The word “Offshore” often conjures up images of murky deals, sleazy lawyers and dodgy tax havens and such other items of entertainment and excitement.
But that’s not what we plan to discuss here. For expats in the UAE, we will discuss here the concept of Offshore Investment Account (“OIA”), and the different ways to open an offshore account that can keep your capital safe.
First things first. What is an offshore investment?
Simply put, it is investing outside of the country in which you are resident. So, for example, a Pakistani citizen in the UAE may want to invest in US mutual funds. Or a UK national in the UAE may have a liking for Indian stocks.
What can you invest in?
What to invest in depends a lot on, inter alia, each individual’s return requirements and risk appetite. But generally speaking, you can invest in shares in companies, bonds issued by companies, mutual funds and Exchange Traded Funds (“ETFs”) run by money managers and structures through OIAs.
The world of equities is huge and varied and many shares have the potential of higher returns if you sell and make a profit, but they are also riskier e.g. Amazon or Tesla stock.
What to invest in depends a lot on each individual’s return requirements and risk appetite.
Bonds are loans taken by companies which are tradeable, are generally less riskier than shares, will give you a regular cash inflow from the coupons and if you stay away from the very risky world of high yield (aka junk) bonds you can get an unleveraged return of between 4 to 7 per cent per annum.
Note: Junk bonds, as explained by Investopedia.com, are essentially bonds that carry a higher risk of default, as in they might have been issued by companies that are struggling financially and have a high risk of defaulting or not paying their interest payments or repaying the principal to investors.
What is a good place to start?
Mutual Funds and ETFs invest in shares and bonds on your behalf and are considered ideal for beginners because they have the expertise and resources (see below), you don’t need to get hands on, they are diversified (hence less risk) and the dividend funds give you regular cash inflows.
Mutual Fund: Investopedia.com explains that a mutual fund is a type of financial vehicle made up of a pool of money collected from many investors to invest in securities like stocks, bonds, money market instruments, and other assets. Mutual funds are operated by professional money managers, who allocate the fund's assets and attempt to produce capital gains or income for the fund's investors.
ETF is a fund that owns assets — like stocks, commodities, or futures — but has its ownership divided into shares that trade on stock exchanges.
Why go offshore?
Reason #1 is legal. Offshore investing also means that your assets reside overseas, and this can be useful when it comes to inheritance issues in the UAE where Sharia law applies. For a non-Muslim expat, if he passes away intestate, (i.e. without a will) this can cause issues.
Sharia law will be applied to any assets that are held in the UAE and this causes most complications in the event of a husband's death. This is because his assets are frozen and will only be released upon the advice of the local courts. Assets are distributed by the courts in accordance with Sharia law and traditional rulings dictate that the bulk of assets could be passed to the closest male relative (Note: Always obtain proper legal advice).
Reason #2 is the global access. If you are, say, an Indian expat in the UAE with plans to migrate to Canada, you don’t have to close and open accounts if you already have an OIA. It stays where it is, irrespective of where you reside.
Reason #3 is that with an OIA, you almost always have access to a brokerage account where you can trade in shares, bonds and ETFs. So, if you love Apple or Alibaba stock, you simply place a trade through the OIA.
Reason #4 is that with an OIA, you have far more choice of investments than with, say an onshore UAE bank, which is relatively limited in what it can offer you. You may ask why you can’t go directly to the mutual fund and invest. You can’t because bankers need to make money and hence banks distribute these funds. The multinational banks offer far more variety of products than the local banks. This is because an onshore bank has several limitations.
If it’s an Islamic bank, then any non-Sharia compliant products are out, which means you can’t access any investment product connected with speculation, alcohol, tobacco, weapons, gambling etc. Plus, onshore banks must comply with UAE Central Bank regulations on what they can and cannot distribute. Also, selling investment products is only one of the many activities that a large onshore bank undertakes (and that too a minor activity) and to have a big range, you need to have dedicated resources to execute due diligence on funds, onboard funds, etc.
What can a multinational bank can offer?
Firstly, most offer deposits, loans, insurance and wealth management products. Within the last, they offer a broad range of Equity Funds and Bond Funds covering Global, Europe, Asia, Japan, Singapore, North America and Emerging Markets across multiple sectors (telecommunication & technology, life and health sciences, financial services, industries, gold & mining).
You can also have access to Structures, which is a family of more complex and risky products that some investors find attractive because of:
- The opportunity of capital appreciation and profit
- Opportunity of a regular income from dividends
- Potentially higher returns as compared to bonds and deposits
How can you open an OIA as an expatriate?
Let’s look at the various ways of opening an OIA as an expat in the UAE.
