What caught my eye this week.
Long-time Monevator readers all know you cannot avoid risk when investing. Indeed, I try to assume that any investment could – conceivably – fail me.
Does my maudlin mindset lead me to keep all my money in guns and ammo?
Not at all.
Firstly, a prepper arsenal will prove a lousy investment if there’s no societal breakdown / zombie invasion (though some exposure might still have been a good insurance policy, as discussed in a fun article below.)
All investments can fail me, remember? Heck, maybe my gun will jam.
More seriously, assuming failure is possible with everything I invest in or own helps keep me diversified across different holdings and asset classes.
You regularly hear horror stories of people putting all their life savings into some property scheme or ‘guaranteed’ bond or offshore opportunity.
Madness – even when such schemes are not outright scams.
You have been warned
Many of you will be nodding along here. But I’ve discovered one area where quite a few readers think I’m just too paranoid.
Which is that personally I would never run all my money with one fund manager, nor keep all my funds with one broker or platform.
To me, diversifying against the very unlikely case of major company incompetence or fraud is cheap and simple. Even for the strategically laziest passive investors, monitoring two accounts instead of one should only add 30 minutes or so to your annual workload.
Investor compensation under the FSCS is limited to just £50,000 – and that’s assuming you’re even covered.
And while I think the chances of losing money with a huge fund house or one of the biggest platforms is very small, the financial crisis taught me that just not having access to my money is scary.
I wouldn’t whistle contentedly while waiting weeks or months for all my worldly wealth to be recovered in full. I doubt you would, either.
People reply that their assets are legally ring-fenced, so they aren’t too bothered.
Of course I’m well aware of this. However things can and do go wrong, I reply – sounding like an Eeyore.
Well, in the past few months something has and is going wrong, with the demise of a small broker called Beaufort Securities.
As the FT reports [Search result]:
Accountancy firm PwC, which was appointed as administrator by the UK’s Financial Conduct Authority, has faced mounting criticism after it said last week that it could cost as much as £100m to return the cash and assets held by the company, currently valued at £550m, to its thousands of private investor clients.
Some 700 clients with larger portfolios — of more than £150,000 in cash and assets — are expected to bear much of the cost.
“In the absence of any other available resources . . . the overall costs of delivering [returns] to clients has to be shared appropriately by those to whom the assets belong,” said Russell Downs, a joint administrator and partner at PwC, on Wednesday, citing legislation introduced in the wake of the financial crisis.
Repeat: Ring-fenced client money is going to be taken and used, and clients will not get all their money back.
The long-time investor Lord Lee of Trafford has tabled a question in the House of Lords about the basis for PwC’s decision.
Lee told the FT:
“Everyone is of the view — including me — that client funds are ringfenced and protected, and no one can put their hands in and dip into them.”
But PwC has insisted there is a legal and practical case for using clients’ money in the wind-up process.
Repeat: You have been warned
No doubt we can have an informative discussion in the comments about exactly what happened here.
I’m only familiar with what I’ve read in the press, and am far from an expert on the law.
I also expect some will say it couldn’t happen with this or that big fund manager or the platform they frequent (although I’d argue some sophisticated passive investors who chase the lowest fees and express annoyance when anyone makes the case for a big and boring platform could actually be more likely to find themselves on a rickety outfit…)
That said, perhaps people will be more reticent to shout “Never!” now this has happened.
Besides, the specifics of this case aren’t the point. Next time the specifics will be different.
The big reminder is what is important for our purposes: Things fail.
Giant investment banks can’t fail until Lehman Brothers failed. Interest rate can’t go to zero until they did. Company pension schemes were safe until some immoral mogul stuck his fingers in the pot.
Order reigns until a time of crisis, when anything can happen.
Normally we’ll be fine. Virtually always we are.
But not always.
I wouldn’t put all my eggs in any single basket.
- Are you a Beaufort client? Voices on Twitter are urging you to write to your MP.
