In the heady days of the late 90s tech bubble, global investment promoters spent a great deal of money on developing the idea that people would buy investments from an internet supermarket, which is how we came to have fund providers like Egg, out of the UK.

A few enterprising people in the offshore financial services market then thought of providing a discount funds broking service on the internet, and today there are a few players dotted around the globe, who can give you access to funds for less than you would pay if you went direct to the fund promoter. There are also a few other sites that promote offshore UK life company products, again at substantial discounts.

Investment advisers operating e-broking services deal with clients exclusively via email. For client and broker, this means there is a clear record of all communications, so that there can be no ambiguity about the financial advice that has been given. The efficiency of this model allows the broker to pass on cost savings to the investor. In the normal way with offshore investment, the client’s money is secure in being sent to an administration bank and not to the adviser.

There’s a certain logic to all this, but the point to stress right at the start is that this approach to investing is not without risk and is best suited to the investor who is confident of their own ability to make an informed and appropriate decision. You will not be dealing, at least directly, with a big institution. Many 'ebrokers' are small operations and do not have people responding to email enquiries all day.

How does it work that e-brokers can undercut the product promoters? If an investor directly approaches an investment or life company, they will be offered the standard charges (no discount) since the company has to protect its broker network. Investment companies pay commission to approved brokers in return for new business. This saves the company from staffing and managing worldwide offices and allows their product to be represented independently. Depending on the amount of business provided by the broker and the market conditions, the fund promoter will pay initial commission to the broker, which is normally paid out of the initial fees paid by the investor. The broker might also receive a commission, known as trail, which is paid as an annual loyalty bonus if the business stays with that company.

Given the modest cost of doing business on the net, an ebroker is able to rebate some, and in rare cases, all of the initial commission, so that the investor gets a higher initial unit allocation within the fund. Say for example, that you invest £100,000 in a fund. The amount allocated using the traditional method would be £95,000 assuming a 5% front-end fee. Using an ebroker, and allowing for charges of 2% from which the broker takes his commission, the allocation for the investment becomes £98,000. Some companies are also able to negotiate lower annual fees and, where redemption penalties apply, they may also be able to negotiate these away.

So who is behind these ebroker sites and how do you know you can trust them? The only way to find out if this sort of thing is for you is to make a lot of enquiries and satisfy yourself that the service provides sufficient information and accessibility. Some of the sites publish little more than a list of products and a few links. These sites might do OK, but the real growth is likely to be seen in the sites that provide fuller information and product comparison. Be wary of the more outlandish claims that some sites make. The menu of products can be misleading, as the advisers behind the site will have their preference in terms of the group that is paying them the most commission at that point. Remember that ‘independent’ is a term that comes in for a fair amount of abuse in the financial services market.

For funds business, the ebrokers will tend to discount two to four per cent. For example, on a 5% bid-offer spread for a unit trust, they will typically rebate 3% or 4% depending on the amount invested. Some funds will be discounted to nil, for example where a redemption penalty applies. They will be happy to provide this discount because the fund management company knows it will be getting annual fees and the adviser knows he will be getting trail commission through the term of the investment.

How do you know what to buy and how do you evaluate the quality of the menu you are being offered? Like anything, it’s important to shop around. Test the sites to see what sort of response you get. And only go with something that you are happy with. The hands-off nature of the sales pitch allows the investor to consider the options at their leisure, and to show all correspondence and web pages to their partner. So it’s safe to window shop.
One of the more comprehensive and well-run ebroker sites is OffshoreRebates.com. Principal adviser Geoff Birch has 22 years of experience in financial services and Offshore Rebates now has clients in 45 countries. Based in Cyprus and regulated by the Central Bank of Cyprus, Birch caters across the risk spectrum, with investment recommendations tending towards active and absolute return managers: “Personally I try to go out of my way to find the fund managers that will genuinely make a difference,” says Birch. “I am not really interested in “index +1%”; why take the risk and cost of active management if they are aiming for passive results?”

Most (but certainly not all) the big name funds are listed on Offshore Rebates, largely because “people would like to see them there” and the search engines find them. But Birch prefers to seek out those managers, like for instance Hugh Hendry at Odey, who really hate losing money: “I do try to choose my managers carefully, and ignore using big name companies just because they happen to be big names. I want a manager who will worry about protecting the NAV as much as making gains. If I can’t find a manager I really like or think can do better than the average then I will use a tracker.”

Most of Birch’s clients are everyday working people without any great appetite for risk: “Calculated and measured risk rather than risk for risk’s sake, and diversity across asset classes is our mantra”. Obviously some clients prefer to keep their distance but in general I have a great relationship with them, very informal. Birch prefers to work with the person that actually wants a bit of a hand and is prepared to pay something for that but still get a discount: “Typically I will charge 2% or sometimes 3% but the client will usually save 40% at least. If I recommend a life bond it must be because we want to use a service or benefit we can’t get elsewhere. Otherwise it’s straight into funds.”

Offshore Rebates provides a good deal of guidance and background information, to make it easy to formulate ideas of what you’d like to invest in. Another site that offers guidance and the ability to research each fund in advance is progs4wealth.com. The company behind it, Programmes For Wealth International, operates from Jakarta, Indonesia and is registered in the British Virgin Islands. The individuals in Jakarta are, in common with most of the other sites featured here, experienced in the offshore business having spent most of their career working for life companies.