There are a few options, each with its merits and downsides.
Option #1: You can go to a bank and ask them to open an OIA. Many local banks and most international banks will do this for you. For example, Citibank will open an account with their IPB (International Personal Bank) in one of their three centres: London, Jersey and Singapore. You can invest in mutual funds and quality bonds through the IPB. They’ll also give you a relationship manager who will advise you. The downside? The gates are shut unless you have a certain minimum wealth. In the case of the IPB, you need to have at least Dh734,620.
Option #2: You can open an account with any of the platforms like Zurich, Skandia, Standard Life, MetLife and Old mutual. These guys are pure distributors of funds and are hired by the money managers to sell their funds.
Understanding platforms and money managers
Starting with, what is a platform in finance?
It is an online service that function like third party service providers who deliver services to investors such as distribution, dealing (i.e. buying and selling of investments), custody of these investments and client reporting.
They play a key role in wealth management and financial advisors use platforms a lot when they advise and sell investments to clients. These platforms typically tie up with and distribute hundreds of funds.
Platforms can also offer a range of investment profiling and planning tools, including tools for analysing clients' attitude to risk and for allocating assets between different asset classes. Because of the many functions that they perform, platforms are also highly regulated by (for example), the Financial Conduct Authority in the UK.
Money managers are different from platforms. A money manager is a firm that manages the securities portfolio of an investor.
Typically, a money manager researches, selects, buys, monitors and sells investments as per their mandate and they charge clients an annual fee for this which is based on a percentage of assets under management. Examples of leading money managers include Vanguard Group Inc., Pacific Investment Management Co. (PIMCO), Blackrock, Northern Trust and J.P. Morgan Asset Management. The main reasons these entities exist are their deep expertise and vast resources which an individual investor cannot muster.
Pros and cons of platforms
Pluses
- You get a lot more variety of investments than in an IPB set up.
- The minimum wealth required is quite low, in the Dh35,000 to Dh75,000 range.
- Instead of having to track different investments in different places, with different statements coming in at different times, a platform holds all your investments in one place.
Minuses
- Of course, there’s no free lunch in finance so the big downside is that you’ll have to pay (exorbitant) annual charge of between 4 to 6 per cent. This is because you are asking them to do a lot of admin work for you plus they need to make a profit. This also means your investments will need to generate a high return (at least 6 per cent) to break even!
- No platform can deal with every possible client situation/requirement.
- Platforms can also be a bit clunky and can churn out reports that are confusing and/or the client could care less about.
4-6 %
Annual fee charged by platforms
Option #3: The DIY or Do-It-Yourself route. Open an account with an offshore, online brokerage and buy and sell stocks, etc. Opening an account is quite easy and once you open, you can wire them cash and buy with one click. And in these hi-tech days, online brokerages are not as clunky or basic as you may think.
But does such an approach fit you? Ask yourself these questions
How good is your knowledge of investments and markets? If it’s not basic, then go to a brokerage.
How much time do you have to research, buy and track and sell investments? This can take a lot of time if you want to do it properly. For example, if you are not working/working full time, then go for a brokerage
Are you an active or passive investor? If you like to be super hands on and you like trading (i.e. buying and selling frequently), then a brokerage is for you.
Finding the right broker
If you decide to go ahead with the DIY approach, the next step is how to choose the right broker. We will talk about that in a subsequent piece. There are many big brokers like Fidelity, Charles Schwab, TD Ameritrade and Interactive Brokers (“IB”). Take IB. They claim that their commissions are lower (all-inclusive cost of 0.008 per cent) and execution prices are better than almost any other broker and they buy and sell assets in over 120 trading venues around the world.
You can even use IB’s Smart Beta account and get your money actively managed at a cost of 0.08 per cent. I checked IB online and you can buy stocks, bonds, funds, commodities and forex and apart from the US and Canadian exchanges, they also cover Australia, Hong Kong, Japan, Singapore and India (NSE).
The downside with brokers is that you are pretty much on your own and don’t get any advice, although with IB you can get advice from qualified advisors listed on the platform (for a fee of course).
The DIY approach rarely gets mentioned by advisors and banks because they don’t make any money from it.
Of course, all the above are just vehicles to invest overseas. The return you make and the risk you take are largely independent of these and depends on the usual factors like the type of investment, the issuer, etc.
Offshore investing is not meant for (or required by) everyone. It must be done only if one or some of these benefits are important for you. There are multiple options and you must know yourself and decide your strategy.
Wish you happy investing!
- The writer is a platform speaker, podcaster and market analyst with more than 27 years of experience.
