Comparing broker commissions is usually one of the first things you do when you start investing. Due to the competitive nature of the stock brokerage industry, commission rates tend to be generally similar even when the trading platforms used are different.
The “Minimum Fees” column shows the minimum fee that brokerage firms would charge for transactions under $50,000. That is, if you were to invest $1,000 in a stock, the brokerage firm (in this case, say, Maybank Kim Eng) would charge a commission of $25 instead of $2.75 (0.275% of the transaction amount).
Looking at the column, you can see that Standard Chartered Bank (SCB) offers the lowest “minimum fee.” However, it is important to note that the shares purchased from SCB are held in a custody account and not in your personal central securities depository account (CDP).
A custodian account means that the custodian (the brokerage firm) holds the shares you purchase on its behalf instead of depositing them into your CDP account.
Why deposit accounts can offer a lower interest rate
SCB is not the only brokerage firm that holds your stocks in custody. In fact, stocks purchased through pre-funded accounts are also held in custody by the brokerage firms.
Shares purchased through custody accounts are charged a lower commission rate because brokerage firms can reduce their costs. CDP charges brokerage firms a fee for holding the shares. By holding the shares in their own name, they can deduct the costs paid to CDP. For example, Maybank Kim Eng charges a lower rate of 0.18% for KE Trade Prefunded compared to the usual 0.275% for a contract value of less than $50,000.
What do I need to consider
1. Maintenance and processing fee for capital measures
Most brokerage firms charge a quarterly custody fee and a processing fee for each corporate action. Typically, the management fees can be waived provided you make a minimum number of transactions during the quarter, depending on the brokerage firm you choose.
2. The Annual General Meeting (or AGM) is over
Since the shares are purchased on behalf of the brokerage firm, you will not be invited to the AGM of the company you have invested in. In addition to losing your Makan session, this also means you will lose your opportunity to vote and interact with management during the AGM. You can contact your brokerage firm to arrange your attendance at the AGM. However, under Singapore law, the company is currently only allowed to appoint two registered “members” as proxies to attend the AGM.
3. Capital measures will not be communicated to you directly
Companies you have invested in do not notify you directly about their corporate actions, which include rights issues and dividend reinvestment plans. In this case, the brokerage firms notify you about the corporate actions.
4. The closure of the depository bank has no impact on your holdings
According to SCB, if the custody service is discontinued, the bank would return the shares to investors or transfer them to another broker of the client’s choice, so you don’t have to worry too much about your stock holdings if the brokerage firm closes (although you should choose a reputable company in the first place).
You need a securities account if you invest abroad
CDP accounts are used to hold Singapore stocks. For foreign stocks, you will need to open a depository account with your brokerage firm. In addition, the fees for maintaining foreign depository accounts are different than for local depository accounts, so it is worth paying attention to the fee differences between brokerage firms.
In many other countries, central securities depositories are not common and most foreign brokerage firms hold their clients’ shares directly.
Depository account: More suitable for investors who trade frequently
In summary, we believe that custodial accounts are better suited for investors who trade frequently, as they can benefit from lower commission rates while also being able to forgo quarterly custody fees.
For investors who trade less frequently and follow a buy-and-hold (forever) strategy, it may be better to pay slightly higher commission rates to hold their shares in CDP accounts. Don’t worry, you can recoup the difference in commission rates between custodian and CDP accounts through your AGM buffet sessions.
Read also: How transaction costs can affect your investment returns
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