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Nominee vs personal depository account – which is better?

Rusmin Ang

 Nominee vs personal depository account – which is better?

In the past, when you purchased a thousand shares of ABC Corp, you would be given a physical share certificate indicating your full name, identification number, home address and the number of shares owned in ABC Corp. Today, with the advancement of technology, shares are no longer represented in a physical certificate but transacted, transferred, and held electronically.

In Singapore, the Central Depository (CDP) is responsible for clearing, settlement, and depository services for securities. The next time you receive your contract statement, take a close look at the cost breakdown and you’ll notice there are brokerage fees, clearing fees, SGX trading fees and government tax. The clearing fee is the fee you pay to the CDP for helping you to do all that backend administrative work.

During one of the monthly Q&A webinars we organise for our subscribers, we received a question by ‘Casey’ about the equivalent version of the CDP in overseas markets like Hong Kong and the United States. We didn’t have the chance to address his question live but I will do it here since this topic is relevant for anyone who invests in the stock market.

The equivalent of Singapore’s CDP in other countries is listed below:

CountryDepository
SingaporeCentral Depository (CDP)
Hong KongCentral Clearing And Settlement System (CCASS)
JapanJapan Securities Depository Center (JASDEC)
MalaysiaCentral Depository System (CDS)
IndonesiaKustodian Sentral Efek Indonesia (KSEI)
ThailandThailand Securities Depository (TSD)
AustraliaClearing House Electronic Sub-register System (CHESS)
New ZealandNew Zealand Central Securities Depository (NZCSD)
CanadaCanadian Depository for Securities (CDS)
United StatesDepository Trust & Clearing Corp (DTCC)
United KingdomCertificateless Registry for Electronic Share Transfer (CREST)

A depository account is usually opened together with your first brokerage account. You may have a depository account without you realising it. It is normal to miss its existence since we normally interact with our stockbrokers instead of the securities depository when trading our shares.

Also, it is becoming increasingly common not to have a depository account as brokers themselves offer attractive brokerage fees if you own the shares through their nominee account. In this case, you are still the beneficial owner of the shares but the shares are technically not held under your name.

Beyond that, here are the key differences between using a personal depository account and a nominee account via your broker.

1. Greater protection for depository accounts

Shares held under your personal depository account certainly belong to you. Your name will be on the shareholder registrar as a legal owner. In the event your stockbroker goes bust, you can be very certain your shares will not be affected.

All brokers will tell you it’s safe to hold your shares under their nominee account because they abide the regulation of segregating their clients’ money into a trustee account. That’s true but… just imagine if you were a client of MF Global and you had an investment portfolio of $270,000 held in MF Global’s nominee account.

When MF Global filed for bankruptcy in 2011, many investors were worried about the fate of their stock holdings. This is what happened to one Singaporean investor who feared that he would never recover his money when MF Global went bust. When the dust settled, MF Global clients thankfully managed to get all their money back — though the money was only returned over a span of five years.

2. More flexibility for depository accounts

When your shares are held in a depository account, you are free to buy from Broker A and sell through Broker B. So if broker A files for bankruptcy and you want to sell your ABC Corp shares, you can do so via Broker B’s trading platform. The depository will automatically deduct your shares from their record book and the proceeds from the sale will go back to you.

On the other hand, if your shares are held in a nominee account, you can’t sell the shares through another broker because the nominee holds the shares on your behalf. Your shareholdings are pooled together with other investors and your broker will have you recorded as a beneficiary owner of those number of shares.

In an unfortunate case like MF Global, any open position in your portfolio would have to be closed and the proceeds returned to you. Again, the process of getting back your money usually takes a very long time and if you intended to repurchase your positions, the share price of the stocks you used to own may no longer be the same.

3. Voting rights only for shares held in a depository account

Do you want to receive a copy of an annual report? Do you wish to attend an AGM/EGM? Most importantly, do you wish to vote?

If your answer is yes to any of those questions, then having a personal depository account is the way to go because you receive direct notifications for any corporate action. For example, if there is a rights issue, you can simply go to an ATM and subscribe to the rights directly. If there’s scrip dividend, a form with the option to convert your dividends into shares will be mailed directly to you – which you then need to mail back. (From my experience, you do not really have to follow up with most mail except for rights and warrants.) And, of course, you get to vote because you represent direct ownership of your shares.

With a nominee account, you can’t attend an AGM nor vote because technically the shares are held by your broker. Some stockbrokers may be flexible enough to let you attend an AGM/EGM as a proxy. But not all brokers provide this, so it is important for you to check with your broker.

On the plus side, having a nominee account means the broker usually handles the paperwork for you when it comes to corporate action like scrip dividends.

