By Alan Grujic, noted investment expert and professional trader, and founder/CEO of All of Us Financial.
Fractional share trading has gained momentum in recent months with brokerages stepping over one another to offer this benefit to customers as a way to distinguish services, especially amidst the no-fees trading wars. While it may be a popular service to offer, fractional share trading isn’t the right solution for everyone. As with anything trending in the world of investing, it’s worth examining with a critical eye, considering both the pros and the cons to determine what is right for you as an investor.
As the name itself implies, fractional shares are portions of a whole share of a company. For example, as of the writing of this article Amazon’s share price was just over $2000.00. For many individual investors, especially those who want to diversify, that can be a daunting amount for just one share. Yet Amazon is a popular company that many would like to have in their portfolio. Fractional shares offer the opportunity to buy into just a portion of one share, a particularly beneficial notion as stock splits are done far less frequently these days.
There are some very attractive elements to fractional shares. For those that either don’t want to, or can’t afford to, invest the amount of money it would take to buy just one share of an expensive stock, they can buy a part of a share and invest in the company of interest.
Many companies nowadays, particularly the high-flying tech names, let their share prices get quite high without splitting their shares. Perhaps the best known company that has had a very high stock price for a very long time is Warren Buffet’s Berkshire Hathaway, Who’s BRK-A securities trade at over $336,000! Most people could not afford to buy a whole share of this stock. Fortunately there is a different class of Berkshire stock, BRK-B that trades at just over $220 but perhaps even that is still more exposure in one share than some people would want.
Fractional shares are also beneficial when someone is trying to create a finely balanced target portfolio of stocks. Fractions of shares allow you to more accurately target the exact exposures, as proportions of your overall portfolio that you hold in each individual security, which is something you cannot as easily accomplish with whole shares. For example, perhaps your model says to hold 1.7% of a certain stock as a proportion of your whole portfolio. Owning a whole number of shares doesn’t allow you to get exactly that proportion, but a fractional component would allow you to target that specific percentage.
On the flip side however, there are some elements that may make fractional shares less appealing. Historically, brokers have kept the fractions of dividends that are below $0.01 that often result from owning fractional shares.
For example, if you own a share that pays $0.07 you receive that money. If you own half a share you would be entitled to $0.035 but often due to difficulties in attributing parts of a penny to customers the brokers would keep $0.005 and give you $0.03. These small fractions of a penny are not a lot, but across many customers they do add up and are a cost to owning fractional shares. In an extreme case where a low priced share pays you such that your fractional ownership is entitled to just under a penny of dividends (perhaps $0.009 cents) you could wind up not receiving any dividend and that portion could be a meaningful percentage of the stock’s value (on a $1 you would miss out on receiving almost 1% of the value, and this could happen 4 times per year with quarterly dividends).
While this may be an extreme and unlikely case, it serves to make the point that some return is inevitably lost in holding fractional shares and such return across many customers adds up to meaningful amounts of extra revenue for brokers.
The act of dividing up shares into fractions has a number of subtle aspects, and is not done for zero costs. There are financial engineering activities in the background that, while mainstream and efficient, are not free. No surprisingly, these costs are covered through additional fees brokers charge their customers to maintain their profits. The net result is that the additional costs of offering fractional shares, rather than just whole shares, are passed on to clients.
Perhaps most concerning is that there are also some unknowns. It’s not clear whether market-makers will offer you the same bid and offer price quality on fractional shares that they might offer on whole shares.
You normally trade fractional shares with market-makers rather than on exchanges, and while these market-makers are obligated to match the best bids and offers available on exchanges, they are not obligated to do better than that. Sometimes they do offer better bids and offers, but it may very well be the case that they are less inclined to do that for small trades in fractional shares. They will want to be rewarded for their efforts and smaller fractional shares may require an effort that doesn’t warrant the same aggressiveness on pricing since the order sizes are so small.
Often a customer is charged regulatory fees, particularly on the selling of shares, and these fees are frequently rounded up to the nearest penny. This could result in proportionately more fees for fractional shares.
