David Gardner: Alright, Emily, now for something completely different: Christopher Olson writing in.
"I can't say enough good things about what you guys and gals do to fulfill your mission
at The Motley Fool, but I'll spare that for the time being and pose my question."
Christopher, by the way, is @lookfromdwnhere.
Thank you for writing in, Chris!
He says, "I've owned a few Chinese companies for over six months now.
Rule Breaker recs.
I had a few small charges to my brokerage, citing something about the ADR.
This has been for iQiyi and Baidu.
I also own Baozun and JD, but can't recall if I've had charges for those, as well.
Just curious if this is the broker charging me. Who's getting this money and why?
The charge comes out of my cash in the brokerage account. Thanks, and Fool on."
Well, Emily, it was natural for me to turn to you because you know China a lot better
than I do, having lived four years of your college in Shanghai?
Emily Flippen: Yes, four years.
Gardner: Yes. And while I don't think either of us purports to be a specialist on ADRs or charges,
I hope you've done a little bit of homework, or maybe you already knew this.
Do we have an answer for Chris?
Flippen: We do.
I definitely would not say I'm an expert, but I think I know more than the average investor
about investing in ADRs. I have a short answer and a long answer.
Gardner: Let's start with the acronym -- American depository receipt.
Flippen: ADR.
American depository receipts are essentially a slip of paper that you're going to buy from
your broker that says, "I own X number of shares of a foreign company."
This is where the fee comes into play.
By owning this piece of paper, you don't necessarily own the stocks at the company.
You own a piece of paper that says you own the stocks of a company.
For all intents and purposes, you own the shares of the company.
But what actually is happening is, whenever these foreign companies come to the U.S. and
list on the U.S. exchanges, they have to use a depository trust company.
This is the person who's going to be owning the shares and then issuing the ADRs,
or the global depository receipts if you're international.
They sell those to your broker, who then sells them to you.
Gardner: I'd never known how that worked.
I've owned ADRs in the past. OK. Flippen: It's a whole process.
Actually, what happened, the reason why you're seeing these fees -- and they're fees that
we don't typically talk about because they're very, very small fees.
They usually range between $0.01-0.03 per share of the stock.
But if you own 500 shares of a stock and it's $0.02 a share, you're paying $10 a year in
these fees, so it's definitely worth mentioning. Your broker is not getting this money.
This is getting paid to that DTC, the depository trust company that the ADR is using as the listing company.
They're called ADR pass through fees, which is coming to you from this system, which is
a complicated way of you owning the shares.
What's really interesting is that you can actually pull up the documents and see
how these are charged. They're not the same for every company.
You'll notice that you'll get a fee for each different company that you own.
It might be $0.01 on one company, $0.03 on another company.
In the case of Baozun, it's $0.05. A little more expensive there.
You can actually go into the SEC's website, they have a search process called EDGAR.
You can search for your company, pull up the F-6 agreement.
This is the listing agreement for the ADR.
If you search through a lot of legalese - it's no fun, I promise you, but I do promise that
it's there -- you can find the agreement that they made with the bank. I pulled up Baidu here.
I think a lot of people own Baidu, so it's a great example.
If you go through and search their F-6 form, you'll see that they actually have an agreement
with the Bank of New York, who is the person who's working as their custodian for this.
Their agreement is that they can charge $0.02 per ADR at the end of the year.
Baozun is $0.05 per ADR at any one point they choose throughout the year.
It's different for every company.
Long story short, it's a legal process that was recently changed in 2008.
It allows them to take a little bit percent shares of any ADR that you own.
Gardner: Very well researched. Thank you, Emily! Very thorough.
Flippen: Long, complicated story. Gardner: We liked the story!
It was very well done.
Baozun is trading at about $34 a share, so $0.05 is inconsequential for the most part.
But Christopher was, I wouldn't say he was troubled, but I would say he was curious.
He was wondering, "What is that money, and where's it going?"
And just helped him understand. You helped me understand, too!
Flippen: I hope so. If there's any other questions, Christopher, feel free to reach out.
Gardner: Awesome! Emily Flippen, thank you!
Flippen: Thank you!