Why did I decide to leave eToro?

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  • On Wednesday, may 13, 2020
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Why did I decide to leave eToro?

As you probably know, my strategy is to buy stocks and keep them for the very long term and thus take advantage of the paid dividends and reinvest them. eToro seemed really perfect for that: 0% commission on stocks, what more could you ask for…

But since last week, everything has changed for me, my vision of eToro is no longer the same and the platform no longer meets my expectations and needs.

eToro is a good platform to discover trading. It is very easy to use and you can start investing with a small amount and the costs are clearly indicated.

No need to think too much like with other brokers where you have to calculate brokerage fees, custody fees, stamp fees, stock exchange fees, and sometimes management and inactivity fees.

So why did I decide to leave eToro?

The trigger was the day I received the dividend from my Swiss Life shares. Being very meticulous with the monitoring of my investments, I saw that I did not receive the amount I had planned and it was from there that I started to do my research.

Here are the different points that made me change my mind on eToro

Not really owner of our stocks

For starters, when we buy a stock on eToro, we don't buy it on the market directly. In fact, we buy a share which in reality belongs to eToro. They are the shareholders of the company, not us.

This is why it is impossible to transfer our shares to another deposit account, because we are not really the owner of our shares. They belong to eToro.

In case of bankruptcy, I think eToro is the only legal beneficiary of the shares, but I'm not sure. I will do some research and maybe an article on broker’s bankruptcy, if you are interested.


The protection of our assets on eToro

One of the important points when we invest, is that our money is protected if our broker ever goes bankrupt.

At eToro, for clients under CySEC regulation, the capital is protected up to 20,000€, and for clients under FCA regulation it is 85,000£.

With my next deposit, I would have reached the maximum of CySEC. So, obviously, I would have made a request to be under the regulation of the FCA, but that would not be enough since I had estimated, if all went well, that I would have exceeded the maximum amount of the FCA within 2 years.
With my new broker, my assets are protected up to $500,000.

Lack of transparency on withholding tax on dividends

So here, for me, is the most important point that really made me change direction.

Like almost all brokers, when eToro pays us a dividend, they levy withholding taxes which vary by country.

For example, the withholding tax on dividends for Swiss stocks is 35%.

In Switzerland, it is possible to be refunded 100% of the withholding tax on dividends already paid. Apart from U.S. stocks, we can recover 15% and the remaining 15% is deducted directly from our income taxes.

Being married and still childless, our gross tax rate is 17.14% - deduction for couples or families = 11.34%.

This means that on the dividends, after the refund of the anticipated taxes, I will pay 11.34% of taxes.

Which gives us for example for 1 Swiss Life share:

Gross Dividend: 15 CHF
Withholding tax 35% =  5.25 CHF
Dividend paid* =  9.75 CHF
Refund of 5.25 CHF
11.34% tax on 15 CHF = 1.70 CHF
Net dividend =  13.30CHF

There is a second tax-free dividend of CHF 5 in July, but I will not go into detail here and will do an article on the "reduction in par value".

On eToro we have the Dividend paid*  but in our eToro account statement there are no indications concerning the dividends. By staying with eToro, I lose 23.66% of the dividend because it is impossible for me to recover the tax.

The only information we have is a "Payment caused by dividend" and a position number. It’s impossible for us to know the amount and percentage of the tax already withheld by eToro.

eToro also does not provide a tax statement, which we need for our tax return.
Obviously, my new broker automatically generates this document once a year.

Conclusion

So this is the reason for my departure from eToro.
I am not going to close my account with them because I still have small positions that I want to keep. I am thinking of using this account for intraday trading or replicating my new portfolio with small amounts for those who wish to copy me. I don't know yet.

Just to be clear, I'm not saying that eToro is a bad platform; on the contrary. If I leave it is only because it no longer meets my long-term investment objectives.

I will continue to promote eToro because I find it is a good platform.

And For those who want to know my new broker is InteractiveBrokers.
I am preparing an article on "Why I chose InteractiveBrokers".

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