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HIDDEN COSTS WHEN INVESTING… AND HOW NOT TO GET HIT

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By Annie Charalambous, Head of Communications at ETX Capital

 

According to recent figures, Brits plan to increase their investments by almost a fifth in the wake of the COVID-19 pandemic – with Gen-Z traders most keen to jump on the markets.

But are those looking to boost their profits paying over the odds without realising? A recent study claims UK investors often pay up to six times more in fees than advertised, costing some traders up to tens of thousands of pounds long-term.

ETX Capital is committed to shining a light on common hidden fees that can trip up new traders. Here’s how you can avoid feeling the pinch.

 

Taxing times

New traders are often unaware that profits made on their stocks and shares are subject to tax, in the same way they pay tax on salary earnings.

If your investment earnings are over £12,300 in a single year, you will have to pay Capital Gains Tax. This will either be 10 or 20 percent, depending on your annual income tax band.

However, married couples can ‘pool’ their tax-free allowance – meaning they can collectively earn up to £24,600 in trading profits each year without contributing Capital Gains Tax.

Some alternative savings vehicles also offer a larger tax-free allowance. For example, you can stash up to £20,000 each year in an ISA and earn interest on your cash.

For those looking to diversify their portfolio, many gold and silver coins are also exempt from Capital Gains Tax as they are technically legal British currency.

 

Commission costs

As with any commercial service, fund managers and platform providers that help traders set up and manage their investments will charge fees for their service.

However, the size of these costs can catch out unsuspecting investors. According to research, commission costs average 1.03 percent in the UK – around double the equivalent fees in the US.

While these costs are unavoidable for those who need support managing their investment funds, it is possible to reduce them. Research investment platforms and fund managers to ensure you find the most cost-effective commissions for your assets.

Alternatively, you may be able to avoid commission if you have the knowledge of the markets and are comfortable with the risk. If so, there are plenty of accessible platforms that will educate you on how to manage your stocks, forex, commodities and more. Although, keep in mind that you’ll likely have to pay fees to trade on these platforms.

 

Not that Stamp Duty

All stocks bought in the UK valued at £1,000 and over are subject to Stamp Duty Reserve Tax (SDRT). At 0.5 percent of the asset price, this can soon add up.

This tax is usually absorbed as part of a total fee charged by a fund manager. However, if you manage your own investments, you’ll need to submit details of your assets to the government in good time to skip late payment fines.

While SDRT marks a relatively small fee compared to the rewards on offer for successful investors, many may still wish to diversify their portfolios to avoid mounting tax bills. A common example is adding corporate bonds, which are exempt from SDRT.

 

Farewell feels

Many budding investors starting their trading journey simply aren’t thinking about what happens when you withdraw funds or transfer them to another platform. And for some, this means getting hit with unexpected ‘exit fees’.

These charges are typically written into the terms and conditions of an investment service and while many platforms and brokers have recently agreed to waive exit fees, there are still plenty leaving traders with a shock when the time comes to withdraw cash.

Exit fees are usually charged as a percentage fee of the withdrawn sum, which can represent a significant cost for longer-term investors.

It’s important to check for exit fees, which may also be referred to as ‘redemption fees’, before signing up for a platform or partnering with a fund manager. And those looking to escape these charges should look for providers that simply don’t apply them in the first place – or at least check the expiry date.

 

Top 10

An Entrepreneur’s Guide to Investing in Bitcoin

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By

Marcus de Maria, Founder and Chairman of Investment Mastery.

 

Over recent years, Bitcoin has been steadily growing in popularity among today’s investors. At the same time, there has been a lot of debate about Bitcoin, and other cryptocurrencies, and their value.

Its supporters argue that it is the future of currencies and investment; its critics are adamant it’s not all it’s cracked up to be and might not make the big profits people are expecting.

To better understand its true stature in the market, we need to look at recent developments. For instance, Bitcoin’s valuation has risen by more than 763% in just one year, easily surpassing the rise in the traditional stock market.

With more and more people buying Bitcoin, it is now gaining the attention of the mainstream financial institutions and platforms, when once Bitcoin was derided, joked about and said would never last.

Marcus de Maria

Fast forward twelve years since its’ launch, and we have Tesla and SpaceX mastermind Elon Musk recently announcing that his car empire will not only buy $1.5 billion-worth of Bitcoin, but will accept cryptocurrencies as payments in the future.

And well-known FinTech companies such as Square and PayPal have also announced their intention to support Bitcoin in the future.

Despite this, the most important Bitcoin development is, perhaps, the recent initial public offering (IPO) of Coinbase Global, Inc. (NASDAQ: COIN), today’s leading cryptocurrency exchange platform.

There is no doubt: Bitcoin is gaining momentum. Recent developments have contributed to the sharp rise in the value of Bitcoin, and asset proponents believe this is just the beginning.