From Monevator
Annuities: What’s so bad about a guaranteed income for life? – Monevator
(If you’ve already read via email you might still enjoy the many comments – Monevator)
From the archive-ator: How to be a capitalist – Monevator
News
Note: Some links are Google search results – in PC/desktop view these enable you to click through to read the piece without being a paid subscriber.1
NIESR slashes forecast for UK growth in 2018 down to 1.4% – Guardian
George Osborne stands by predictions of Brexit impact [Search result] – FT
HMRC suspends its Making Tax Digital plan to focus on Brexit – The Register
Mortgage prisoners could be handed lifeline as three in 10 borrowers could have found cheaper deal – Telegraph
Beware of ‘push payment’ scams – Guardian
More higher-earners are maxing out their ISAs as pension allowances fall – Telegraph
‘My £1,000 Macbook Air was stolen at airport security and no one cares’ – Guardian
Argentina has raised its interest rate to 40% – BBC
Back to the future: US one-year government bonds are yielding more than US stocks for the first time since the financial crisis – Dr Ed’s Blog
Products and services
UK buyers need more help to find cheap mortgages, says FCA – Guardian
What happens to your credit card debt when you die? – ThisIsMoney
Co-op offers ‘no frills’ cremation service – Guardian
Here’s my CORRECT Thriva affiliate link. It gives you a 50% discount off your first health-tracking blood test. Thanks to reader @Ray for discovering my error last week! Sorry about the confusion. – Thriva
The ‘exclusive world’ of high-end investment clubs [Search result] – FT
An argument for adding crypto to a 60/40 portfolio [PDF] – Bitwise Investments
Hey crypto bros! Journalism ≠ advertising [Search result] – FT Alphaville
Comment and opinion
Why the masses missed the ten-year bull market – Investing Caffeine
Retired accountant fails to understand interest-only mortgage, loses house – Simple Living in Somerset
Why it’s time to sell Beazley shares – UK Value Investor
Schrodinger’s portfolio – A Wealth of Common Sense
Save your goofing off for your 50s – Humble Dollar
Can you become a millionaire on a fireman’s salary? – The Escape Artist
Is annuities’ bad press deserved? – Young F.I. Guy
How the finance industry is being replaced by better robots – Abnormal Returns
Equity factors and inflation [Nerdy] – Factor Research
Value investing isn’t dead, but price-to-book certainly looks comatose [Also nerdy] – Alpha Architect
US equities are not egregiously over-valued – Macro Man
Does higher financial literacy lead to higher returns? – Academic Insights On Investing
Kindle book bargains
Total Competition: Lessons in Strategy from Formula One by Ross Brawn and Adam Parr – £0.99 on Kindle
Tomorrowland: Our Journey from Science Fiction to Science Fact by Steven Kotler – £0.99 on Kindle
Doughnut Economics: Seven Ways to Think Like a 21st-Century Economist by Kate Raworth – £1.99 on Kindle
The Wisdom of Finance: How the Humanities Can Illuminate and Improve Finance by Mihir Desai – £3.29 on Kindle
Off our beat
The surprisingly solid mathematical case of the tin foil hat gun prepper – Medium
In Japan, old robot dogs donate organs and get a Buddhist send-off – NPR
Tim Hartford: Cheap innovations are often better than magical ones [Search result] – FT
And finally…
“The bottom line is that the victims of crime are denied justice, and people who are not guilty find themselves in prison. And what astounds me is that most people don’t seem to care. Or even know.”
– The Secret Barrister, The Secret Barrister: Stories of the Law and How It’s Broken
Like these links? Subscribe to get them every Friday!
- Note some articles can only be accessed through the search results if you’re using PC/desktop view (from mobile/tablet view they bring up the firewall/subscription page). To circumvent, switch your mobile browser to use the desktop view. On Chrome for Android: press the menu button followed by “Request Desktop Site”. [↩]
My wake-up call was when individual citizen savings accounts in Cypriot banks took a hit in their financial crisis & the lesson I took was that those in power make the rules, so can also break them if they want to …..so for ants like me, the safest thing is to assume nothing is sacrosanct. [Diversification is the main protection against those unknown unknowns]
“I would never run all my money with one fund manager, nor keep all my funds with one broker or platform.” I’m with you TI and it’s a topic that also recently came up in the comments of SHMD.
When it comes to ‘fund managers’ my top 3 are:
– 32.2% Vanguard
– 18.0% iShares
– 5.7% One of a few derisory interest paying savings accounts
Then broker wise I’m:
– 25.1% Hargreaves Lansdown
– 20.3% YouInvest
– 17.4% Interactive Investor
I’m obsessive about reducing investing costs yet I’m prepared to pay for diversification here with my 2xSIPP’s for wrapper diversification being one more obvious example.