4. Lower brokerage fees for nominee accounts

In countries like the U.S. or Hong Kong, investors usually need to deposit money with the broker first before making any trades. Singapore and Malaysia are the exceptions where investors with depository accounts are allowed to buy the shares first and settle payment a few days later. (This also means you get some speculators that attempt to buy and sell a stock for a small profit — without any capital. And, of course, things sometimes get ugly.)

For nominee accounts, brokers usually require their clients to deposit the money first so they don’t have to worry about a default on payment. By reducing their default risk, they can offer a cheaper, more attractive commission structure. In Singapore, Standard Chartered is well-known for their relative low brokerage fees. Shares are held under their nominee account and, of course, they require investors to deposit funds first before they trade.

Stock BrokerageMin Fees (S$)Trading Commissions
< S$50KS$50K-100K> S$100K
Phillip Capital250.28%0.22%0.18%
DBS Vickers250.28%0.22%0.18%
AmFraser Securities250.275%0.22%0.18%
CIMB Securities250.275%0.22%0.18%
Citibank Brokerage280.275%0.20%0.18%
RHB Securities250.275%0.22%0.18%
Maybank Kim Eng Securities250.275%0.22%0.18%
Lim & Tan Securities250.28%0.22%0.18%
OCBC Securities250.275%0.22%0.18%
SAXO Capital Markets250.15%0.15%0.15%
Standard Chartered100.20%0.20%0.20%
UOB Kay Hian250.275%0.22%0.20%

Brokerage Fees in Singapore (Source: DollarsAndSense.sg)

Once you buy a stock via a nominee account, the broker knows you can only sell the same stock through them as the shares are held under their nominee account. So the broker is guaranteed to earn the commission later on (unless you never sell). For the rest of the brokers in Singapore, the minimum fees are slightly higher as you can free to buy first and settle payment later as the shares are credited directly into your CDP account.

5. Nominee accounts provide more privacy

If you’re extremely wealthy and do not want to let your prying wife or husband know you have substantial wealth parked in stocks for whatever reason, then investing through a broker’s nominee account will shield your identity. Your name will not appear on the shareholder list since your shares are held in a nominee account.

The fifth perspective

If your priority is to save on brokerage fees (and keep a low profile), then a nominee account makes the most sense.

If you want to sleep more peacefully at night, it is hard to go wrong with a depository account. For us at The Fifth Person, we prefer to pay slightly more and have our shares deposited directly to a depository account.

Considering our investments are usually mid to long-term, we only have a handful of transactions every year, so we don’t save much in brokerage fees by using a nominee account. However, if you trade very frequently, then this might make a bigger difference to you.

But we are not writing off nominee accounts because we use them ourselves when it comes to investing in foreign stocks. Instead of managing multiple brokerage accounts in different countries, it is more convenient for us to use our broker’s nominee account to purchase a stock in Hong Kong for example.

Nominee accounts have their uses; you just have to make sure the broker you choose is financially strong so the likelihood of it going bust is low because I’m sure no one wants to experience a saga like MF Global.

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This is neither a recommendation to purchase or sell any of the shares, securities or other instruments mentioned in this document or referred to; nor can this course material and/or document be treated as professional advice to buy, sell or take a position in any shares, securities or other instruments. The information contained herein is based on the study and research of the Fifth Person Pte Ltd (“the Authors”); and are merely the written opinions and ideas of the Authors, and is as such strictly for educational purposes and/or for study or research only. This information should not and cannot be construed as or relied on and (for all intents and purposes) does not constitute financial, investment or any other form of advice. Any investment involves the taking of substantial risks, including (but not limited to) complete loss of capital. Every investor has different strategies, risk tolerances and time frames. You are advised to perform your own independent checks, research or study; and you should contact a licensed professional before making any investment decisions. The Authors make it unequivocally clear that there are no warranties, express or implied, as to the accuracy, completeness, or results obtained from any statement, information and/or data set forth herein. The Authors, its related and affiliate companies and/or their directors, executives and employees shall in no event be held liable to any party for any direct, indirect, punitive, special, incidental, or consequential damages arising directly or indirectly from the use of any of this material.

 
Robin Han
Rusmin Ang

Rusmin Ang is an equity investor and the co-founder of the online investment magazine The Fifth Person. He is also the co-creator of The Investment Quadrant, an online multimedia stock investment course where students can learn how to invest profitably in the stock market. Rusmin has been featured multiple times on 938LIVE as a guest expert on MoneyWise and is on the speaking circuit for CIMB Securities (Malaysia) and has spoken at events in Penang, Sibu and Kuala Lumpur. Rusmin is also the co-author of Value Investing in Growth Companies which is internationally published by Wiley, Inc. The book can be found in all major book stores worldwide and on Amazon.com,Amazon.co.uk, Barnes & Noble and Apple's iBooks. If you're interested to learn more about stock investing, you can join The Fifth Person Newsletter and receive free weekly insights on how you can generate higher returns and dividend income from the stock market.