 

Bitcoin background

Bitcoin was created in 2008 by a programmer, or group of programmers, under the pseudonym “Satoshi Nakamoto”. Twelve years on, and the true identity of Bitcoin’s inventor is still unknown, adding a little mystique to this already enigmatic entity!

Essentially, Bitcoin is a cryptocurrency. A cryptocurrency is a virtual “coins” or “tokens” and used in digital cryptocurrency systems instead of physical cash.

Similar to physical fiat currencies, digital coins have no intrinsic value, and are not backed by gold or silver.

Bitcoin is one of the most widely used of the thousands of cryptos now available to the investor.

Considering that the great attraction to crypto is that it’s a decentralized currency, thousands of different types of coin in “circulation” is a big giveaway to how popular it is among users and investors.

What gives Bitcoin its value is the fact that there will only ever be 21 million bitcoins “minted” or “mined” to give its proper definition (more on this in the future).

It’s this scarcity that provides the value, although one Bitcoin can consist of multiple denominations, the smallest being a “satoshi” which is 0.00000001 of one Bitcoin (or BTC as it is also known).

 

Bitcoin & The Blockchain: How does it work?

Bitcoin exists solely on the “blockchain” in “wallets.”

A wallet is the digital equivalent of a traditional bank account for fiat currencies such as dollars, sterling, yen, etc.

The blockchain is a public ledger that is totally transparent and accessible to everyone who uses the blockchain and bitcoin, and now any crypto that is in existence.

Transactions on the blockchain are “peer-to-peer”, meaning the transaction doesn’t go through a “middleman” (i.e. third party that would normally charge a fee for making the transaction).

Crypto transactions also undergo thorough verification and confirmation.

Crucially, every transaction and record of bitcoin activity is encrypted which means no one knows who owns any one bitcoin or where it goes to and from, unless they publically declare it (although the identities can eventually be detected under special police powers in cases of suspected fraud).

Only the transaction itself is recorded and is made visible to anyone.

That is why Bitcoin is a cryptocurrency (or crypto), because it has an extremely high level of privacy to it via cryptography.

“Crypto” comes from the Greek word “kryptos,” meaning hidden.

Bitcoin wallets operate via secret key.

This key is used to “sign” transactions. It provides mathematical proof that the transaction has come from your wallet (or owner of the transacting wallet).

This secret verification stops the transaction from being tampered with once it has been issued.

All transactions are confirmed and appear on the block chain network within 10-20 minutes.

It is this security and the fact YOU – and not the banks – are truly in control of your digital money that is so appealing to users and investors alike.

 

What to consider when investing

Firstly, and arguably most importantly, is risk-factor. Investing in Bitcoin as an individual is a lot less risky than investing as a business.

The mentality must be, ‘this is my business’s money. I won’t speculate with my business’s money, and I am not going to risk my employee’s livelihoods. Yes, I would be crazy not to invest but it would be crazier to risk it all.’

It’s very easy to go all-in and invest a large sum of money when you have it, but that is not really a sensible strategy.

So, to start with, entrepreneurs and business leaders should consider the risks, diversifying their portfolio and starting small.

 

Other Bitcoin Investment Options

There are different options when it comes to investing in Bitcoin.

First, you can invest in a company that uses Bitcoin technology so you will be exposed to it without purchasing it directly. When the value of Bitcoin goes up, the company shares go up too, providing a return on your investment.

I can’t invest in Bitcoin through my ISA, but investing in a company such as Block (previously known as Square) means I have an indirect tax-free investment opportunity in Bitcoin. Investing in a company that utilizes Bitcoin can be more volatile than Bitcoin itself, so more money can certainly be made.

Investing solely in Bitcoin is different, as it doesn’t move so much in value, but the individual company using Bitcoin can go up and down sometimes by 80%.

Buying Bitcoins directly from an app like Coinbase allows investors to “physically” own the asset.

This is an important distinction to make, as Coinbase allows investors to actually buy Bitcoin and store it in their own crypto wallet. That way, investors will be able to gain access to the coin’s price performance and use it as the currency to make other trades.

Owning a standalone Bitcoin is no different from owning any other currency, except for the incredible fluctuations in value.

 

To invest directly into Bitcoin here’s how to get started:

  1. Sign up to an Exchange
  2. Enable two-factor-authentication for security
  3. Get a Bitcoin wallet
  4. Connect the wallet to a standard fiat bank account
  5. Place your Bitcoin order
  6. Manage your Bitcoin investment

When the set-up is complete, what you really need to consider is, how much do you know? I am a firm believer in spending at least 20 minutes a day educating myself on investing. I’ve seen too many beginner investors ignoring that advice and rushing in without understanding how it all works.

