The five-step guide to low-cost offshore investing for UAE residents

Many UAE residents want to invest their money sensibly overseas, but have no idea how to go about it. Very few people realise there is a fairly cheap and flexible way to do this yourself. The DIY approach rarely gets promoted by financial services companies because they do not make profit from it.

Financial advisers will try to convince you that investing can only be done through their platform, but locking yourself into a long-term plan is usually an expensive mistake. Minimising fees is key when you want your investments to grow quickly.

You will probably try to convince yourself that you do not have the time or the expertise for DIY investing. You are wrong. Yes, there will be a few hours of reading articles, opening accounts and filling forms. Once that is done, you will have a simple and powerful, long-term investment system for life, requiring little more than one hour per year.

This article is not about why you should invest or what you should invest in, as those topics are well covered elsewhere: read Andrew Hallam's Millionaire Expat: How To Build Wealth Living Overseas or join the SimplyFI.org's Facebook group in the UAE - a non-profit community following the investment principles of Jack Bogle, the founder of Vanguard and inventor of passive index funds.

The short answer to why is that regular investments in cheap, global stock and bond funds - known as exchange traded funds - will grow your retirement fund so fast you may well retire early. Vanguard’s VWRD stock exchange-traded fund (ETF) and iShares IGLO bond ETF could be all you need, diversifying your money across 2,900 global stocks and 700 global bonds through just two products.

However, lots of UAE residents come this far and then get stuck on how to invest. If you go straight to Vanguard, they will turn you away. Just as you do not buy bananas directly from Chiquita, you cannot buy VWRD directly from Vanguard as an overseas resident. You have to get them through an offshore brokerage, which is like a supermarket for funds.

So here is my five-step guide to the DIY investing chain, from your money leaving your local bank to the purchase of an ETF. To understand the chain fully, it is easiest to work backwards:

1. ETFs

While your friends back home can benefit from mutual funds like Vanguard LifeStrategy, residents in the UAE can only use ETFs. Fortunately, these can be bought and sold easily and cheaply, like individual stocks. Let’s say you want to keep things simple (which you should do) by investing 80 per cent in VWRD and 20 per cent in IGLO.

Unless you are a US citizen, you don’t want to invest in US-domiciled ETFs, i.e. those based in the US. These may be liable for estate tax if you die (up to 40 per cent on amounts over $60,000) and a 30 per cent withholding tax on dividends. Stick to ETFs domiciled in Europe (with ‘UCITS’ in their name). JustETF.com and Morningstar.com are good places to learn about each ETF, including where they are domiciled, fees and what they invest in.

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2. Fund Managers

Vanguard and iShares are highly-respected fund managers, managing trillions of dollars. Vanguard is especially awesome, as all profits go towards reducing your management fees (helping you grow your investments faster).

Fund managers create ETFs, packaging together hundreds or even thousands of shares or bonds to create a fund with a single price. Without them, you would have to buy all the shares in an index individually and you probably would not bother.

3. Offshore Brokerages

Most brokers in your home country will not allow you to open an account with them if you are not a resident there. You need to find an offshore broker instead.

You send the broker some money and tell them which ETFs you want to invest in. They will quote you a price, buy the shares and hold them for you. When you want to sell, they quote you a price, you click ‘sell’ and should have the money within three days for transfer to your bank.

Most brokers have a website and a mobile app that allows you to easily track your investment performance, receive dividends, buy or sell ETFs and transfer money in or out.

Brokers are required by law to keep your money and investments separate from their own money, so your assets are protected if they go bust. If they have committed fraud and used clients’ money, then you are further protected (for example clients of US brokers are covered by the Securities Investor Protection Corporation for up to $500,000 of stocks and bonds, and $250,000 of cash).

My choice of broker is Interactive Brokers (IB), which is based in the US and is large, robust and cheap. Other options include Saxo Bank, Internaxx and SwissQuote. IB has a good mobile phone app for investing and tracking your portfolio. You won’t be liable for US estate tax as long as you don’t invest in US-domiciled ETFs and don’t have more than $60,000 sitting uninvested in your IB account.

Setting up an IB account requires you to fill in a few online forms and send them proof of identity online. You want an individual cash account (‘cash’ here means you will invest with your own money and not borrow money to invest). After that the setup is fairly quick.

To add money to your IB account (no minimum though account fees are cheaper once your account is above $2,000), you click on Transfer Funds (then Wire transfer) under Account Management. Enter an amount you want to transfer and IB gives you a code for the transaction.

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4. Exchange Houses

You need to send money to your broker and probably change the currency as well. Brokers typically charge high rates for foreign exchange conversions, so it’s better to do it before it reaches your broker account. Your local bank is also likely to charge high fees for transferring the money and not have the best exchange rates.

Instead, you can use an online company like TransferWise.com or CurrencyFair.com. Check with your broker first, as sometimes the money will not arrive under your name. This can cause problems for the broker, especially when you are opening an account.

As an alternative, exchange houses can offer good rates. They can help you through the transfer process if they are familiar with sending money to your broker.

My choice is UAE Exchange, which offers good rates and low charges for its Club Exclusive customers. The staff also know how to get money into your IB account efficiently and in your name.

When I want to make a transfer, I send them the transfer amount and the transaction code I received from IB. Then they let me know how much local currency I need to transfer to them. This amount includes their exchange rate and transfer fee. I send them the money in dirhams from my local bank account and they pass it on to IB in US dollars within 24 to 48 hours.

5. Local banks

If you are using an exchange house or online transfer company to save costs, then you only need your local bank to transfer the local currency from your account to the exchange house’s local account. Some banks offer free local transfers, which will reduce your costs even further.

This whole process may sound complicated but, once you have set up the accounts and tried out each step, your monthly or quarterly transfer should not take more than 15 minutes out of your day.

Steve Cronin is the founder of DeadSimpleSaving.com, which helps UAE residents invest sensibly by themselves. He has no commercial affiliation with any of the companies mentioned above