Local or offshore? How to choose an investment platform

Buying all your investments on a single platform has several advantages but when it comes to investing outside SA, choosing the correct platform is even more important.

Investment platforms give you the ability to buy investments from different providers, switch between them easily, and to view all your investments in a single, online place.

Views differ on whether you should choose a local platform with a good range of offshore options or opt for a platform located outside the country. Established local investment companies such as Investec, Sanlam, Allan Gray, Momentum and Old Mutual all offer offshore investment platforms.

Mickey Gambale, the CEO of Stanlib’s group investment platform, says for a truly offshore platform it must be domiciled or located outside of SA. Local companies also offer platforms domiciled in foreign countries.

When you invest in an offshore-domiciled platform you use your foreign exchange allowance of up to R11m a year to take money out of the country. For many local investors this mitigates political risks, he says.

Gambale says there is no VAT charge on the administration fees of offshore-domiciled platforms, ensuring that more of your money is invested.

He believes a platform must provide you with secure, reliable access 24 hours a day, seven days a week.

Anthony Kelsey, the head of business development at Capital International Group, says it is easier to understand and gain confidence in offshore investments on a platform that offers support locally. It’s much easier to deal with someone in your country who understands the challenges that you may be facing, rather than trying to phone a distant country with a different time zone and staff who might not even speak your language.

He says you should choose a platform in a country with good laws and strong regulation, which can demonstrate how it will secure your investment and personal data. It is for this reason that the Isle of Man, Jersey and Guernsey are so popular with South African investors, he says.

Jaco van Tonder, director of adviser services at Investec Asset Management, however, says that  South African companies’ offshore platforms have the edge on the platforms offered by companies not registered here because they know the tax and other regulations.

Stringent financial controls and tax-reporting requirements — which differ between countries — are major reasons for using an investment platform, Van Tonder says.

Different investment jurisdictions report according to different standards on important matters such as your investment returns, fees and tax liabilities, he says.

Why local is better

It is becoming increasingly difficult for investors who have investments in different countries to obtain comparable and consolidated information.

Using a South African platform allows you to monitor all your holdings in one place and on a consistent basis, Van Tonder says.

Second, a local company’s offshore platform knows how you need to report your taxable income, dividends and capital gains to the SA Revenue Service (Sars).

In contrast, if you are dealing with multiple offshore jurisdictions and administrators, you will have to pay a local tax expert to recalculate the information in the format Sars requires, he says.

Third, local platforms can offer you the option to hold your offshore investments in South African life insurance endowments. The major benefit of this is that the life company, rather than you, the policyholder, pays the tax and takes the risk of failing to calculate or report any offshore taxes correctly, Van Tonder says.

The tax rates applicable to  South African endowment wrappers is likely to be slightly lower than if you hold the investment directly. High-earning South African taxpayers pay income tax at an effective rate of 45% on income, whereas income tax on endowment assets are taxed at 30%. You pay capital gains tax at rates up to 18%, whereas life companies pay 12%.

If you pass away, the South African executor of your estate would have custody over both your South African and offshore assets — so your estate will pay executor’s fees on your offshore assets.

However, your estate will incur additional winding up costs for assets held directly offshore because your South African estate will also have to comply with the estate winding up processes in each of the countries or jurisdictions in which you own assets (known as probate).

In a life assurance policy you can nominate a beneficiary to receive the proceeds, essentially bypassing the probate process and the charges that apply in foreign countries, Van Tonder explains.

Kelsey agrees that trusts, international pensions and endowment products all have different tax, control and legacy benefits, but not all platforms offer these.

Investment choice

Gambale says your offshore platform must have a broad range of funds in the currency of your choice.

Not all of them offer easy access to mutual funds (unit trusts) as well as increasingly popular listed passive instruments such as exchange traded funds, Kelsey adds.

Van Tonder says most local companies’ offshore platforms offer about 50 funds and its highly unlikely that these platforms will not have a suitable investment for you.

Generally, when platforms have about 30 or 40 funds there will be a number of passive investments from which to choose and some also offer offshore share portfolios.

Fees

Make sure you understand the costs of an offshore investment platform, it can be expensive if you choose the wrong one, Kelsey says.

Van Tonder says you need to understand the fees at every level.

The platform fee may be explicit but often there are additional layers of fees, such as transaction charges or additional custody and brokerage fees for share portfolios.

Very few South African platforms charge for transactions but offshore platforms often do.

Some South African platforms partner with offshore entities such as a stockbroker, which will have its own fee schedule.

Finally, South African platforms will show your fees in an easily measurable and comparable number (the effective annual cost), whereas offshore platforms seldom present a single figure for all fees.

Is a platform worth the cost?

South African investors accessing an offshore unit trust fund directly will typically pay 1.25%-1.5% a year. Platforms receive a discounted asset management charge from offshore managers. As a result, on most of the popular funds, the fee saving you enjoy as a result of the bulk access through a platform covers the platform fee.

Tips for choosing an investment platform

The platform should:

• Allow you to appoint a specialist investment manager of your choice to manage your offshore investments.
• Be simple and easy with a responsive customer service. Opening an account should be simple and not entail posting documents around the world.
• Have good online access so you can track your investments easily and cash out whenever you need to.
• Have a proven track record, giving you comfort that it is secure but not so large that you will get poor service. You should ask for references or client testimonials.