There are significant savings to be made by sourcing financial products overseas, writes FIONA REDDAN

IF YOU spend hours searching websites all over the world from the US to Asia looking for the cheapest place to buy a Sony Reader or a pair of Ugg boots, you may wonder why you don’t do the same when buying financial services products.

If you’re in the market for a mortgage, life assurance or a pension, you will be largely restricted to domestic institutions, but for a wide range of other financial products, going international may be the better option. While the advent of the single European market may not yet mean one market for the provision of all financial services, it is still possible to avail of some cross-border products, and you can even cast your net further afield for services such as buying foreign exchange.

So, if you want to pay over €1,000 less in management fees on an investment fund which tracks the Dow Jones Euro Stoxx 50 Index, or save hundreds on a foreign exchange deal or avoid annual maintenance charges on share transactions, it is time to go global.

Online trading

The arrival of TD Waterhouse into the Irish market has brought some welcome competition into online share dealing, charging, as it does, €20 for standard trades, or €15 for frequent traders.

Nevertheless, if you look further afield, you will find many brokers charging less than this. But, be warned that while one platform may offer low-cost trades on US stocks, it may be more expensive for European equities, and vice versa, so you may need to shop around to find a provider that best suits your needs.

US broker Firstrade charges just $6.95 (€4.70) per trade, and allows Irish residents to open an international account. While the requirements of opening an account with an international broker can be more onerous, if you’re a frequent trader, then the savings will stack up. You can trade US stocks or international ADRs on Firstrade’s platform.

Interactive Brokers offers trading on a wide variety of exchanges, including the main US markets, as well as many European ones such as the London Stock Exchange and LIFFE, and Asian-Pacific exchanges. It charges just $0.005 per US stock, with a minimum of $1 per trade, or 0.1 per cent cent of the trade value (charging a minimum of €4) for continental European markets. A minimum account balance of $10,000 also applies. However, if you pay less than $30 in commissions a month, a monthly account fee of between $10-$20 will apply.

For low-cost foreign exchange trading, check out ACM Forex, a Swiss-based online trading facility which offers commission-free trading. It charges spreads from 4 pips (price interest points) on EUR/USD for amounts up to $5,000 and 1.5 pips on amounts between $100,000 and $250,000.

For European stocks, Keytrade Bank, which is part of the Credit Agricole Group, charges €7.50 for trades on Euronext, rising to $29.95 for trades on US markets NYSE, Nasdaq and Amex.

Given the weakness of sterling at present, UK-based providers also offer good value. Odlmarkets.com, an online forex, derivatives, equity and commodity trading house, charges £12.50 (€13.80) per trade under £2,000, rising to £25 per trade above £2,000 on UK stocks, and $15.95 on US equities. If you wish to trade US options through the company, you will be charged $15 per trade and $2 per contract, while UK options are £15 per trade and £1.80 per contract.

Another option is E*Trade, which enables you to trade all UK and Irish dual-listed stocks at a flat-rate of £7-£11.50, depending on how often you trade.

Some trading sites will allow you to fund your account in whichever currency you desire, which means you can cut down on foreign exchange fees. For example, Odlmarkets requires a minimum of £1,000 to open an account, but accepts a wide range of currencies including the euro, US dollar and Swiss franc.

Low-cost funds

Given that many Irish investors are used to paying in excess of 1 per cent per year to service their investment funds, it may come as a surprise to discover that there are so many cheaper options once you cast your net outside Ireland.

Exchange-traded funds, which are traded on stock exchanges like shares, are very similar to index-linked funds, but are often much cheaper over the long run. You can purchase many of these funds through a stockbroker.

Barclays Global Investors has the largest range of ETFs available through its iShares platform, and investors can choose from funds as diverse as a global Shari’ah fund to a covered bond fund. To compare the costs, take the iShares DJ Euro STOXX 50, which aims to track the Dow Jones EURO STOXX 50 Index. The annual cost of this fund, or its total expense ratio (TER), is just 0.15 per cent. If you were investing in an index-linked fund offered by an Irish provider, however, which invests in the exact same stocks by tracking the same index, you would be paying fees of at least 1 per cent per annum.

So, in terms of fees, a €10,000 investment in a mainstream index-linked fund would cost you €1,557.52 over 10 years, based on an annual return of 5 per cent and an annual management fee of 1 per cent, compared to just €242.69 in the iShares ETF.

The cost of ETFs increases depending on the geographic spread and underlying asset, and while they are not all as cheap as the aforementioned example, they still fall some way short of 1 per cent. For example, the iShares MSCI Latin America ETF has a TER of 0.74 per cent, while the Janney Global Water Fund, which is available on the Irish Stock Exchange, charges 0.65 per cent.

