don’t want to pay more hidden costs when investing internationally, you may have to consider the potential tax implications of your decision. Remember, tax-related matters are one of the most complicated issues in terms of investment. That’s the reason why you should get familiar with how long-term and short-term capital gain tax works and benefits you.
- Ask your advisor to explain their fees and other hidden costs– In order for you to avoid paying higher fees when investing overseas, asking your advisor to explain all of them makes a lot of sense. For instance, if you have a bond portfolio but it only has a few transactions each year, you don’t necessarily need to pay a flat fee but paying on a transactional basis can be a better option.
- Avoid firms that charge add-on fees– With a variety of hidden costs associated with international investing, you can still save more money if you avoid investment firms with add-on fees. To do that, you just have to stick with major online brokerages since they don’t usually bill you with account maintenance fees which are common with traditional brokerages.
What are the Major Considerations When Investing Overseas?
Given the modern era of the Internet, people like you can invest in the foreign markets of America, Australia, Europe, and many more. It also allows you to expand your portfolio and invest your money outside your home country. Below are some important considerations when you invest internationally:
- Find a broker
There’s plenty of brokers who can facilitate your foreign investment. You can choose some online brokerage platforms or go for traditional brokerage services. In either case, be sure you know what fees and other hidden costs you may have to pay. When finding the right broker, know whether the broker you intend to choose offers the products you want to invest in, and provide access to different markets.
- Create an account
Depending on the country you wish to invest your money in, you may be required to make an account and fill out some forms before you can start with your foreign investment. If possible, ask assistance from your broker for more information and guidance about the compliance of all the requirements.
- Start transferring funds and trade
Once you’ve created an account, it’s time to transfer funds and start trading. Under these circumstances, your broker may ask for the fund transfer to your account to begin trading or may require the linking of your bank account to the brokerage account. Either way, be sure to understand the exact process before you trade.
Get Help from an Investing Pro
Investing overseas can be a complicated undertaking, especially when it talks about the overall costs. And to have a better understanding of the value you’re investing, you may need to take a look at your fees, including the hidden costs. This means you have to work with an investing professional to know the breakdown of your fees and other hidden costs and where your money is going. If you want an idea about how these costs can impact your investment, get help from a pro and start building your long-term wealth in no time.
The Bottom Line
In order to be successful in your investing efforts, you always have to be familiar with how much you’re paying, especially if the investment you’ll make has hidden costs. With all of the information presented above, we hope you find this article useful when it comes to obtaining knowledge about investing overseas and its associated fees and hidden costs.