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Currency fees can sting — how to take the pain away

Good advisors help wealthy families plan high-volume transactions so hefty exchange costs can be minimized

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Timing a currency exchange is tricky. In fact, currency is “the most difficult asset class to predict any short-term direction for,” says Dennis Bobyk, portfolio manager at Grayhawk Wealth in Montreal.

Bank analysts and economists don’t always arrive at the same currency conclusions, and even when they do, the evidence that supports them can be very different, he says.

Yet high-net-worth families often deal in multiple currencies at the same time. When making large real estate purchases abroad, for example, they want the best exchange rates and lowest fees possible, especially on large transactions. With the margin on foreign exchange at 2.5 per cent on average, high-volume transactions can result in significant fees.

For that reason, many rely on family offices and other advisors to handle their currency needs strategically, whether that’s by scheduling large purchases for when rates are low or working with banks to obtain preferential rates on their transactions.

Of course, the process needs to be customized to clients’ needs, factoring in the timing of the transactions – whether a purchase is imminent or in the distant future — and determining their existing currency reserves.

“It depends on who you are dealing with and the size of the transactions that you’re executing,” says Bobyk. “Know your clients, know their particular situation, and help them navigate these decisions.”

How to lower currency exchange costs

Here’s how advisors give their clients an edge in handling currency.

Plan ahead. At Stonehage Fleming, a family office operating around the globe, clients are urged to determine in what currency the family “thinks,” says Johan van Niekerk, partner and head of family office (U.S.), based in Philadelphia. “There’s always a currency in which they measure themselves,” he says.

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Van Niekerk says advisors sit down annually with families and determine what significant purchases are planned, and in which currencies they will be taking place. “It’s really about forecasting and looking at the future,” he says.

Then it becomes a case of finding the best rates for big volumes and bringing in currency experts to facilitate those transactions.

Time the transaction. Currency risk-management firms offer the option to lock in favourable exchange rates in advance of a transaction, even years before. They also employ hedging strategies where clients can place market orders to purchase and sell currencies when their optimal exchange rate materializes.

“They’re putting in a limit order for the future. If the rate goes in that direction, then the order will execute,” explains Bobyk.

Shop around. Most HNW clients have established banking relationships and are granted more favourable rates as high-value customers, says Bobyk. And many investment management firms have arrangements with large institutional brokers and can access better rates. “It’s very easy for a large firm to shop around from one bank to the next and from one broker to the next,” he says.

Educate clients. Van Niekerk says that a big part of his job is educating clients about global events and the impact they might have on currencies, especially if he’s aware of a significant purchase coming up.

For example, geopolitical events can lead to a currency’s rapid devaluation, which can have big implications for a client. Other times, it’s about planning ahead to ensure the impact of a geopolitical event is reduced. Sometimes “it’s just ensuring the family has sufficient foreign currency available” at a given time, he says.

Use Norbert’s Gambit. This is a way of exchanging Canadian dollars and U.S. dollars without paying fees. It involves buying stocks that are listed on both the TSX and the NYSE, such as bank stocks.

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“On one exchange, the stock trades in CAD and on the other exchange, it trades in USD,” says Bobyk. By purchasing the stock in Canadian funds and then immediately selling in U.S. dollars, the individual can avoid paying exchange fees.

“If the transaction is large enough and covers the commission fees, which are typically $10 to buy the position and $10 to sell the position, and so long as you’re converting a large enough amount to cover those costs, very often it’s most advantageous to do this sort of transaction than go to the bank and outright convert the currency,” he says. Bobyk cautions that this method has its risks, as the stock price may change in the few minutes between buying and selling.

Regardless of how exchange rates behave, family office teams need to develop plans to protect their clients’ purchasing power, says van Niekerk. “It’s knowing something is coming up, the family dynamics and being absolutely aware of global events.”

“It’s about being currency-aware,” he says.

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