ADR Fees: What is it and Why it is Important be Aware of it

Investing in foreign stocks via American Depository Receipts (ADRs) involves a few disadvantages. For instance, one has to pay dividend withholding taxes to foreign governments on dividends paid by the foreign company with some exceptions. Countries like the UK , Singapore, etc. do not deduct this tax for US investors and others such as Canada waive the tax if the security is held in a retirement account. The tax rate can be lower than the regular rate if there is a special tax treat between the US and the country. In addition to this tax, another unique expense with owning a foreign stock is: ADR fees (also called as ADR pass-thru fees or ADR service fee).

What is an ADR fee?

When an investor owns an ADR, a custodian is in charge of holding the ADR, maintaining the records and more importantly collect the dividends paid out the foreign issuer, convert it into US dollars and depositing into the stockholder’s account. The custodian charges a fee for all these services and this fee is called the ADR fee. The custodians can be Citi, Bank of New York Mellon, Deutsche Bank or JP Morgan Chase. If dividends are paid out by an ADR then the custodians may deduct this fee from the dividends or they may decide to charge it separately to an ADR holder as a fee. If the ADR does not pay a dividend then the custodian will charge that fee directly to the brokerage who in turn will charge it to a client’s account. Regardless of how it is paid, the ADR fee is ultimately another expense for an American investor.

Here is some information from Charles Schwab:

ADR Pass-through Fees: What They Mean for You

If you are an ADR investor, you may already know that banks that custody ADRs (ADR agents) are allowed to charge custody fees. The amount and timing of custody fees are detailed in your ADR prospectus.

In the past, ADR agents could collect custody fees only when they were able to subtract them from ADR dividends. Since many ADRs do not pay regular dividends, agents were often unable to collect their fees.

New fee-collection method approved by SEC

Last year, the Depository Trust Company (DTC) received SEC approval to start collecting custody fees on behalf of ADR agents for ADRs that do not pay periodic dividends. To collect the fees owed by ADR investors, the DTC has started charging companies like Schwab that hold ADRs for their clients. Fees charged to Schwab by the DTC are referred to as “ADR pass-through fees.”

What this means for ADR investors

ADR fees normally average from one to three cents per share. Fee amounts and timing differ by ADR. See your ADR prospectus for specific information. Search for it online with EDGAR Company Search.

Fees collected from Schwab by the DTC will be automatically passed through to you. They will be deducted from your Schwab account and shown on your monthly statements. See sample statement.

Pass-through fees are deducted from your account for your ADRs that do not pay dividends. For dividend-paying ADRs, agents will deduct their fees from your dividends as they have in the past. Going forward, both types of ADR fees will be identified on your statement as “ADR Pass Thru Fee.”

Source: ADR Pass-through Fees: What They Mean for You, Charles Schwab

Additional details on ADR fees from Interactive Brokers:

ADR pass-through fees

Account holders maintaining positions in American Depository Receipts (ADRs) should note that such securities are subject to periodic fees intended to compensate the agent bank providing custodial services on behalf of the ADR.  These services typically, include inventorying the foreign stocks underlying the ADR and managing all registration, compliance and record-keeping services.

Historically, the agent banks were only able to collect the custody fees by subtracting them from the ADR dividend, however, as many ADRs do not regularly pay dividends, these banks have been unable to collect their fees.  As a result, in 2009, the Depository Trust Company (DTC) received SEC approval to begin collecting these custody fees on behalf of the banks for ADRs which do not pay periodic dividends.  DTC collects these fees from its participant brokers (such as IB) who hold the ADRs for their clients.  These fees are referred to as pass-through fees as they are designed to be then collected by the broker from its clients.

If you hold a position in a dividend paying ADR, these fees will be deducted from the dividend as they have in the past.  If you hold a position in an ADR which does not pay a dividend, this pass-through fee will be reflected on the monthly statement of the record date in which it is assessed.  Similar to the treatment of cash dividends, IB will attempt to reflect upcoming ADR fee allocations within the Accruals section of the account statements as well. Once charged, the fee will be reflected in the Deposits & Withdrawals section of the statement with the description ‘Adjustments – Other’ along with the symbol of the particular ADR it is associated with.

