A little-known fact is that most investment types are not protected by the Financial Services Compensation Scheme (FSCS). Yes, your broker is likely covered. But what happens if the firm that actually manages your investment funds blows up?
In that scenario, the only kind of vehicle you can expect to be protected is a UK domiciled Unit Trust or OEIC (Open-Ended Investment Company).
Offshore funds aren’t covered by FSCS compensation. Neither are ETFs or Investment Trusts.
In practice this means there’s no FSCS protection for a broad swathe of funds marketed to UK investors, because they’re either the wrong type or they’re domiciled in exotic, far-off lands like… Ireland.
Now you may be entirely comfortable with that, because your assets are lodged with a financial titan such as Vanguard or BlackRock. The chances of such a giant being wiped out – and so vaporising 100% of your assets in a hot mess of scandal and fraud – are exceedingly small.
But you can never rule out the possibility entirely. Which is why some Monevator readers prefer to invest in funds that should benefit from the FSCS scheme in a nightmare scenario.
- Here’s our guide to the FSCS investment protection rules if you’d like a refresher.
If having the FSCS scheme as a backstop helps you sleep at night, then read on for our pick of low-cost UK domiciled funds provided by FCA1 authorised and regulated firms.
These funds should all be eligible for FSCS compensation (though it’s not an absolute certainty as we’ll explain in a sec), enabling you to build your passive investing strategy – as per our previous investment portfolio examples – with the knowledge that you couldn’t be any more protected.
Caveat Time!
The FSCS bends over backwards (and you might wonder why) to point out that compensation is not guaranteed just because a firm is FCA authorised and regulated.
The most reassurance you’ll get on each fund provider’s Financial Services Register page is:
The FSCS may be able to provide compensation if this firm goes out of business owing you money.
Hmm. Doesn’t exactly sound cast iron, does it? Moreover, check out the following piece of advice plastered liberally across the FSCS website:
Ask your firm to confirm that the activity they are carrying out for you is a regulated activity and FSCS protected.
Given that’s the lie of the land, then the best your plucky DIY investor champ Monevator can do is to say the following funds are all UK-domiciled Unit Trusts / OEICs, offered by fund firms that were FCA-authorised at the time of writing.
In other words, please follow the FSCS’ advice above to maximise your chances of being eligible for compensation, should you ever need it.
Beware too that compensation tops out at £85,000 per firm.
If Vanguard went bust, for example, the most you could claim from the FSCS is £85,000 – no matter how much you had invested in different Vanguard funds.
That won’t be a problem for some people, but 100% protection could become pretty laborious to maintain for those investors with larger portfolios.
At the very least it may require some creative juggling between different fund providers. Hence our selection focuses on enabling you to diversify your choice as much as possible.
Incidentally, you could go even further by including active managers in your scope. But on Monevator we typically major on keenly-priced index trackers, so that’s our focus today.
Enough with the ambling pre-amble, let’s get into our list of FSCS-eligible funds.