It’s also not clear what a fractional share’s position is in the case of insolvency of the company that issues the shares, the case where a company offers stock dividends on shares, or where there is a broker-dealer bankruptcy. These may be rare events, but the underlying mechanism and financial structures that deal with these rare events are complex and the implications would require expert analysis. Many times innovative financial instruments have had unexpected downsides so it’s important to think these subtleties through for relatively new financially engineered securities.
As the industry moves to sharing more revenue with their customers, and more transparency, it’s not clear whether various revenue streams earned will be, or even can be, passed on to clients for fractional shares. For example, if the broker lends out your securities but has to lend out your fraction of a share along with all the other fractions — to create a whole share to lend out — can they or will they share some of that revenue with you? Can they or will they share some of the payment for order flow on a fractional share with you? If you have a margin account, are your fractional shares entitled to allow you to borrow against them on margin? If not, that could change your overall portfolio borrowing and cash interest costs in ways you should be aware of.
While overall fractional shares are potentially a useful customer offering, there is still not enough understanding about costs and possible unexpected effects. Fractional shares are relatively new, and the proper way to offer these products would be for brokers to fully disclose the money they make on them, and for regulators to commission expert studies to advise customers on the more subtle effects.
A tried-and-true approach
In the end, customers are likely to be better served by simply buying well-diversified and very-low- expense-ratio ETFs such as SPY than they are by using robo-advisor services to re-create SPY-like S&P500 exposure with the inherent costs and minimal benefits that are associated with the latter approach.
In other words, just buy and hold some well diversified, large, low expense ratio ETFs and don’t let yourself be the product that the creators of robo-advisor products and financially engineered products such as fractional shares want to turn you into. There just isn’t the value to be gained, if any at all, from these products over the simple approach of just buying a good ETF. Remember, the brokers offering these products aren’t doing it for free, so if the benefits are zero or really small, the costs will outweigh them.
Gain an Understanding of all the Functions of an Offshore Bank Account
Offshore bank accounts are one of the most powerful financial tools that you could employ. Far from being a resource that is only open to those who are considered upper class or wealthy, there are institutions that happily work with middle-class individuals as well to create a cache of financial resources.
There are many functions and advantages associated with offshore banking accounts. Here, we share some examples that may apply in your case.
Offshore Accounts Provide Some Protection from Political Shifts
Political shifts that impact the function of your domestic government often come with increased financial risk. One of the great things about having offshore savings, checking, and investment accounts is that they remain relatively untouched by whatever is happening at home. Should your domestic assets suffer losses, there’s a good chance that the balances in your international accounts will remain stable. They may even continue to bear interest as things stabilize at home.
Consider what could happen if political decisions trigger a recession. You could see assets like your domestic pension fund begin to lose money. Meanwhile, the term deposit account you have with an international bank may continue to perform at a rate that’s equal to or better than the returns you’re experiencing on that domestic fund.
Protection from Different Types of Economic Shifts
Not all economic shifts have to do with political changes or decisions. At times, factors such as technology can shift the job market and lead to temporary hardships in local or state economies. Natural disasters may undermine an industry and eventually affect the economy. What happens if all of your savings and investments are tied back to those economies? You end up taking a hit, possibly one from which you never fully recover.
By opening and continuing to grow offshore bank accounts based in economically stable countries, you sidestep a number of these issues. As your assets at home shrink a little, the offshore assets keep chugging forward. They can provide resources that you can call upon even if your domestic wealth is severely compromised.
Protection from Domestic Lawsuits
Not everyone knows that assets held in offshore accounts aren’t subject to judgments awarded by domestic courts. If you are sued for any reason and the outcome is not in your favor, your domestic assets may be seized in order to settle the award granted by the court. What would you do if those assets constituted your total current wealth? There would be no alternative than to start over.
With offshore bank accounts in place, you have a foundation for getting back on your feet. When, and as necessary, you can draw on those account balances to cover basic living expenses or any other pending costs. Once you’re back on your feet and replenish your domestic accounts, you can begin to deposit more funds in your offshore accounts.
Enjoy More Investment Options
There are excellent investment opportunities that you cannot access via a domestic investment account. While you do want to make use of what’s at home, it pays to diversify by securing investments via an offshore account. In some cases, the relationship between the returns and the risk will be superior to similar domestic investment opportunities.