I have to say that this article is a little confusing. The words ‘Assets’, ‘Funds’ and ‘Money’ seem to be used interchangeably. This was discussed all the time back when TMF existed and the take-home message was that the actual nominee-held shares were ring-fenced but any cash wasn’t. Remember that until quite recently, we couldn’t hold much cash in an ssISA anyway. So was it cash or nominee-held shares as well? If the latter, then, yes, that is bloody terrifying!
Re. the stolen Mac Airbook, I don’t know which I find more ridiculous; either the fact that a student wanted an incredibly over-rated thousand quid laptop anyway, or the fact that she hadn’t backed-up her dissertation somewhere, something that every supervisor tells their students to do. Where I worked years ago, a student lost their whole PhD thesis this way.
@Steve21020 — I’m referring to all of money, funds, and assets because I am talking about a generality. The generality is that I would never put all of anything in one place.
If I hated the financial system, say, I wouldn’t put all my money under one mattress. I’d find a second mattress somewhere else, too.
Your reminder about the difference between cash and nominee-held shares is very welcome and useful.
But from the perspective of the point I’m making, it wouldn’t matter to me what the law says. Fraud can happen. Governments can change the rules or be more helpful in one situation but not another. Systems can buckle in extremes. You may get all your protected money back but it may take months (years) in far-fetched but possible scenarios. 🙂
I’m not saying I wear a tin hat. I say I have adopted the Mad Max-ian post-apocalyptic survival strategy of setting up more than one platform from the comfort of my own home, perhaps drinking a cup of tea, and then spreading my stuff, whatever it may be, around.
It is very easy, as calamity insurance goes.
p.s. Also, when I am talking about ‘funds’ to be clear it’s again not really in relation to this failed broker case, but referring to the many discussions on this site over the years about how I wouldn’t have *all* my money in even benevolent behemoth Vanguard’s funds, nor solely in the funds of anyone else.
I’d use at least two providers. Just like I have two kidneys.
I completely agree with the split approach. It may cost a bit more but having 3 brokers and then splitting funds in each, just seems easy and sensible.
One thing though: there’s an inverse relationship between low cost (we all like) and financial stability. If investors force pricing so low that there is solvency risk to funds or brokers, that’s madness. And low margins increase the risk of bad governance, if not fraud or mal-practice.
Take Hargreaves Lansdown: visitors to this site probably think they are expensive and not competitive. However they are FTSE100 listed with suitably good governance, and they have zero debt. What’s that worth to you? In cost terms, 15 bps perhaps? Or 100 bps? It’s very personal and unless you’re an insolvency lawyer, very hard to analyse.
I am paranoid about this. I don’t have a lot, but it has taken years to accumulate and if it vanished I wouldn’t be able to recover without a time machine! This also worries me about say a very left wing government, if they decide to confiscate wealth they are unlikely to care whether your wealth came from 40 years of hard graft with no hope of recovering or if it comes from living the high life on an extreme high income as say a celebrity. Maybe I am super paranoid, but I fully agree with the above and look to diversify as much as possible until I am far too wealthy to keep managing it (so never 🙂 ).
I think you need to stop reading the right-wing press. Government confiscation by a left-wing administration is much less likely than an individual financial company going bust and their investors taking a hit. There’s being cautious and then there’s this…
🙂 my problem is I see the risk in everything. It is somewhat paralysing at times. Agree very unlikely, and if I really believed it would happen i would just spend it all (which I am not doing). Though to be fair there is very little I can do to protect against this risk anyway short of emigrating to another country (but then that country could do the same) so although I worry about it in the depths of night I don’t really give it much thought.
I also shouldn’t single out left wing governments. It could arguably be a right wing government just as much as left.
Beware of ‘push payment’ scams
———-
“Calder, a single mother who considers herself painstaking with her security details, had fallen victim to a telephone scam so slick even the most vigilant can be duped.
“The caller ran through some initial security questions, such as the first line of my address and full name, then asked if I had made certain large purchases that day,” she says.
The Observer has established that Calder’s account was compromised after the initial phone call, not before.