Surround yourself with people that understand crypto investment and dedicate time to reading up on strategies and tips that will benefit all investments you make.

Bitcoin is certainly a crypto asset you should be investing in alongside a diversified portfolio. It is certainly a highly volatile asset with large and rapid price swings, which in turn can offer the potential for large returns but also carries a high level of risk.

Before making any decisions, it is critical that you learn how to invest in Bitcoin responsibly and utilise proven, reliable strategies. Once you feel confident with your approach, take that first brave step.

As Warren Buffet once famously said, “Be fearful when others are greedy, and greedy when others are fearful.”

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Banking

The role of Artificial intelligence in compliance at banks

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Sujata Dasgupta, Global Head – Financial Crime Compliance Advisory, Tata Consultancy Services

 

There’s not a financial institution across the globe that will be a stranger to money laundering, fraud, and other financial crimes. In the UK, institutions have witnessed a significant rise in financial crime since the pandemic, with analysis by money.co.uk of the fraud and cyber-crimes reported to Action Fraud finding that £2.4 billion was stolen in 2021, 174% more than the previous year. And these are just those crimes that are reported– in reality, the amount lost to criminals could run to tens or hundreds of billions of pounds per year.

With the frequency and severity of such crimes on the rise, they increasingly pose a significant challenge to banks and financial services firms. Many banks have been struggling to tackle longstanding financial crime compliance issues due to poor data quality, fragmented compliance platforms, high false alert volumes, and high operational costs.

But the biggest problem is that the financial crime compliance units of these financial institutions still rely mainly on heavy manual processes. Their key reason for their cautious approach in the utilisation of AI and automation has been uncertainty about technology. Do regulators approve machine-based decision-making, and is machine learning logic fair in identifying suspicious activities?

This uncertainty highlights a clear need for the proper utilisation of technology in financial crime compliance. Financial crime compliance functions are responsible for monitoring account transactions and customer behaviour for money laundering, terrorist financing, bribery, corruption, and fraud. The current systems and processes of the financial institutions mean that these tasks involve heavy manual routine measures that take up a significant portion of staff’s working time.

Regulatory technology, or RegTech, could make handling these routine tasks more efficient. This tech can utilise machine learning, advanced analytics, NLP, dynamic biometrics, network graphs and other forms of AI, which can take responsibility for routine tasks such as data collation and processing, as well as some other everyday responsibilities. This can free up significant portions of analysts’ time for more complex, cognitive work such as in-depth investigations into potential crimes, as well as other tasks that require data-driven judgement and decision-making.

Lack of access to information on criminal activities outside national boundaries has hindered efforts to combat banking fraud and compromised anti-money laundering and financial crime compliance actions taken by banks. While the need for collaborative action in fighting financial crime is evident, financial crime intelligence sharing has hit a roadblock given restrictions imposed by data privacy regulations. As usual, technology has come to the rescue – privacy-enhancing technologies (PET) offer a way to share data while protecting privacy. Using PETs can help financial institutions to understand suspicious patterns of behaviour through financial information sharing and analytics whilst preserving the privacy of individuals.

Internationally, governments are just now starting to utilise PETs. For example, in June 2022, the UK and US governments collaborated to develop PETs to tackle digital financial crime and enable data sharing better across borders to prevent money laundering attempts.

There has been some progress in using technology to fight financial crime on a national level also. In 2019 the Bank of England announced that it would be working to encourage the introduction of artificial intelligence-based RegTech among UK banks. It pledged to launch a review in consultation with financial institutions to increase the use of RegTech over the next decade, to reduce the burden on them and improve the quality and effectiveness of their data. UK’s Regulator, Financial Conduct Authority (FCA), has encouraged FIs to use advanced technology to prevent and detect fincrimes, providing sandboxes for RegTech solutions development and validation. FCA has been organising Tech Sprints every year to foster innovation in this space.

Some banks in the UK have already started adopting AI-powered solutions in fighting financial crime, while others are yet to explore advanced technology in this space. As financial crimes quickly grow more complex, adding more people to compliance functions alone may not help in disrupting them. A strong defence requires a combination of people, processes, and platforms. Processing huge volumes of data to uncover sophisticated criminal networks and illicit money trails in financial institutions must necessarily utilise AI.

In 2021, the European Commission announced guidelines on ethical AI, pursuant to which artificial intelligence solutions will be classified as a minimal, limited, high or unacceptable risk. Recently the UK Government also announced plans to publish a national strategy on responsible AI adoption. These types of guidelines based on regulation will support increased AI usage even in compliance functions.

In the UK, people have trust in banks and financial institutions. The only way for the financial sector to maintain and grow this trust is to keep up with the development of technology which can help fight financial crime. Financial institutions must step up and proactively seek technological and AI solutions to deal with increasingly sophisticated criminals and hackers. The time for action is now!

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