For example, choosing to open offshore foreign currency accounts can allow you to engage in currency exchanges that make it possible to build more wealth. All it takes is being up to date on the current rates of exchange between different currencies. In some cases, you can manage the currency exchange through an international account faster. That’s important, since rates of exchange between currencies can shift a number of times each day.
Competitive Interest Rates on Savings and Checking Accounts
Offshore accounts based in the right country can come with more favorable terms related to balances and interest earned. For example, you may find that you can maintain lower balances and still lock in a competitive rate of interest. In order to get that same interest rate with a domestic account, you might have to maintain a balance that’s considerably higher.
Even allowing for any account fees that may apply, the result is that the balance in your international checking or savings account could earn more interest over the period of a year. Think of how much you could earn if those accounts were open for two or more decades.
Great Deals on Loans
As a depositor, you may qualify for certain types of offshore loans. While the qualifications may vary based on the country where your accounts are based, this could be the ideal way to invest in real estate, begin developing a property that you ultimately use for vacations or during your retirement, or a number of other activities.
Assuming that you do qualify for a loan, there’s a good chance of being able to lock in terms and conditions that work well. That includes enjoying a more manageable repaying schedule and paying a lower rate of interest. As with any loan offer, it pays to look closely at what the bank is offering. Once you understand the terms and find them to your liking, proceed with the loan arrangements.
Saving for Retirement
Offshore accounts are often one of the ways people save for their retirement years. Thanks to modern technology, you don’t have to physically be in an offshore location in order to make deposits. Instead, they can be made via an online interface.
The interest rates on options like term deposit accounts tend to improve as your balance grows. Renewing for longer terms also helps yield higher rates. Even as you continue to build retirement resources in your home country, those offshore accounts provide you with even more financial security.
Access to Offshore Funds When Traveling
If you tend to travel abroad on a regular basis, making use of the funds in an offshore account could be in your best interests. Along with enjoying a more favorable rate of exchange, you may find that processing debit and credit card payments come with fewer fees. That allows you to get more from your account balance and stretch those funds accordingly.
It’s not unusual for offshore banking clients to use their demand deposit accounts for purposes like international travel. The funds can be withdrawn any time that you like, making them perfect for world travelers.
Covering Medical Costs While Abroad
What happens if you become ill while traveling abroad? Delays accessing domestic accounts could pose problems. If you have a debit card attached to an offshore account, it’s possible to utilize a combination of your travel insurance and those funds to cover your medical care.
Remember that even if you’re in a country that extends medical benefits to visitors, there may still be a balance that requires your attention. Between your debit card and the ability to make international wire transfers using your account balance, it’ll be easy to cover the cost of medical care.
Potential Tax Savings
While tax laws vary, you may be able to place funds in international accounts and save money on domestic taxes. This is true for the principal balance as well as any interest that you earn over the course of a year. This ties into the privacy that often comes with any type of international bank account.
You may still need to provide some information to domestic tax agencies. In many cases, the country where your accounts are based may provide limited information to those agencies. Make sure you know what information to report and everything will be fine.
Is Offshore Banking for You?
Could offshore accounts be the right financial solution for you? The only way to know for sure is to talk with a financial services professional who can help evaluate your financial circumstances, including the goals you’ve set for the future.
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Luigi Wewege is the Senior Vice President, and Head of Private Banking of Belize based Caye International Bank, a FinTech School Instructor and the published author of The Digital Banking Revolution – now in its third edition.
You can follow his posts on trends shaping the banking and financial services industry on Twitter: @luigiwewege
Banking comms in crisis: One-third of British consumers don’t trust digital communications from their banks
“At a time where we are arguably relying more on digital interactions than ever before, many people face a dilemma when it comes to their finances. On the one hand, they need digital channels to manage their accounts and conduct transactional activities to a greater extent than before. On the other, significant numbers fear that digital communications expose them to greater risk.” – Frans Labuschagne, UK & Ireland country manager, Entersekt
A recent survey commissioned by Entersekt and conducted by YouGov online with over 2000 UK banking customers, found that more than one-third (34%) of British consumers distrust digital communications from banks to the extent that they ignore actions the messages suggest they take. This number grows in the older age bracket (55+), where they are twice as likely as 18–24-year olds to ignore messages (43% vs 20%).