They elicit enough details to enter the victim’s account and make it look like there has been disreputable activity, by moving sums between accounts and renaming the account as “frozen”.
———-
So woman who considers herself to be savvy with her security details provided her password to the fraudsters…
Unless one of the security questions asked was the password itself, then how would they have gain access to the account without asking “what’s your password” and her giving them the details.
I have no sympathy for this woman.
Richard, there is a way insuring against government risk without emigrating that was advocated by Harry Browne with his “Permanent Portfolio”. It involves opening accounts in other countries and having some gold within other jurisdictions such as Switzerland or Australia. It is not just for the rich. It is possible for a small investor to do but is obviously more expensive to operate than UK based accounts. I am not advocating his investment style but it is all explained in his book, “Fail Safe Investing” and in more depth in a book called “The Permanent Portfolio” by Craig Rowland. You may wish to give either or both a read. I hope this helps.
@Aron — My rule with aged relatives in particular is to tell them never ever to answer anything on the phone that they didn’t initiate themselves. Nevertheless I have much more sympathy. These schemes work because fraudsters have developed slick psychological patterns that lower a person’s defenses. By the time she is giving her password, she believes she is talking to her bank, she believes her money is in danger, and she has already been exchanging information with a reliable seeming party. And I can think of instances where legitimate calls have involved me exchanging some sort of security code information over the phone (albeit usually a couple of digits) so it’s not unheard of.
The number of intelligent people who fall for this stuff tells us there’s something sophisticated going on. Perhaps you’ve never dropped your guard for anyone; I’m as paranoid as they come and I know I have a few times in my life, although only once where I was actually left out of pocket. (Not much but a long and miserable story involving a crying woman/scammer in a London street when I was younger.)
At the least I have more than “no sympathy” for anyone who falls prey to a criminal. The latter are the bad actors here.
Back in the mists of time when I first read Monevator’s warning about broker risk, I resolved to take heed and spread my investments across multiple platforms. In the early days with a small portfolio this was straightforward – there was no problem simply opening an account with a new broker as I reached the FSCS protection limit. But as the years went by and the post-crisis bull market advanced, it started getting a bit more complicated, and even more so when I was lucky enough to get a windfall following the death of my parents. Although by no means massive (still under £1M), I’m now struggling to find good value platforms across which to spread the load. I’ve said goodbye to the plan not to exceed the £50K FSCS protection and am now using some brokers charging percentage fees, which isn’t ideal. When you take account of the fact that many platforms transact through other brokers (e.g. Iweb and Lloyds both use Halifax), and others have merged (e.g. TD and II), there would appear to be a limit to the strict application of the spread-it-around strategy. I wonder what the mega-rich do… Perhaps if you’re in this class you don’t worry about the odd hundred thousand or two disappearing now and then? Or am I missing something?
The real risk is not with the broker or the fund manager or the platform it is with the custodian banks. If it fails that is when you are at risk of losing your assets. There are only a few of them so you might diversify between fund managers but actually end up with your assets in the same custodian bank.
@OneEyedMan
I had the same concern. One way to remove broker risk and cost entirely is to hold securities directly, in certificated form. I’ve done that with two big investment trusts that I plan to hold forever. No platform = no broker risk and no charge.
To anwser your question, look at investment trusts such as RIT (Rothschild family) and others like Caledonia, Ruffer, Brunner ….. all depositories for the super-rich to stash their cash!
When Vanguard UK release their SIPP offering later this year, I’m seriously thinking of just dumping everything with them.
Will be so much less hassle to maintain and explain to my family how to deal with if I die, rather than repeated sessions on the three platforms we currently use with glazed looks on their eyes.
Vanguard are surely extremely low risk.
@OneEyedMan — I don’t think we can reduce all this risk entirely, certainly not without increasing complexity and cost. There’s also the fact that the more baskets you diversify into, the greater chance of having some of your money in a bad one!
My point is going from one platform/broker/bank/fund manager/wealth manager/mattress to two effectively removes the danger of a catastrophic impact on all your non-cash/property wealth at once (or more likely an inability to access it for some period).
