Why foreign exchange might be unnecessarily costing you money
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Articles by John Rowe.
Foreign exchange (FX) is an area where we have seen clients unnecessarily losing money. And we’re not talking small amounts, either; something that became abundantly clear to us after talking with foreign exchange expert, Phillip Lindberg.
Foreign exchange (converting NZ dollars into another currency, or vice versa) is a necessary process for many New Zealand businesses – importers buying materials or raw ingredients from overseas, exporters selling their products in various countries around the world, or a New Zealand property investor purchasing property overseas. What many small to medium business owners (SMEs) don’t realise, is that they are often paying far more than is necessary.
Large financial institutions charge a lot for FX, and small to medium business owners frequently don’t realise there can be a much more economical alternative that can make a huge difference to their bottom line. And when we say huge, we are not exaggerating. To illustrate, Phillip told us about a business that recently needed to convert $11 milion and was charged $110,000 by their bank to do so. They complained to their bank and the rate was substantially reduced – by approximately $80k! So they ended up only having to pay around $30k, but only because the business owner knew where rates were (something that SMEs normally don’t know because they are busy running their business rather than focusing on exchange rates). Another recent example was a manufacturer exporting around the globe, who was being charged 1% on their FX. Annualised, this equated to $75,000 off their bottom line. That’s a lot of $30 products they needed to sell to cover this cost. If they had used a good FX broker instead, that fee would have been closer to $15k annually. In other words, they would have been able to add $60,000 to their bottom line!
For a small to medium business this sort of saving could be the difference between hiring a new staff member, or not having to let an employee go. Or it could simply be additional profit that can go to the business owner as a dividend. Of course most SME owners are not foreign exchange experts, so they are not aware of the savings they could potentially be making.
Thankfully you don’t have to be an expert in FX – but you do need to understand that there are other options out there. Using a reputable, qualified and experienced foreign exchange company could make a massive difference to a business. The trouble is, many SME owners don’t realise there are alternatives and that they can shop around. Sharpening up their FX is sometimes all a business needs to do to markedly increase profit – and is much easier than selling more products or developing a new product line.
Exchange rate
There are three main factors to consider with FX, the exchange rate being the most obvious. Big clients tend to get very competitive rates from the large financial institutions, but smaller businesses will often be given an exchange rate that is well above market rate. The truth of the matter is that there is no more work involved to convert $20k than to convert $50m, so it does seem rather unfair. And as the stories above illustrate, shopping around and using a reputable foreign exchange adviser can potentially save a business significant amounts of money.
Advice
The second factor to consider with FX is advice – should you buy the currency now or hold off? Someone with expertise in this area (while not able to be 100% accurate all of the time, of course) will have a good idea what direction the exchange rate is heading, as they are constantly looking and assessing. Bad advice can end up costing you dearly, even if the FX fee seems reasonable.
For example, Phillip told us about one business owner who was quoted a very fair fee for converting US dollars to NZ dollars. However, he hadn’t yet converted them because at the time the rate was 68c and he was told it would go to 63c. When Phillip talked to him, the rate had gone up to 73c. So while the fee was OK, the bad advice cost him 5c, which in his case equated to about $40,000.
FX Products
The third factor is advice about the type of FX product. There many different products, and your adviser needs to understand which is the best one for your situation. SME owners are unlikely to get this sort of advice from a large financial institution because they are generally dealing with tellers, who don’t have the appropriate knowledge or expertise.
Some products are more lucrative for large institutions to sell, so a SME may be encouraged to use that product, even if it is not the best one for their needs. (Options are an example, where you pay a premium for the right to buy at a particular exchange rate at a certain date in the future. If the exchange rate is worse at that time, you exercise your right to buy at the better rate you agreed to. On the other hand, if the exchange rate is better, you don’t exercise your option and instead buy at the rate on the day.)
Choosing a good FX adviser
There is a great deal of potential upside to using a foreign exchange broker – but only if you are using a good one. Dealing with cowboys puts your money at risk. Below are some pointers for choosing an FX adviser:
• They should be experienced with a long-term good track record in foreign exchange.
• Ensure they are both FMA and NZX regulated – if they are they will be regularly audited by independent auditors. Ask for documentation to prove their accreditation.
• They will always segregate client funds and never merge them with company funds.
Word of mouth can be a good way of finding an FX firm – ask other business owners who they use. At GRA we recommend Phillip Lindberg of Jarden (previously OM Financial). To request that Phillip contact you to discuss your FX requirements, please email him at phillip.lindberg@jarden.co.nz.
