Should DIY investors have a go at investing with a Degiro or eToro account?
By Marc Westlake
Published on: January 24, 2022
“67% of retail investor accounts lose money”. We have lost count of the number of clients we have advised recently who have gone down the DIY investing route and lashed a few hundred grand into a collection of shares, ETFs and other investments on a ‘low cost’ investment platform like Degiro or Interactive Brokers.
Almost without exception these are smart, generally prudent people who just decided to have a go at DIY investing with, in some cases, north of €1m in their account.
So if you have a couple of hundred thousand in a DIY portfolio or with a traditional stockbroker and you’d like a second opinion please get in touch.
Low cost – but what about tax?
The common theme we hear time and time again is that these investors were simply trying to keep down their investment costs.
Whilst we certainly support keeping costs down, in our opinion DIY investing is too difficult in Ireland for most people to attempt without assistance and investors are at a considerable disadvantage to professionals who can construct investment solutions specifically designed for Irish taxable accounts.
For example we provide the following three key benefits for investors in our portfolios
- The custodian will deduct Irish Dividend withholding tax which means revenue are getting an up front tax payment which they don’t get from some offshore platforms. This means that income payments have tax deducted at source which may help with categorising the nature of the income for tax purposes.
- Intermediaries are required to file a form 8d with revenue which means that we are defining to Revenue our understanding of the tax treatment of an investment in a portfolio and giving them the opportunity to challenge that understanding. Note that the form 8d filing obligations are explicitly referenced in the Revenue e-brief in September 2021.
- Finally, by using a Discretionary Investment service we circumvent the EU regulations (PRIIPS) preventing DIY investors from purchasing non-EU Products.
These three aspects combined are impossible for the DIY investor to replicate and are therefore of particular value to Irish taxable investors.
Where does my money go?
This is a frequent question we are asked by new clients and, naturally, many are nervous about handing over large sums of money to “us” .
But before we reply we ask the simple question: “do you know exactly where it is now?”
Many look flummoxed. “Well I assume its…..”
A little digging and it transpires that most haven’t read the terms and conditions or conducted even rudimentary due diligence of their current investment account. They know that it’s cheap but not much more.
We continue, do you know for example
Who regulates it? “Erm”
What investor protections are in place? “Ah, well”
In a dispute which country’s courts will hear your case? “Umm….”
Most don’t know, for example, that De Giro may lend out their stock so that another party can take a short position.
Do you know what collateral you now hold in lieu of the stock you bought?
“I don’t even understand the question” said one client
Independent Custodians
We do not hold your funds in our own name. We have appointed highly regulated and respected custodians to provide safe custody and administration services.
The custodian holds clients’ securities separately and distinctly from its own assets.
As segregated assets, they are fully protected in the extremely unlikely event of default or bankruptcy of either the custodian or its sub custodians. In most markets, the custodian operates through omnibus accounts where client securities are held on behalf of clients in the name of the custodian or its nominee company.
This structure provides asset protection for underlying clients as the market recognises the custodian or its nominee as merely the account holder who holds assets on behalf of underlying beneficial owners. This beneficial ownership is reflected in the custodian’s book of record.
Due Diligence
Before we engaged with our current investment platform, Conexim, now a wholly owned subsidiary of Irish Life, we conducted a detailed due diligence process.
Conexim hold client assets with Pershing Securities which worldwide holds $2 Trillion in assets and is owned by Bank of New York Mellon which custodies over $41.1 trillion.
You don’t have an investment problem, you have a tax problem
“This is a question too difficult for a mathematician. It should be asked of a philosopher” – Albert Einstein (when asked about completing his income tax form).
Many of our clients are investment professionals themselves Actuaries, fund managers, accountants and lawyers.
Almost all of them are perfectly capable of picking a few investment funds and having a decent stab at an investment portfolio.
It’s often said that you shouldn’t “let the tax tail wag the investment dog“.
The problem is that in Ireland it’s like Revenue seem to think that the tax rate is 100% and they let us have living expenses.
For over 10 years we have worked to provide our clients with portfolios which are optimised for Irish tax. Meaning that you get to keep more of your investment returns.
Many financial advisers in Ireland think that tax isn’t their problem and It generally isn’t because many, if not most, will just send your money to an insurance company which takes care of the tax for you, albeit at a flat rate of 41%. And maybe that’s fine for small retail investors but we think that it doesn’t really cut if for larger accounts and in particular where the use of exemptions results in a better outcome for investors.
Read more in our Guide to Taxation of Investments.
Tax again (estate taxes)
One of our observations is that much of the wealth in Ireland has been created in the last 50 years or so. Many families don’t have a history or passing on significant wealth to the next generation and it’s therefore rare that a client has really thought about estate planning.
The attitude of their parents that “they’ll get the house” isn’t really valid anymore and certainly not for a family with a €5m estate.
“Inheritance tax is a voluntary levy paid by those who distrust their heirs more than they dislike Revenue” – Roy Jenkins MP.
Read more in our Estate Planning Guide here.
Better diversification and more efficient portfolios
This is a real client portfolio which they had put together themselves on a low-cost investment platform
This portfolio has averaged a respectable 17.50%pa for the last 3 years. However, the market return was 20.44% so we expect to add about 1.5%pa after our costs.
The Tax benefits we would anticipate from have the new portfolio taxed under general tax principles would probably add around 0.50%pa and inheritance tax savings from restructuring with an estate plan could add as much as 3%pa. So a total of about around 5%pa on an €800k portfolio our advice could add around €40k pa after costs. Note that the Central Bank of Ireland does not regulate tax advice.
Is the fee worth it?
Our fees are completely transparent. Of course, if you are hell-bent on saving every last penny in investment fees that you can at any price then we are not going to be the firm for you. But if your circumstances are complex enough, and in truth many people’s are, then, as our clients will testify, our fees are worth paying.
Schedule a Call to discuss tax efficient investment options
