Not all investment accounts are created equally. There are several types of accounts, each of which has its strengths and weaknesses. One of the most important steps in becoming a successful investor is choosing an appropriate way of organizing investments. What criteria should you use to choose and how to open an investment account? Let’s consider these issues in more detail.
- Brokerage account (For example – Ameritrade, Scottrade, Schwab, Fidelity, E-trade, Saxobank, Interactive Brokers… etc)
- Investment bank accounts (UBS, Credit Suisse, JP Morgan, Goldman Sachs, Lloyds, HSBC, Barclays, BNP Paribas, Rothchilds)
- Investment account with an insurance company (Royal London 360, Investors Trust, Generali, Royal Skandia, Friends Provident, Old Mutual)
Brokerage companies specialize only in transactions for the acquisition or sale of securities, which sometimes limits the investor. Also today, many foreign banks, in addition to basic services, offer the option to open an investment account. Since 2015, in Russia you can open an IIS through a brokerage company, which has a number of features. Abroad, some insurance companies are full-fledged brokers and can represent the interests of investors by purchasing securities at their request.
In order to make the right choice, it is importance to outline your goals from the start. Having identified your priorities, you can proceed to the selection, weighing all the pros and cons of the following criteria:
1. Access to Investments and Financial Instruments.
Depending on your risk tolerance and expected returns, you will likely choose an appropriate combination of investments – stocks, bonds, ETFs, REITS, structured products, etc. By choosing to open a brokerage account, you will probably not have access to a full list of instruments outside of the jurisdiction of the brokerage. A brokerage account will be useful to active investors in a particular market offering products traded on specialized exchanges. Banks provide access to deposit accounts, lending facilities, certain securities and some internal products like funds and structured products. Life insurance and offshore wrappers can incorporate the widest array of listed instruments – as they use many various brokers and banks as custodians for their clients. Trusts and Foundations can even hold private company shares and physical property.
2. Taxation and commissions.
Any operations with assets require the payment of a commission. Sometimes this amount is commensurate with the income itself, so you should study this issue in detail. The lowest commission is provided when using brokerage accounts and is usually from 1 to 10 ten dollars per transaction. Accordingly, the brokerage company is an excellent choice for active traders who do not focus on long-term investments and often make many transactions.
Operations with a bank account usually cost 1-2% in commission, which can grow to large amounts! If you make relatively large transactions fairly often, service at the bank may not be appropriate. Investing with the help of the insurance company, on average, will require you to pay 1-2% commission during the first years of service, but in the future the percentage is reduced. Trusts and Foundations are most often costly to establish, but can be administered cheaply depending on what they hold as assets.
Investors will be pleasantly surprised by the taxation conditions when opening an investment account in an insurance company. In this case, the tax is levied only on income that exceeds the refinancing rate. In the case of a brokerage company and a bank, the investor must pay capital gains and/or income tax on an annual basis.
IIS allows you to claim tax deductions under Russian law. However, in order to use preferential taxation, it is necessary to invest for a period of at least 3 years, which makes IIS not attractive for short-term investments and speculation. Contributions to IIS are made so far only in rubles, which may limit the long-term investor.
Thus, at the moment the investment account in the insurance company is the optimal solution for a long-term investor.
3. Security and protection of capital.
Whatever financial goals you set, the protection of financial resources will always be a priority. The government guarantees for investment accounts in various institutions differ depending on jurisdiction. Basically, all insurance companies and banks with the appropriate license are insured by the government. Due to the fact that in Russia a new type of account (IIS) appeared relatively recently, it is not yet protected by the state.
Investors are often interested in capital inheritance rules. insurance policies, trusts and family foundations have an absolute advantage in this regard, since capital is inherited only by the persons specified in the policy or the trust deed.
In general, if a financial institution has long been providing its services and has an impeccable reputation, do not worry about the safety of your investments. However, sometimes an inexperienced investor will have an extremely difficult time distinguishing a reliable financial institution from a dubious institution.
It is quite obvious that professional assistance in choosing the type of account and financial institution will be indispensable for both novice investors and those who simply value their time and money. We work only with reliable foreign banks, brokerages and insurance companies. We will open any type of account for you for free. After that, our specialists will help to develop an investment strategy and make up an individual investment portfolio diversified by asset classes, currencies, risks and profitability. We will provide you with appropriate tax advice and work as a fiduciary to reduce the costs and fees of your investments. We believe we offer a unique proposition to the clients we serve in Russia and around the world.