Once you go beyond this simple redundancy, I’d agree with anyone who says the argument is harder to make. 🙂
Ive actually had this thought with p2p. I could put alot more in but did alot of research before i put any money inand even then only 20% of my non pension non house equity net worth. Split between two ifisas. I just don’t like the look of the other platforms or the return from the big ones just isn’t worth the risk to me
Hi Monevator,
I’ve just read “Enlightenment Now” by Steven Pinker which I think you’d find interesting.
It’s an easy read mostly though I did find the last chapter over my head at points.
I’m also hoping to get to “Factfulness” by Hans Rosling soon.
In complete contrast I then read “WTF” by Robert Peston…
@Sara — Thanks for the tip. Pinker has popped up on a couple of podcasts that I listen to recently, and I have enjoyed his previous work so it’s definitely on the “would be nice to read” list! 🙂
@investor. Crying woman/scammer in a london street, mine was a guy who had been discharged from hospital and had lost his train ticket. There is a scam out there to con anybody.
I agree that fscs protection and tsb style computer glitches are more important than getting the best fees. It will be more to keep track of across platforms and adding it all up but I’ll do it
But I wouldn’t enjoy having to buy different funds
I remember Monevator covering similar issues some time ago and there was a comment to the effect that it might be worth considering pension company and pension fund options that were subject to 100% guarantees as they were considered long term contracts of insurance.
The Standard Life Active Money Pension Plan is said in the company’s literature to be a long term contract of insurance and it seems to suggest that if you stick to using pension funds rather than mutual funds those are also covered by 100% guarantees. There appears to be a reasonably wide range of pension funds (a few hundred) including a series of relatively low-cost trackers (some around 0.5%) in various investment classes and geographical areas which, when combined with low platform fees, appears to make it an attractive option. However the literature also appears to say that if a fund invests in other funds which fail for reasons outside of investment performance then it might mean that no cash comes back to the “victims” of the failure. Does anyone have any view on whether such long-term contract of insurance SIPP-like options are “safer” than a straightforward SIPP with platforms like Hargreaves Lansdown or Best Invest?
That’s interesting about the ring fenced assets being used. I currently invest in a Vanguard Fund on Halifax iWeb. This has made me think about reviewing whether it might be wise to invest via another broker and whether two types of general funds might be better. Definitely one to further look into.
Chris@TheFIJourney
Well, we know Iweb are run by Halifax, which are too big to be allowed to fail….
I use HL, Iweb, Vanguard, Fidelity and Ishares (Blackrock). I think they are all too big to fail.
OTOH for my p2p, I’m sure they could all fail, and while the honest borrowers would continue to pay back, the dodgy end of the market that is forced to pay their high rates might rub their hands with glee and scarper.
We are warned not to listen to the news when the stock market falls. That includes reading the papers too. They, like the news like to sensationalise everything to get buyers and viewers. Is this just scaremongering? Spread you’re investments by all means but unless you’ve fallen for a scam(thats your dumb fault) then is there really reason to worry?
Um, why can’t PWC just do an In Specie transfer from Beaufort to another platform? Even the high fee guys only charge £50/£75 per holding, so job done, no need for £100m, let’s move on.
Or were Beaufort into some dodgy stuff the mainstream platforms don’t touch?
I respect the suggestion, but I value simplicity highly.
I have thought a lot about it but am sticking with vanguard ETFs through the HL platform.
If it all goes to shit, it’s game over man.
On the Vanguard point: if you invest in Vanguard funds/ETFs in, say, a Vanguard ISA, are you cutting down the risk of trouble compared with holding Vanguard investments on a different platform?
@Mark: I also like the idea of holding some assets overseas and it doesn’t have to be more expensive.
DeGiro (one of the brokers in Monevator’s comparison table) offers its services in many EU countries. It’s easy to set up an Irish account (English language, EUR currency) but also in Holland, Germany, etc if you prefer that.
Some issues to keep in mind with overseas brokers:
1. Check that capital gains, dividends, and interest are paid gross and declare them on the UK Self Assessment tax form.
2. Learn how inheritance/estate tax is handled on the overseas account. For example, the USA may charge estate tax on US stocks over 60k USD (see Form 706NA).
3. Review the financial compensation and fraud protection. This will be different from the UK.
4. Decide how to minimize the fees and hassle of currency exchange.
It’s more complicated than investing at home and adds risk of its own, but I feel safer knowing there is some money accessible in the case of massive problems in the UK.