It should be pointed out that a disadvantage of ETFs is that their tax treatment can be complicated, as they require individuals to file tax returns to disclose their holdings, unlike investments in index-linked funds.

Another downside is the stockbroking fees you incur when buying/selling, which also act as a disincentive to a drip-feed investment approach into an ETF. For example, a €10,000 investment in the iShares DJ Euro STOXX 50 will incur dealing charges of €125 with Goodbody Stockbrokers (1.25 per cent charge, minimum of €32).

If you wanted to smooth out your entry into the market by investing €2,000 each month over a period of five months, this would bring your dealing costs up to €160. Nevertheless, even when the annual cost of holding the fund is included, the costs are still far less than the charges incurred on an index fund over 10 years.

Moreover, to counteract the broking costs, you can use one of the aforementioned international low-cost online brokers to buy and sell your ETFs, provided that they cover the market on which your desired ETF is listed.

Foreign currency

If you need a significant amount of foreign exchange, instead of going into your local bricks and mortar bank to buy it, by going online and buying from an international provider you could save yourself a lot.

With a traditional bank, you would be typically charged a spread – which is the difference between the price at which you can sell your primary currency and what you have to pay to buy the delivery currency – of up to 2.5 per cent.

With an online provider, however, you could get the same transaction for 1 per cent or less. Remember that even if a bank or other foreign exchange provider offers low fees or no commission, this may be because they have adjusted their exchange rate to make up the difference.

Another advantage of buying through an online provider, which is used to dealing in large volumes, is that exchange rates are updated throughout the day.

This means that the transaction may be actually cheaper in the afternoon than in the morning. Moreover, it is easy to get a real-time quote online. One point to note is that in times of low liquidity, such as weekends or when markets are closed, you may be charged more with an online provider.

But how much can you actually save? Well, say you purchased a property in the UK and needed to settle an outstanding bill of £30,000 on November 9th.

With Bank of Ireland, the cost of this transaction would have been €34,083. With an online specialist provider however, the costs can be much lower. Oanda FX Global Transfer, for example, would have charged €33,660.19, including a €16.69 fee, meaning you would have saved over €400 by going with an international provider.

The firm, which has been providing currency services since 1997, says it can offer lower rates due to the large volume of transactions it conducts. A US-based company, it accepts Irish customers. To use its services, you need to set up an account with the firm, which you will then need to fund. From this account you can then wire the required recipient. Oanda keeps its customer funds in accounts at banks such as JPMorgan Chase, Royal Bank of Scotland, Deutsche Bank and the Royal Bank of Canada.

Deposit accounts

If you are one of the thousands of Irish shoppers who have crossed the border to go shopping, you may have noticed the savings rates on offer in UK banks.

While rates are marginally better at the moment, once the UK economy improves – and this may happen sooner than in Europe – the Bank of England will start pushing its rate up from 0.5 per cent, thereby likely increasing deposit rates for savers.

For example, Halifax is offering an interest rate of 6 per cent, fixed for 12 months, on its children’s regular savings product in the UK, or 4.5 per cent a year on deposits locked away for three years.

According to the UK regulator, the Financial Services Authority, it is possible for Irish residents to open UK bank accounts. So, if you see a UK bank offering a preferential rate, technically you should be able to avail of it.

However, in practice, many of the banks only accept account applications from UK residents, although banks in Northern Ireland may be willing to open accounts for Southern residents.

Ulster Bank, for example, will open savings accounts for residents of the Republic in the North provided they open it in a branch and complete a non-resident declaration form. However, according to the bank, the customer must be resident in the UK if they wish to open a savings account via the internet or the telephone, and ISA accounts are only available to UK residents, as they are designed to meet UK tax rules.

Of course, opening a sterling-denominated account does bring with it foreign exchange risk, and the possibility that regardless of the interest rate on offer, your investment will actually decline because of a fall in the value of the pound. However, with sterling at such a low, placing funds in a sterling account may actually reap dividends if the currency strengthens again.

The other option is seeking out rates offered by international players in the Irish market. UK building society Nationwide, for example, which operates an online service in Ireland, has a 3.35 per cent 12-month fixed rate, and a 3.30 per cent variable rate. Minimum investment starts at €2,000.

Halifax is offering 3.75 per cent on its variable rate account, for amounts of up to €10,000, National Irish Bank pays 3 per cent on deposits up to €50,000, and Rabodirect has a five-year fixed rate of 3.4 per cent per annum on amounts over €500.