The survey also found that one-third of those over 55 (33%) think they are “more likely” to fall victim to fraud by going paperless with their bank, whereas only one-fifth of 18–24-year-olds (20%) think the same way. Furthermore, 34% of widowed consumers and 33% of retirees feel they are more vulnerable to fraud as a result of paperless banking.
This has huge implications regarding the way banks communicate with their customers in the new paperless revolution.
The survey focused on consumers’ attitudes to “paperless banking” – the means by which banks and their customers communicate and administer accounts, rather than the tools they use to transact. Conducted online by YouGov in March 2020, almost 2,300 consumers were polled on their experience of banking-related digital communications like emails, text messages, and banking portal notifications.
The paperless revolution
Even before countries started imposing lockdowns to restrict the spread of the COVID-19 virus, organizations around the world have been moving more customer interactions to digital channels. Feeling the pressure to minimize waste as much as possible, financial institutions have largely led the way in this area by substituting paper-based communications for digital channels, and urging their customers to cooperate in this transition.
However, it’s been estimated that in 2019, approximately 55% of global emails were spam. With the average person receiving 121 emails per day, it becomes easy to see why some of these communications fall on deaf ears as users attempt to block out the noise of everyday information overload.
With bank branches having to limit operations due to the nationwide lockdown, putting call centers under immense strain, many people have to navigate a situation where they must rely on digital channels to manage their financial activities to a greater extent than before. At the same time – as our survey demonstrates – many people fear that digital communications expose them to greater risk. The instinct of many, therefore, is to ignore suggestions or instructions delivered in this way.
Cutting through the digital noise
It may be time for banks to rethink their digital communications strategies. Here are a few guidelines from Frans Labuschagne, UK & Ireland country manager at Entersekt, for creating a more trusted approach to digital communications:
Open a trusted line of communication
Email and text communications have been making headlines due to increases in SIM-swap fraud and phishing attacks. Apart from resulting in greater awareness of cybersecurity, these kinds of attacks also cause suspicion of these communication channels. Banks can decrease the likelihood of being ignored by offering customers a secure platform, such as a banking app, that can keep customers informed and their data safe.
Be there at the right time and in the right place
Let the customer choose how they want to be contacted
Even if a dedicated app isn’t part of your current strategy, let customers choose how you contact them and through which channel. Lloyds Bank, for example, has a radio ad that states it would never call customers to ask them to move money or offer a refund. Be clear with customers how you will contact them and for what – and if you can, offer them a choice.
“It is clear that after this crisis has passed, financial institutions will need to revisit how they contact their customers with important information and calls to action. The secure banking app could be the most conducive alternative means of engaging customers,” concluded Labuschagne.
Survey conducted online by YouGov among 2,300 consumers in the UK during March 2020
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Counteracting Increased Fraud during a Pandemic: A Simple Approach
By Frans Labuschagne, UK & Ireland Manager, Entersekt
As most of us are acutely aware of by now, the Coronavirus pandemic is having a global impact on the way we live our lives. Not only is the disease endangering the health of millions of individuals, it is also shutting down businesses, closing schools, and increasing our dependence on technology like never before. Whether it be working from home, communicating with family or keeping up to date with finances – technology has proved invaluable in these unprecedented times. However, as people become more reliant on the internet – cyber security becomes an even bigger issue.
For instance, banking customers are increasingly reliant on the internet and their mobile devices to carry out transactions, with research revealing that 82 percent do not feel safe visiting their bank branch during the pandemic. Ever-opportunistic, cyber criminals are taking advantage of this increased reliance on remote banking to launch attacks.
It is therefore vital that banks prepare for this surge in cybercrime and consider additional security measures to keep customer accounts safe.