I’m hoping that financial services will continue relatively unhindered post-Brexit, otherwise I may need to reconsider the EU as an overseas brokerage location. A risk.
@The Investor
Thanks for clearing that up about funds, assets etc. I have two ssISA providers and one very old non-ISA (Halifax sharebuilder) but I don’t use it much and use all dividends to help fill up the ssISAs.
I didn’t actually think about all this till after the Financial Crisis. The Sharebuilder account was running more or less on automatic, my background is Biology, not finance, (company reports make my eyes glaze over) and at that time we were very busy, so the events seemed to pass me by for a while. Then it was suddenly wake-up time, plenty of reading and, as you say, educate myself by watching all the Mad Max movies! 🙂
@marco. Love your respose, it made me laugh out load. Seriously I wouldn’t be laughing it really was” game over” though. We can only do our very best with the options we have in front of us at the time. The UK has a very generous welfare system and ill be dammed if I ever have to fall back on it buts its there.
Good article and plenty to agree with. The one worry I have about my diversification strategy is what would happen if someone at Vanguard managed to get their fingers in the till?
Thanks for the reading this weekend, TI, and the beautiful weather you’ve sent to accompany it.
I love the argument that two isn’t much harder than one, but is much better for diversification, and three isn’t worth the effort. And I often forget the ring-fenced funds vs nominee holdings argument (bonds *are* different to cash in this regard!). But I diversified between iii and TD and the buggers merged (and changed their fee structures), so I’m going to have a lot of inertia to change that now.
I think a more important point on tail-risk and diversification is to be in the crowd. We don’t know what politicians will do, but they rarely screw the masses over too much. One of the perils that FI’ers have is that they are so unusual, so grabs for their money to not come with a lot of negative votes. Too big to fail is often too politically tricky to fail.
I am so glad I am not the only paranoid one 🙂 I used to have an account with BF for a while, but transferred out years ago. I am across 3 different providers, as soon as my next ISA gets too large then I will look for yet another provider. Then I will have 4 and I will be as comfortable as I can be.
I have a lot with Vanguard, so I am looking at choosing different trackers going forwards as my paranoia dictates!
Cheers,
FiL
I’m not a client of Beaufort, but have still written to my MP. I will also write to the FCA and urge every other reader to at least write to their MP (today is better to avoid procrastination).
If we are told our funds are ring fenced, but they are not, then the UK starts to become an unreliable place in which to invest our money. Next, we will have runs on stockbrokers, rather like the bank runs of 10 years ago.
I’ve also opened an account with a Singapore stockbroker, where everyone holds their shares directly, via an electronic system. That account was opened shortly after Mr Corbyn came a strong second last year. One has to be prepared for disasters.
For @Jeff’s suggestion, contact details and emails
http://www.parliament.uk/mps-lords-and-offices/mps/
Isn’t an important question whether custodied assets are (a) diversified (preferably across jurisdictions) and (b) protected in an insolvency rather than necessarily which broker you go through?
Jeff
If you don’t mind could you give a link to the Singapore Stockbrokers you refer to. Most of them seem to need you to be a local resident.
Thanks
Thanks TI for the commentary on Beaufort and everyone for the interesting comments BTL. I don’t know much about the ins and outs of what’s happened at Beaufort. As a forensic accountant I thought I might share some observations.
Having read the PWC statement the £100m comes across as a worst case estimate. I say that, because they use the same kind of wording I’d use when pitching for work. The worst thing to do in contentious work is under-price and then things go wrong and you tell your client fees have doubled. They quite rightly get upset!
The fee itself seems at the high end (but I have no idea what work is envisaged) but an overall cost of high double digit millions wouldn’t be too surprising from my experience. Asset tracing is notoriously laborious especially when potential illegality is involved. Unfortunately, this won’t be as straight forward as going to a register, pressing a button and everything being transfered.
Unsurprisingly, when firms go tits up you find that lots of the controls and processes they were using were not being followed or were substandard. Another issue is that the people who know how it all works are usually long gone, left under acrimonious circumstances and are very reluctant to be dragged into a mess they had no part in. It can take dozens of people to replace the work of one person.