Large financial institutions charge a lot for FX, and small to medium business owners frequently don’t realise there can be a much more economical alternative that can make a huge difference to their bottom line. And when we say huge, we are not exaggerating. To illustrate, Phillip told us about a business that recently needed to convert $11 milion and was charged $110,000 by their bank to do so. They complained to their bank and the rate was substantially reduced – by approximately $80k! So they ended up only having to pay around $30k, but only because the business owner knew where rates were (something that SMEs normally don’t know because they are busy running their business rather than focusing on exchange rates). Another recent example was a manufacturer exporting around the globe, who was being charged 1% on their FX. Annualised, this equated to $75,000 off their bottom line. That’s a lot of $30 products they needed to sell to cover this cost. If they had used a good FX broker instead, that fee would have been closer to $15k annually. In other words, they would have been able to add $60,000 to their bottom line!
For a small to medium business this sort of saving could be the difference between hiring a new staff member, or not having to let an employee go. Or it could simply be additional profit that can go to the business owner as a dividend. Of course most SME owners are not foreign exchange experts, so they are not aware of the savings they could potentially be making.
Thankfully you don’t have to be an expert in FX – but you do need to understand that there are other options out there. Using a reputable, qualified and experienced foreign exchange company could make a massive difference to a business. The trouble is, many SME owners don’t realise there are alternatives and that they can shop around. Sharpening up their FX is sometimes all a business needs to do to markedly increase profit – and is much easier than selling more products or developing a new product line.
Exchange rate
There are three main factors to consider with FX, the exchange rate being the most obvious. Big clients tend to get very competitive rates from the large financial institutions, but smaller businesses will often be given an exchange rate that is well above market rate. The truth of the matter is that there is no more work involved to convert $20k than to convert $50m, so it does seem rather unfair. And as the stories above illustrate, shopping around and using a reputable foreign exchange adviser can potentially save a business significant amounts of money.
Advice
The second factor to consider with FX is advice – should you buy the currency now or hold off? Someone with expertise in this area (while not able to be 100% accurate all of the time, of course) will have a good idea what direction the exchange rate is heading, as they are constantly looking and assessing. Bad advice can end up costing you dearly, even if the FX fee seems reasonable.
For example, Phillip told us about one business owner who was quoted a very fair fee for converting US dollars to NZ dollars. However, he hadn’t yet converted them because at the time the rate was 68c and he was told it would go to 63c. When Phillip talked to him, the rate had gone up to 73c. So while the fee was OK, the bad advice cost him 5c, which in his case equated to about $40,000.
FX Products
The third factor is advice about the type of FX product. There many different products, and your adviser needs to understand which is the best one for your situation. SME owners are unlikely to get this sort of advice from a large financial institution because they are generally dealing with tellers, who don’t have the appropriate knowledge or expertise.
Some products are more lucrative for large institutions to sell, so a SME may be encouraged to use that product, even if it is not the best one for their needs. (Options are an example, where you pay a premium for the right to buy at a particular exchange rate at a certain date in the future. If the exchange rate is worse at that time, you exercise your right to buy at the better rate you agreed to. On the other hand, if the exchange rate is better, you don’t exercise your option and instead buy at the rate on the day.)
Choosing a good FX adviser
There is a great deal of potential upside to using a foreign exchange broker – but only if you are using a good one. Dealing with cowboys puts your money at risk. Below are some pointers for choosing an FX adviser:
• They should be experienced with a long-term good track record in foreign exchange.
• Ensure they are both FMA and NZX regulated – if they are they will be regularly audited by independent auditors. Ask for documentation to prove their accreditation.
• They will always segregate client funds and never merge them with company funds.
Word of mouth can be a good way of finding an FX firm – ask other business owners who they use. At GRA we recommend Phillip Lindberg of Jarden (previously OM Financial). To request that Phillip contact you to discuss your FX requirements, please email him at phillip.lindberg@jarden.co.nz.
John Rowe
Retired Partner, Consultant to GRA
© Gilligan Rowe & Associates LP
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Disclaimer: This article is intended to provide only a summary of the issues associated with the topics covered. It does not purport to be comprehensive nor to provide specific advice. No person should act in reliance on any statement contained within this article without first obtaining specific professional advice. If you require any further information or advice on any matter covered within this article, please contact the author.
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