ADR Pass-Through Fees

ADR Pass-Through Fees are small, recurring charges levied by a depository bank on investors who hold American Depositary Receipts (ADRs). Think of them as a service fee for the convenience of owning foreign stocks without the hassle of dealing with overseas exchanges and currency conversions. The depository bank (like BNY Mellon or JPMorgan) acts as a middleman, bundling foreign shares into the neat, US-dollar-denominated package that is an ADR. These fees “pass through” from the bank to you, the investor, to cover the administrative costs of this service. These costs include processing dividends, managing shareholder communications, and ensuring compliance with US regulations. While seemingly tiny—often just a few cents per share per year—they are a direct and often overlooked cost that can subtly erode your investment returns over time.

When you buy an ADR, you're not just buying a stock; you're buying a service. The depository bank handles a lot of behind-the-scenes work to make your international investment feel like a domestic one. The pass-through fees compensate the bank for a range of administrative and custodial services, including:

• Dividend Distribution: Converting dividends from the foreign currency (e.g., euros or yen) into U.S. dollars and distributing them to ADR holders.
• Corporate Actions: Managing and communicating things like stock splits, rights offerings, or mergers and acquisitions from the foreign company to you.
• Custody and Safekeeping: The bank’s foreign custodian holds the actual underlying shares of the foreign company on your behalf.
• Regulatory Compliance: Filing the necessary paperwork, like the Form F-6, with the Securities and Exchange Commission (SEC) and maintaining the ADR program's legal status.

For a value investor, every basis point matters. You meticulously hunt for wonderful companies at fair prices, and the last thing you want are hidden costs nibbling away at your hard-won returns. ADR Pass-Through Fees are precisely that—a small but persistent drag on performance. Imagine them as termites in the woodwork of your portfolio. A single fee of $0.02 per share seems insignificant. But if you hold 1,000 shares for a decade, that's $200 vanished from your account, not even accounting for the lost opportunity of reinvesting that money. This is a direct reduction of your total return. A true value investor scrutinizes all costs, from commissions to taxes. Ignoring these fees is like ignoring the expense ratio on a mutual fund—a mistake that separates amateurs from disciplined investors. Before you invest in a foreign company via an ADR, these fees must be factored into your valuation.

The collection method for these fees is what makes them feel sneaky. There are two primary ways they are collected:

• Deducted from Dividends: This is the most common method. If the foreign company pays a dividend, the depository bank will simply subtract its fee before passing the net amount on to your brokerage account. For example, if the dividend is $0.50 per share and the fee is $0.02 per share, you will receive $0.48 per share.
• Directly Billed: What if the company doesn't pay a dividend? The bank still needs its fee. In this case, your broker will deduct the fee directly from the cash in your account. This often appears as a vague “ADR Fee” or “Custody Fee” on your statement, making it easy to miss if you're not looking for it.

The fee is typically charged annually or semi-annually and is disclosed in the ADR's prospectus.

Knowledge is your best defense. Finding the exact fee is straightforward if you know where to look:

1. The ADR Prospectus: Every ADR is registered with the SEC via a Form F-6. This document clearly states the depository bank and details all associated fees. You can find it on the SEC's EDGAR database.
2. The Depository Bank's Website: Major depository banks like BNY Mellon, JPMorgan, Citibank, and Deutsche Bank have dedicated websites for their ADR programs. You can usually search by company or ticker symbol to find a fact sheet listing the pass-through fee.
3. Your Broker: While they may not advertise it, your broker can provide this information or point you to the right documents.

Let's say you're a value investor who loves the German automaker “Autoschnell AG,” which trades in the U.S. as an ADR.

• You own: 1,000 ADRs of Autoschnell.
• The ADR Pass-Through Fee: $0.03 per share, per year.
• Your annual fee: 1,000 shares x $0.03/share = $30.00.

If Autoschnell pays an annual dividend of $1.50 per share, the bank will take its $0.03, and you'll receive $1.47 per share. Your total dividend would be $1,470 instead of $1,500. It's a small difference, but it's your money, and it compounds over time.

ADR Pass-Through Fees are a small but important detail in the world of international investing. They are not a reason to avoid ADRs altogether, as they offer incredible convenience. However, as a savvy investor, you must treat them as a fundamental cost of doing business. Always identify the fee before you buy an ADR and factor it into your calculation of expected returns. A great company is still a great company, but knowing all the costs ensures the price you pay is truly fair.