The insolvency process also involves a high level of accuracy and precision. The insolvency practioner (IP) will need to engage specialist lawyers and (given the legal issues) counsel. They will need to get valuations of assets and then independent valuations to assess the appropriateness of those valuations. They’ll need to get other teams at the firm to manage operations and the sale of assets. All these things have to be done properly to ensure the integrity of the liquidation process. And they all cost a lot of money.
Finally on terms on who pays the costs. It is a minefield. By law the IP gets paid first. That’s sensible because otherwise nobody would take on this kind of work. The unfortunate thing here is that there isn’t the non-client assets to pay for it. So that leaves those assets as the only means of paying for the insolvency. PWC have been (deliberately?) coy about how the costs have been allocated. That’s probably because there have been very long discussions about how much of the tab the FSCS will pick up. I imagine the FCA has said you leave the small asset holders alone – that way they can get paid quicker and the taxpayer won’t have to foot the bill for them. Unfortunately that means the cost will fall on person’s with larger holdings. That decision won’t have been taken lightly. In fact that’s probably what a huge amount of work so far has been on.
I’m no shill for the restructuring industry. But be assured that these guys are professionals and will be working very hard and doing their best. It’s a rubbish situation and supports why you should be prudent and spread money across brokers. Those familiar with the icesave saga will know it’ll take a long time to resolve but I hope it will work out OK for as many clients as possible.
I have read recently that the compensation limits are to increase to 85k but whether true or not who knows
I’m no expert; far from it. But maybe we should all be writing to our own ISA providers as well to explain exactly how nominee shares are ring-fenced and how that protection works. I’ve always been surprised that although this question of nominee shares, FSCS 50,000 protection etc has been discussed for many years (particularly back at TMF), I can’t remember ever seeing my own providers put any info on their websites about this.
Steve
Pretty much every ISA and pension provider has a page explaining how jolly safe your investments are. Here is HL’s.
http://www.hl.co.uk/security-centre/how-safe-is-your-investment
Of course, in a crisis …
@Gadetmind
Thanks. Very interesting:
-“Stock you hold with us is held in the name of or to the order of Hargreaves Lansdown Nominees Limited, or by an approved third party custodian………..of all your investments and assets for which you will at all times remain the beneficial owner.”-
I’ve just spent 10 minutes checking on the meaning of ‘Owner’ vs ‘Beneficial owner’ and it doesn’t make me feel any safer.
HK Expat,
You don’t need to be a Singapore resident to open a brokerage account. You can open an account with DBS Vickers, for example, but you need to physically visit a branch to do so. As presumably an HK expat, you may be able to do so in a HK DBS branch. The procedure seems quite straightforward. DBS is one of the safest banks in the world. Another disadvantage is the high trading fees for UK stocks, though Asian stock trading is more reasonable IIRC. My plan, now abandoned for new strategic reasons, was to transfer in my inactive ETFs and ITs held on a never sell basis thereby avoiding the fees.
Good luck!
TP2.
@TheInvestor and @YoungFIGuy
Many thanks for your opinions regarding Beaufort. With the exception of the FT the situation seems to have been ignored by the press so the additional info and links is greatly appreciated. Thank you.
Great comments all, thank you — especially @YounFIGuy. Very interesting to hear the views of someone with domain experience.
If they do preferentially hit those with the larger holdings then that might be another reason to diversify — if not all pounds are equally at risk and adding more pounds increases risk, then might be worth reducing the chances of you being a fat fish to fry. That said it’s all relative, and I imagine it doesn’t take much (from the perspective of a Monevator reader’s lifetime savings) to move into the higher brackets of fund size.
I would think such a wind-up approach should really be spelt out or committed to ahead of time, perhaps via regulation or at least some sort of official regulator guidance?
I guess I just happened into diversification through happenstance more than anything else.
I have a SIPP with Bestinvest, ISA with Charles Stanley, a company pension and superannuation account in Australia (non-transferable), and my wife has a SIPP with III and a civil service pension. We both are likely to qualify for the full state pension. They are by no means evenly distributed.
That’s enough diversification for me.
I am fortunate that i have over the compesation limits approx 120/130k to invest and was happy to put it with VLS but am alittle worried after reading any ideas ple
Lord Lee has had a response to the question he tabled in the House of Lords. The written answer from Lord Bates on 8 May is as follows.
