#38 Exchange fees: the hidden yield eater

A well-diversified portfolio is not only spread across different asset classes, but also geographically. However, as a Swiss investor in particular, you are dependent on a certain exposure to foreign currencies. And this is precisely where exchange fees arise.

Currencies are not traded on public exchanges, but on the so-called interbank market. For currencies of the major western industrialized nations, the rates negotiated between banks are often very close. However, banks rarely pass these favorable rates directly on to their customers. Instead, they add a margin to the exchange rates, known as the «FX markup» (foreign currency surcharge). These costs can significantly impact your return, especially if you regularly invest in or restructure positions in foreign currencies.

How can you protect yourself from these costs?

Whether you manage your portfolio yourself or leave it to a bank under a discretionary mandate, you should negotiate the exchange fees if possible. And avoid excessive trading.

An experienced wealth manager will also use strategies to minimize costs for you without jeopardizing portfolio diversification. There are three approaches to this:

1. Maintaining foreign currency accounts for major trading currencies
   If you have separate cash accounts for major foreign currencies, such as euros or US dollars, you can avoid unnecessary currency transactions. For example, if an ETF is bought in euros and later sold back in the same currency, this saves conversion costs. In addition, you can transfer euro holdings in a euro account directly to your investment portfolio without paying additional fees for the incoming funds.
2. Instruments traded in Swiss francs
   You can invest in investment instruments that are traded in Swiss francs (CHF), even in foreign markets. In this case, the currency conversion is handled by market makers or issuers. Since these are institutional market participants, they receive more favorable exchange rates on the interbank market – and these savings are passed on to you.
3. Netting and pooling
   When securities are not distributed among individual securities accounts but are held in a central depository, this is referred to as collective custody. This is often the case with retirement savings, such as in Pillar 3a. Your wealth manager can perform internal netting if, for example, one client needs US dollars and another is selling some at the same time. This avoids unnecessary trading and reduces exchange fees.

How do we deal with this topic at True Wealth?

Cost efficiency and cost transparency have always been very important to us. That's why we make sure to keep exchange costs as low as possible, and avoid them altogether if possible. To do this, we apply the approaches mentioned above.

Have you already checked how much FX markup your bank charges for currency conversions? Drop me an email about your experience.