Wednesday, 21 November 2012

Employee shares - Avoiding high transaction costs on the way out

In a recent post I mentioned that I had been stung pretty badly when selling my employee share plan shares.  The operator of the share registry that my company uses knows that most people will sell their shares directly through them and will often charge outrageous fees which employees think that they have to pay.  This post will show you how to save a lot of that money.

Who typically gets stung the worst by the share registry fees?

Typically the people that get stung the worst are employees that live in one country but get issued shares in another one (i.e. on a foreign stock exchange).  This is pretty common for those working for large US corporations but who do not live in the US.

The shares that are issued to them are typically listed on a US stock exchange and held with a share registry company that specialises in employee share plans.  A very common registry for US stocks is BNY Mellon (which is now owned by Computershare).

The fees that a foreign shareholder normally gets stung with include

  • A transaction (trade) fee:  This is normally quite reasonable and everyone gets charged this
  • A foreign wire transfer fee:  This costs $25 and is a little annoying but not over the top
  • A spread on the foreign currency:  This is where they really sting you badly.  The rate that BNY gives you is much worse than the actual wholesale rate.  In the case of the AUD there was a 2% difference between that rate and the rate they gave me - this meant that I automatically lost 2% of my profits through this cost.
In most cases you will not be able to avoid the first fee and it is a reasonable one to pay however you should  NOT be paying the second and third fees (or if you do pay them they should be much lower).  Below I have outlined some strategies to save on the fees.

Saving on the foreign currency fee

If you sit back and think about how much that foreign currency fee is actually costing you - you will be outraged.  If you assume that you are allocated $20,000 of stock in a year (not out of the ball park if you have variable compensation and an employee share plan) and you sell this stock you are getting hit with $400 in foreign currency fees which is outrageous!

Here are some ways to save on the fee charged by these share registries
  • Do a position transfer to a broker like Interactive Brokers which and sell through them instead - they do not charge an FX spread
    • What you are doing here is actually transferring the stock itself to Interactive Brokers - you are not selling it through the share registry.  This should not cost anything.
    • Sell the shares through interactive brokers - their trading costs for US stocks are very cheap (generally you want to be trading US stocks through a US broker not through your home country broker)
    • Interactive Brokers does not charge an FX spread - they charge you a flat percentage of the currency conversion cost which is 1bp - i.e. 0.01%
      • Instead of paying $400 in currency costs you will therefore only pay $2.50 (the minimum trade value)
  • Sell the shares through the share registry but set up a multi-currency account
    • There are some banks (like Citi and HSBC) that offer multi-currency accounts
    • They also offer exchange rates that are better than those offered by the share registries
    • You sell the stock through the share registry and then transfer the funds to these accounts to be converted into your home currency
    • These accounts typically have minimum balances and have reasonably high fees however they are worth considering if you get a lot of stock in foreign currencies or travel a lot
Saving on the wire transfer fee

The wire transfer fee is not a large amount ($25) however it is an annoying amount that I really believe that you should not have to pay.  Here are some ways that you can get around it.
  • Transfer the funds to a US based (multi-currency) account
    • If you can do an in country bank transfer instead of a wire transfer then you do not have to pay this fee
    • Multi-currency accounts typically have branches in several countries and so you do not get charged the wire transfer fee for bringing it back to your home country
  • Use a broker to sell you shares that does not charge a wire transfer fee
    • Interactive Brokers (mentioned above) does not charge a wire transfer fee for Australian accounts.  This is because they have an account based in Australia so what they actually do is an in country bank transfer to your account
  • Request the proceeds in a check
    • The share registries normally give you the option to receive your proceeds as a check.  If you do this it will take a little longer to get to you but you are not paying a pointless fee to receive it
    • You can then deposit this into your local bank or your multi-currency account
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