“The legal basis for the payment of administrators’ expenses from client assets is contained within rule 135 of the Investment Bank Special Administration Rules (England and Wales) 2011 (Statutory Instrument 2011/1301).
The Investment Bank Special Administration Rules apply to a broad range of businesses which hold client assets and are authorised to carry on a regulated activity which relates to the dealing, safeguarding or administration of investments as agent or principal, including stockbrokers.
Rule 135 sets out that client assets may be used only to pay the expenses which administrators have properly incurred as a result of the work undertaken to ensure that client assets are returned as quickly as possible. The rule also sets out the order of priority for payment of those expenses.”
Lord Lee has asked three further questions which you can see on his House of Lords webpage.
So it seems that ringfenced assets can be used to pay administrators’ costs. Of course the costs will depend on the complexity of the work they have to do. But still rather sobering.
Thanks @Mark, I will take a look. Gold buried in the back garden was one thought.
Would you be safer if you were with an insurance company, esp for pensions. I understand insurance products have 100% protection. So the higher cost of say may work pension to my SIPP may actually be worth paying as ‘insurance’ and keep individual SIPPs below £50k.
Diversification across brokers, managers (funds and ETFs), custodian banks, sub-custodians, securities lending agents etc. is sensible. This is exactly what the large asset owner/managers do (think state pension funds and sovereign wealth funds). Their ultimate advantage is that they can have named accounts – all the way through to the securities depository (e.g. Euroclear or CREST) – which ringfences their assets in their own name should one of the multiple intermediaries fail.
As individual investors we will be within omnibus accounts and nominee entity structures on multiple layers (at the broker, fund manager, custodian and depository). In which case the assets may only recorded in your name at the broker and some level of diversification is advisable.
The legal provisions of the nominees, custody agreements, securities lending agreements will generally provide for ring-fencing and repatriation of assets in the event of a winding up. It just may take a long, long, long time. The nightmare issue is the intermediary corrupting the asset owner records (think of a fraud or a cyber-attack that deletes the underlying ownership records of the broker’s nominee account.) Do you have a physical statement from your online broker that will get you your share of the assets – unlikely?!
So – if you really wish to follow this path to full diversification – you need to establish and understand the full path to the underlying assets and diversify all of the intermediaries: e.g. Broker – ETF/Fund – Trustee/Custodian. As an example – the LSE listed iShares MSCI ACWI ETF and SPDR (State Street) MSCI ACWI ETF both use State Street as the custodian – so not much diversification there at the custodian level. The Vanguard FTSE All World ETF uses Brown Brothers Harriman – which does not use State Street as a sub-custodian in any location.
This type of operational risk diversification is exactly what the large asset owners undertake – depending on your own level of assets and risk appetite you may also want to do something similar.
Great comment Howdy. That’s exactly right that institutional investors undertake diversification a cross trustees and custodians. A great deal of due diligence and effort goes on behind the scenes to make sure that assets are as safe as possible. That’s a big improvement over how things were prior to the financial crisis. However, we haven’t seen how these systems and processes work yet in a market turmoil environment. One potential issue is that custodian and agency services are highly concentrated among a few big players (State Street being, I think, the largest). This confers on them a greater apparent level of security. But there are concerns that this concentration could lead to ‘contagion risk’.
I agree, great comment Howdy, it’s no wonder forensic accountancy is a growth area!
I apologise for this may take some time,my situation is that i have 90k in s&s isa with VLS and Iweb as the platform with another 20 to add. this has been activ for 3 years. 1.who has the money Iweb or Vanguard ( iam alittle uneasy over compesation limits) 2.Which is the best way to rectify. A. Put half in my wifes name ,shedoes not have a s&s isa and invest rest outside an isawith different company andprovider or can i have 2 s&s isa with different providers. Sorry again.
As for the above,i have just spoken to VG who tell me as its one isa but comprising of two funds its not possible to split one fund to keep with different platforms. So another question if the worst did occur eg iweb in difficulties would its parent Lloyds step in or would it be deemed a separate entity and fold. Thanks
Lloyds have shown themselves to be set at zero regards ethics, and have less than zero reputation to maintain, so assume they will do what’s best for themselves.
yes, its obvious really. As I cant split the funds to get them under the compensation limits the only alternative is who do I have more faith to keep straight Iweb or Vanguard