While the amount of this fee will generally range from $0.01 – $0.03 per share, the amounts may differ by ADR and it is recommended that you refer to your ADR prospectus for specific information.  An on-line search for the prospectus may be conducted through the SEC’s EDGAR Company Search tool.

Source: ADR pass-through fees, Interactive Brokers

From the SEC’s site :

What fees are charged to ADR investors?

As a matter of course, an ADR depository bank may be authorized under the deposit agreement relating to the ADRs to charge a fee, called a custody fee, for the work it performs on the ADR. ADR depository banks charge holders of ADRs custody fees, sometimes referred to as Depository Services Fees, to compensate the depository banks for inventorying the non-U.S. shares and performing registration, compliance, dividend payment, communication, and record keeping services.

A common practice for collection of the custody fee is for the ADR depository bank to subtract the amount of the fee from the gross dividends paid by the bank to ADR holders. Typically, the Depository Trust Company, (DTC) will announce both the gross dividend rate and the net dividend rate after deduction of the ADR custody fee. The ADR depository banks pay DTC the net dividend, and DTC allocates the net dividend to its users. However, a number of ADR issues do not pay periodic dividends, which prevents the fees from being collected through the above described mechanism. In this case, DTC charges the fee to its users (i.e., banks and broker-dealers) who pass them on to their customers.

Depository banks may charge other fees, such as relating to the distribution of dividends, foreign currency exchange, voting of shares, and other matters.

Source: SEC

What are the tax implications of the ADR fees?

Since the fees vary from 1 to 3 cents per share, total fees paid in a year can add up. One way investors may to able to deduct this fees is to itemize the expense in IRS Form 1040 Schedule A under “Other expenses—investment, safe deposit box, etc. List type and amount” in line 21 under the “Job Expenses and Certain Miscellaneous Deductions” category provided the total amount for this category exceeds 2 percent of your adjusted gross income(AGI). So for many investors this ADR fee may not be tax deductible.

Here is an example of how the ADR fee is charged:

Recently Continental AG(CTTAY) paid out a dividend. Let’s see how much an investor loses out to dividend taxes and ADR fees.

Ticker: Continental AG(CTTAY)

Gross Dividend: $0.86

Germany Dividend Withholding Tax = $0.22

ADR Fee = $0.02 per share

So Final Net Dividend Payable to ADR holder = $0.62 (i.e. $0.86-($0.22+0.02)).

So at 2 cents per share, an investor holding 500 shares would be charged $10 in ADR fees. This fee can be deducted from the dividend payments or can be deducted from a customer’s account depending on the brokerage.

Key points to remember:

  • ADR fees is not avoidable.
  • In most cases, ADR fees may not tax deductible as investment expenses.
  • If ADR fees is charged by the custodian to ADR holders, the brokerage will pass on this fee directly to a client’s account.
  • If an ADR does not pay a dividend then this fee will deducted from the client’s cash account.
  • The ADR fee is charged only once per year.

Though investing in ADRs costs an American investor more in expenses than investing in US stocks such as this ADR fee, investors should not avoid ADRs and stick with only domestic stocks. The benefits of international diversification, potential higher dividend yields, etc. far outweigh the costs involved with owing ADR including the small ADR fees.

Disclosure; Long CTTAY

4 Comments

  1. By buying a low cost international ETF, such as Vanguard FTSE Developed Markets ETF (VEA), are these fees avoided? Perhaps with the expense ratio factored in it is a wash?

  2. Nope.These fees are not avoided if those funds like the one you mention hold ADRs which have fees. The fees will be paid one way or the other by deducting from dividends or charged to the Vanguard by the ADR depository. You may not see these fees explicitly mentioned but I am sure they will be factored into the expense ratio as it is a cost of running the fund.

    Thanks
    -David

  3. If they are factored into the expense ratio, at least the become automatically tax deductible as the investor will see only net dividends, if any are distributed.

Leave a Reply

Your email address will not be published. Required fields are marked *