Programmes For Wealth director Gary West explains that the company has two main business; publishing and e-broking. As well as selling funds and life company products, it is also involved in selling fund research and newsletter services to its database of 50,000 potential subscribers. The fund research is generated in-house by a small team that uses various fund analysis sources as the basis for its own fund factsheets.

Programmes for Wealth clients are a mix of expatriates in the corporate environment and older investors who might be less experienced at investing but who have acquired assets and are educating themselves on the best way to invest. Interestingly, while the other sites would seem to get the vast majority of their clients through referral, West claims that as much as 70% of their
site traffic comes as a result of search engine prompts. He says the company has worked hard at pinpointing key words and targeting the major search engines. He suggested I key in Quadriga GCT (a top performing futures fund) into google.com and said that progs4 wealth would appear at or near the top, above even Quadriga itself. I tried it, but sadly for West, the Quadriga site registered the top three responses and progs4wealth came in sixth. Nonetheless, West says progs4wealth has a high success rate in turning site visitors into clients.

The other e-broker site which contains a breadth of information suitable for those who are still learning about investment is squirrelyournutsoffshore.com. Like progs4wealth, the site is registered in the BVI, with the actual processing of business carried out in Barcelona, Spain. Many of the big life companies and a few of the fund groups feature prominently on the site. The company behind it sets itself out clearly as an ‘independent financial adviser’, providing a broad range of services. For example, trust planning is catered for by the inclusion of the Forsyth Portfolio Trust and wrap facility.

In the majority of cases, investors looking to use an ebroker will not be fully aware of the range of products available. So using an information rich, advice site is the best option. For the occasions when the investor is aware of the relative merits of the various products and simply wants a broker to execute his instructions, an execution only site may be an option. At this stage though the execution-only sites tend to be those majoring on the sale of insurance company products.

According to Jeff Williams, the man behind execution-only site OnePercent.us the site deliberately sets out not to offer advice to clients regarding the suitability of products nor does it offer tax or investment advice or any research material. Williams is an investment adviser who splits his time between Cyprus and Thailand. Administration assistance on the site is provided by another Cyprus adviser, Ross Pays.

Williams still operates as a traditional ‘meet the client’ broker in the Middle East and is only now developing the on-line service as his ‘global’ offering. He says he regularly sells offshore bonds and other insurance contracts that pay 7% or 8% commission up front. In a situation where the investor deals through the web site, he will rebate 6% of the commission (on a 7% initial commission) and ensure that he takes his one per cent.

OnePerCent is registered in Cyprus but unlike Offshore Rebates, is not regulated by the Central Bank. The ‘us’ suffix is issued by American domain name hosts and despite the fact that the investments Williams is promoting are not eligible to US investors, he says he chose to use it because it was the only way he could acquire a domain name using ‘onepercent’.

Should you choose on the basis of cost alone? If you are the type of person who likes to get a range of quotes and will always go for the cheapest, then there’s no reason to change, assuming you understand what it is you are buying. But for many people, the satisfaction with the medium will come from finding an ebroker who understands what you want and who can deliver a seamless service. Geoff Birch admits he may not always be the cheapest, but that’s not really why he is doing it: “I tell those that simply say “I want to buy XYZ and what can I have it at?” that though I am pleased to assist them, they maybe should try somewhere else. I then explain what I do offer. I have lost the business sometimes like that and then found them come back and try it my way next time.”

You won’t find much in the way of tax advice on the sites, as they are really aimed at investors using offshore, tax neutral vehicles. However, where the ebroker is inclined towards giving personalized advice via email, you will get guidance on the suitability of different products, particularly for UK expatriates. Geoff Birch says he will often use a UK onshore product because the charges are lower or where there is just a greater choice. Dividends on UK shares are taxed at source in the UK and you can’t reclaim them. CGT allowances apply equally to onshore and offshore if the client ultimately repatriates so in some cases it is not so important to be offshore in the strict sense. He says he will use onshore products for regular savings as there is more choice available.

For those ebroker sites that are giving advice or analysis of various products, there is the issue of whether they should carry professional indemnity insurance. PI cover acts to protect investors in the event of bad advice or negligence. None of them have it, for the simple reason that it is very difficult, and hugely expensive, to get PI cover in the offshore market. One broker who tried to gain cover was quoted a premium of £39,000. In many onshore jurisdictions, it is mandatory for a financial adviser to possess professional indemnity insurance. But in other countries, it is impossible for advisers to obtain professional indemnity insurance at all. Certainly, if brokers were expected to pay high premiums to cover themselves against claims of negligence, the discounts would disappear.
Traditional salesmen would argue that the most important aspect of the adviser/client relationship is the ability to meet and discuss matters. Some still believe that financial advice actually has to be sold, that people do not buy financial products in the same way they would household items.
Birch says, “Speaking personally, I would say that clients get a much better service. Obviously we have to pop to the bank and shops etc and even take holidays but so do existing advisers. And they don’t get hounded by phone calls from advisers trying to see them and push other products, and that is a big plus for many clients.”

Published in INVESTMENT INTERNATIONAL, February 2003