Fees are a major topic among Singaporean retail investors looking to diversify their investments abroad, and rightfully so. As Joshua Giersch, author of Rich By Retirement sagely states:
“The easiest way to improve your investment returns is to pay less in fees”
Simply put, it is one of the very few free lunches in the markets.
Think about it – if you neglect fees and your portfolio happens to pace the indexes because you held index ETFs, you can be sure that you do not beat your index benchmarks after accounting for fees.
Bringing it closer to home, this was how my account P/L looked like between the span of 23rd March to 10th April, before I gave fees the time of my day:
Yep that’s right, fees devoured 30% of my capital gains.
To explain this phenomenon, I was realising profits at a clip of around 3 trades per week during this span to capture the rebound off market lows in March.
PDT rules do not apply to account holders of Saxo so I took advantage of that in my swing trades. Therefore when you’re trading at that sort of volume, you naturally incur costs from fees and commissions accordingly.
If you are an investor planning to have holdings in the US markets, this article is for you.
The following content details how fees are usually accrued by investors on Saxo Markets and presents 2 ways to minimise any fees incurred.
Status Quo: Local SGD Deposit to Saxo Account (SGD Base Currency)
The typically process which a Singaporean investor usually undertakes, is to open a Saxo account before funding them through a local bank or electronic transfer.
One seemingly innocuous detail tends to be overlooked by everyone, myself included.
There is a portion during the account opening phase which requires you to select the currency base of your Saxo account. Not knowing any better, most of us would have selected SGD and not thought too much about it.
The issue soon becomes surfaces upon your first trade and the schedule of fees I’ve compiled should make it immediately clear why.
With every holding valued at USD 1000 (e.g. buying 5 shares trading at USD 50) you plan to own, you will incur a cost of 2.48%.
In layman terms, you’re set back 2.48% before any price movement has begun – which is pure bollocks in my humble opinion.
Now you have to wait until the value of your holdings appreciate sufficient to cover your fees before any unrealised profits can be take place. In some instances, you won’t even get to see that light at the end of the tunnel and the red becomes redder.
It gets even more ridiculous when you want to enter a larger position since the currency conversion fees are variable. So the larger your holdings, the more exorbitant your fees.
To illustrate, if you decided to buy 5 Amazon shares at USD 2409.78*, you’ll be set back USD 180.73 (SGD 256.64) just to enter the position.
I haven’t even gone into commissions yet.
Although the commissions are low by industry standards, they are pegged at 0.06% for US equities, with a minimum of USD 4 and maximum of USD 100 per trade. To get the total commissions charged, just simply multiply by 2 (since buying involves executing a trade, likewise for selling).
Therefore, the commissions are fixed at USD 4 per trade up to a position size of USD 6666.67. From thereon, the commissions are variable based on the percentage and it finally caps at USD 100.
But as distilled earlier, if your position is going to be as large as USD166,666.67, expect your conversion fees to be exorbitant too.
Fortunately, there are ways you can seek to circumvent this issue if you’re on Saxo but do not want to switch brokerages.
Method 1: Opening a Saxo Sub-account (USD Base Currency)
One way is to open a sub-account under your main Saxo account.
The reason we do this is because Saxo does not allow account holders to change the base currency of their account. The only way to effect a similar change is to open a sub-account which can be denominated in any currency of your selection.
Here is the schedule of fees assuming similar trading conditions to the status quo example:
As you can see, the fees incurred for each holding is markedly less due to the omitting of currency conversion fees and each trade becomes less than a percent of your position.
“But, won’t I still incur conversion fees when I transfer SGD from my SGD based Saxo account to this USD sub account?”
Aaaand you’re correct!
This method is not fool-proof – you will still unfortunately incur currency conversion fees similar to the rates mentioned in the status quo example. So what exactly is the benefit?
The benefit lies during trade execution.
Remember the picture I showed you containing my account P/L? The substantial costs were due to me executing a relatively high volume of trades to realise my profits and incurring conversion costs over and over again.
This method effectively removes currency conversion fees for future trades since your account is denominated similarly to the markets. Furthermore, you can hold the USD as cash within the sub-account for future trades.
The only time you will see currency conversion fees will be during fund transference between accounts. Other than that, you can bid it au revoir.
The only drawback is that there is a minimum AuM requirement to open a sub-account, which is set at SGD 10,000 or equivalent. I do think there are ways around this issue, based on anecdotal evidence. Please personally contact me if you wish to know because I understand Saxo does this on a discretionary basis only.
Method 2: Using a 3rd Party Multi-currency Account with Saxo Account (USD Base Currency)
This method takes what we discussed in method 1 to another level by improving on inefficiencies in Saxo’s FX spread. It does not matter if the Saxo account is a sub account or main account, as long as it is denominated in USD.
Method 2 allows investors to leverage Saxo’s industry low commission fees and aims to completely remove Saxo’s currency conversion fees, replacing it with a 3rd party providing competitive FX rates.
Investors can opt to open a multi-currency account at any 3rd party money transfer service provider such as Revolut SG or TransferWise, converting their SGD to USD there to reduce currency conversion costs.
They can then transfer their USD to Saxo and credit their Saxo accounts accordingly.
Using TransferWise as an example:
The currency conversion fees charged at Transferwise (0.58%) is less than that of Saxo (0.75%).
While these percentages seem miniscule and negligible at first, it gets significant when your holdings start to increase so it is always good to set out a system to mitigate costs in the long run.
A major disadvantage lies in having to wait a business day for the funds to be credited into your Saxo account. Utilising Saxo’s conversion function allows you to transfer SGD directly to your Saxo account which can be done almost instantaneously via PayNow or FAST transfer. The ultimate decision lies in deciding between speed or additional costs – only you can make that call.
What does this mean for the Layman Saxo Investor?
Understanding the fee structure if your trades are one of the paramount things an investor should consider.
Being conscientious and ascertaining all costs incurred while utilising your brokerage can be viewed as a first step to fundamental analysis, which is far more complex than viewing a few percentages in a fee schedule.
Saxo is definitely not the only brokerage for Singaporeans to use in their efforts to achieve geographical diversification. There are a couple of websites which have done an outstanding job comparing online brokerages with international exposures, such as this.
I would highly recommend US focused investors looking to open an account with Saxo, select USD as their base currency denomination. However, if you are looking to deploy your Saxo portfolio internationally, then perhaps selecting the SGD base would still be better since it provides you more flexibility in your home currency than having to convert to USD first and incurring needless conversion costs.