Can expat investors now trade for free? (And if so, should you?)

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It’s all over the news – US broker firms are offering removing fees for trading. Interactive Brokers then Charles Schwab then TD Ameritrade – as the broker war escalates, they are all dropping fees to survive and their share price is taking a beating.

If you didn’t notice at all, that may be a good thing – following the financial new too closely usually makes you tempted to change your investments based on what the market is doing. Nearly everyone doing that will lose out over the long term. Just keep putting your money in month after month and you will beat everyone sweating over the Financial Times.

How can these companies offer free trading? It’s part of trend in declining fees that’s been rolling for a while now. There’s plenty of new upstart broker firms that have been offering zero-fee trading as a way to lure investors over to their platform.

It’s not just trading. Some index funds are becoming free by dropping their management charges and robo-advisors become free by dropping their platform fees.

How brokers make money from you

So how do they survive? Should we start expecting free Cokes and Teslas? Is profit so 2018? Surprisingly, these brokers make more money in other, subtler ways. They are removing the fees that cause investors the most obvious pain and which investors use to choose a broker or fund. That’s not going to help them though, because all the other brokers have gone free almost overnight.

Brokers make money from your cash deposits – you put some cash in your broker account and they charge you a poor rate of interest while you figure out how to invest it. Then they lend it out to others for a higher interest. Charles Schwab makes 57% of its revenue from doing this, so it doesn’t care about trading fees! 57% of revenue from something you barely notice – that’s a good business model.

Sometimes robo-advisors will robo-decide that you need to keep part of your portfolio in cash to reduce risk, especially if they feel a downturn is coming. Or if they make their money from lending your cash out! You’ve been warned.

The brokers have some other ways to squeeze money out of their platform. Some companies pay to get access to your orders and sell to you what you want to buy. This keeps the price differences between buy and sell fairly tight by inviting in willing buyers and sellers, so is probably no bad thing for us.

Brokers also hope that once they’ve lured you in, you might still generate some fees for them. They may lend you money ‘on margin’ to invest in shares, charging you interest. They may lend your shares out to others, keeping some of the profit and sharing the rest with you. And you might be tempted to invest in non-free mutual funds or start trading complex options, which will more than offset the loss they make from your free share trading.

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So is your trading going to be free?

This fee slashing is great for American customers but not so much for you. American residents can happily buy and sell US-listed shares and US-domiciled (i.e. where the registered office of the fund sits) funds.

If you are not a US citizen or resident, then you should not be buying US-domiciled funds, Exchange-Traded Funds (ETFs) or (many) stocks from US stock exchanges like the NYSE. You need to find UCITS ETFs that are domiciled in Ireland and listed on the London Stock Exchange (LSE) or other European exchanges.

Then you will pay half the withholding tax on dividends that US-domiciled funds are charged (15% vs 30%). And, most importantly, your beneficiaries won’t get slapped with a 40% estate tax on your US-domiciled cash, shares and funds worth over $60,000 when you die. With Irish-domiciled funds, there’s no estate tax at all.

The other problem is that there are very few brokers globally that can be bothered to accept expats, due to tough anti-money laundering regulations. So if you see an offer for free trading, it’s likely they won’t accept expats or it’ll be for US-listed shares and funds only.

I’ll let you know if that ever changes. The LSE charges a stamp duty tax on share trades though, so trading is unlikely ever to be free while the tax is still around. But hey, we are still getting very cheap trading, and it’s insanely cheap compared to the monster fees you will get slapped with if you are stuck in a long-term savings plan or insurance plan with a savings component.

The fees for buying and holding an Irish-domiciled ETFs are like a pesky mosquito compared to the shark-like savings plan fees that are eating literally half your body.

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6 thoughts on “Can expat investors now trade for free? (And if so, should you?)”

  1. Great site.. I’ve opened up IB account now. I contacted wallstreet exchange but they do not have any option of an account set up. They do one transaction at a time. Is this how it’s supposed to be or can you guide me.

    1. Steve Cronin

      Hi Ryan, yes but you can use their relationship manager Rizwan for their Priority Club. If you want his number, send me a message – I don’t really want to post it here for all the scammers to scrape.

  2. Hey, thank you for this post. Is there any other reasonable way to invest in American ETFs, where you don’t have to pay the double tax? The European ones sound attractive but since I follow the US and not European markets, I look for a way to invest in their indexes. Thanks again for the super informative posts!

    1. Hi Jedy, when we talk about the “European” ETFs we refer to those domiciled in Ireland (UCITS regulated). Among those there are also some that follow the American market (S&P 500 or the All World Index).

  3. Hello, Steve. I really enjoy following your site and have gotten invaluable information setting up an IBKR account and getting funds transfered to start my ETF savings journey. I have tons of questions, but I’ll keep this one simple. I’m an American expat in the UAE invested in roughly 80% Vanguard Total World 15% in Vanguard Total Bond and 5% in Vanguard Total International Bond. Can you tell me why I have iBKR pro instead of lite? Currently, I have far less than 100k USD in the account (planning a relatively hefty deposit very soon) and notice that I’m getting hit with 10 dollar monthly fees which aren’t a big deal, but I literally use ZERO functions on the pro version. I feel like I got the pro version from following your how to, but can’t figure out if I need it or not. Just want to say again how much I’ve gotten from your efforts and that they are much appreciated. Also thanks to all the commenters posting great questions helping us financial midgets try to get informed.

    1. hi Chris, to our knowledge the Lite account is available only to Americans living in the US, there is no access to the Lite account from the UAE.

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