One of the biggest tactics cyber criminals are utilising during the COVID-19 pandemic is phishing, with research from Barracuda Networks revealing there has been a 600 percent increase in attacks since the end of February. Research also shows cyber criminals are starting to reap the rewards from their scams, with data from National Fraud Intelligence Bureau (NFIB) revealing that cyber criminals have already netted over £1.6 million.
The most prevalent scams encourage users to hand over money and confidential information, with bank details being the ‘Holy Grail’ of sensitive personal data. It is critical for banks to offer their customers – both consumers and businesses – additional security measures to ensure they can bank securely and that no unauthorised intruders are accessing their accounts. One of the most reliable ways to achieve this is through multi-factor user authentication.
Multi-factor authentication (MFA) is widely used by financial institutions and is a method of controlling access to a system or network by requiring a user to present credentials – authentication factors – in at least two different ways – for instance, via a password, biometric data or through a physical token, as a smart card or other device.
Over the past few years, strong customer authentication (SCA), which relies on the MFA principle of requiring at least two different types of authentication factors, has become a key security measure in the financial services and payments industries, mandated by Europe’s revised Payment Services Directive (PSD2). Implementing SCA ensures that only authorised individuals can access an account or complete a sensitive transaction, thereby protecting users against account takeover fraud and similar attacks.
With PSD2 mandating the implementation of SCA, the industry has seen a rapid increase in providers offering authentication solutions. It’s fair to say, though, that not all authentication solutions are created equal. So, what should banks look for in order to provide a secure banking experience, without over complicating transactions or excluding customers that might be less tech-savvy?
One of the most common mistakes many financial institutions make with MFA is asking customers to authenticate themselves via different methods depending on how they access their bank account. The result is a muddle of authentication techniques: biometrics on the banking app, challenge questions from the call centre, card swipes in-branch, and static or one-time passwords online.
This can leave customers feeling confused and left trying to remember too many pieces of information, which can encourage mistakes like using easy-to-remember passwords or using passwords across multiple accounts and platforms.
What banks should really aim to offer customers is a more streamlined authentication process, no matter what channel customers are accessing their accounts from, all while combatting fraud and satisfying regulators.
Multi-factor authentication best practices
A key element of a winning MFA solution is one that provides the utmost security while putting the customer first, enabling quick and easy authentication that does not detract from the overall banking experience. However, accurately identifying and authenticating users on remote banking channels is a complex undertaking. Not only is it subject to constant change as technology and consumer behaviour evolve, it is also regulated and enforced by governing bodies that set standards and requirements. Selecting a vendor with an eye on global regulatory trends is important as this will ensure that the authentication solution is compliant with regional regulations.
MFA solutions should be built on technology standards, offer flexibility to scale to meet future requirements, and be compatible to run seamlessly across multiple operating systems. Authentication should seamlessly integrate into the customer’s digital banking experience and be built into the mobile app or web browser. This will ensure customers won’t have to rely on passwords, find themselves unable to access services if they don’t have a physical card reader to hand.
When it comes to evaluating the basics of an MFA solution, there are also important guidelines to remember:
- Each factor selected must be equally strong. Combining a weak factor with a strong one yields little more protection than relying on the strong one alone. A social security or national identity number, for example, may qualify as a knowledge factor, but can be obtained by fraudsters with minimal effort, precluding it as a strong factor. The same would apply to the more standard challenge questions in use today, like a mother’s maiden name.
- Factors must be mutually independent, so that if one factor is compromised, it cannot typically be used to gain access to the other/s.
As cyber criminals look to cash in on the pandemic, it is critical that banks take steps to protect their customers as they become more dependent on internet and mobile banking. MFA provides a way for banks to doubly verify that accounts are being accessed by authorised individuals and not by intruders. When identifying a solution, banks should look for one that balances state-of-the-art security with a user experience fit for today’s age of the customer.
Banks should keep these eight best practices for MFA implementations in mind:
- All sensitive transactions must be multi-factor authenticated
- The entire authentication process must take place out of band
- All sensitive data must be encrypted in transit, end-to-end
- Cryptographic keys and sensitive data at rest must be protected
- All authentication responses must be digitally signed
- Clearly display critical transaction information for verification
- Take a layered approach for high-risk transactions
- Adopt a consistent multi-channel approach
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