Global / All-World equity (Developed world and emerging markets)
- HSBC FTSE All-World Index Fund C
- OCF 0.13%
- Fidelity Allocator World Fund W
- OCF 0.2%
- Vanguard FTSE Global All Cap Index Fund
- OCF 0.23%
Developed world equity
- L&G Global 100 Index Trust C Inc
- OCF 0.09%
- Fidelity Index World Fund P
- OCF 0.12%
- L&G Global Equity Index Fund
- OCF 0.13%
- Vanguard FTSE Dev World ex-UK Equity Index Fund
- OCF 0.14%
- Aviva Investors International Index Tracking Fund 2
- OCF 0.25% (ex-UK fund)
UK large cap equity
- HSBC FTSE All Share Index Fund Institutional
- OCF 0.02%
- iShares UK Equity Index Fund (UK) D
- OCF 0.05%
- Vanguard FTSE UK All Share Index Unit Trust
- OCF 0.06%
- Fidelity Index UK Fund P
- OCF 0.06%
Emerging markets equity
- Fidelity Index Emerging Markets P
- OCF 0.2%
- iShares Emerging Markets Equity Index Fund (UK) D
- OCF 0.21%
- L&G Global Emerging Markets Index I
- OCF 0.25%
Property – global
- iShares Environment & Low Carbon Tilt Real Estate Index Fund (UK)
- OCF 0.17%
- L&G Global Real Estate Dividend Index Fund I
- OCF 0.22%
UK government bonds
- Fidelity Index UK Gilt Fund P
- OCF 0.1%
- iShares UK Gilts All Stocks Index Fund
- OCF 0.11%
- HSBC UK Gilt Index C Acc
- OCF 0.13%
- Vanguard UK Long-Duration Gilt Index Fund
- OCF 0.12%
- abrdn Sterling Short Term Government Bond Fund
- OCF 0.25% (Active management)
Global government bonds hedged to £
- abrdn Global Government Bond Tracker B
- OCF 0.14%
Global inflation-linked bonds hedged to £
- abrdn Short Dated Global Inflation-Linked Bond Tracker Fund
- OCF 0.13%
- L&G Global Inflation Linked Bond Index Fund I
- OCF 0.23%
- Royal London Short Duration Global Index Linked Fund M
- OCF 0.27% (Active management)
Useful pointers
As always, make sure you do your research to ensure these funds are the right fit for your portfolio. Morningstar and the fund provider’s own factsheets are good starting points.
We’ve ranked our selection purely by cost (as measured by OCF). Check out other Monevator pieces for more on how to choose the best global tracker funds and the best bond funds.
You’ll often find more index funds available in each category if you need them. There’s a good slate of US tracker funds available too – but nothing doing for gold or commodities.
You can quickly tell if a fund is UK domiciled by checking its webpage or by looking out for the designation GB in its ISIN number.
- Investigate more low-cost index fund and ETF options.
Market-leading index fund providers
To diversify your passive fund holdings as much as possible, check out these investment firms for your FSCS-eligible OEIC / Unit Trust needs:
- Vanguard AKA Vanguard Investments UK Limited, FRN2 494699
- iShares AKA BlackRock Fund Managers Limited, FRN 119292
- Fidelity AKA FIL Investment Services (UK) Ltd, FRN 121939
- HSBC AKA HSBC Global Asset Management (UK) Ltd, FRN 122335
- L&G AKA Legal & General (Unit Trust Managers) Ltd, FRN 119273
- Abrdn AKA abrdn Fund Managers Limited, FRN 121803
- Royal London AKA Royal London Unit Trust Managers Ltd, FRN 144037
- Aviva AKA Aviva Investors UK Fund Services Limited, FRN 119310
You can investigate a firm’s FSCS particulars by typing its FRN into the Financial Services Register page.
Bear in mind that the FSCS scheme kicks in only if a firm fails and the value of your assets is otherwise irrecoverable. (And it only protects you up to the exciting £85,000 limit, of course).
The Financial Ombudsman holds sway in other scenarios.
Do you need to go to these lengths?
Personally, I don’t worry about whether my funds are FSCS protected. Insisting upon it would cause a level of stress (induced by excessive portfolio management) that isn’t worth it to me. At least versus the low probability of ever calling upon the scheme for a bail out.
But all that really matters is that you are comfortable with your investing choices.
If you’d like to create a ‘It helps me sleep at night’ portfolio then I hope the fund list above speeds you on your way to the Land of Nod.
Take it steady,
The Accumulator
From time to time I do worry about this, but as you conclude, doing something about it practically wouldn’t be easy. I’ve settled for sticking to the big name fund managers.
One question though – the list of funds, is it just that? Funds and not the ETF versions? (I hold the ETF versions to keep my costs down)
@ PC – yes that’s right, the FSCS does not cover ETFs.
Hmm, I hold over six figures in VWRL. Perhaps time to start accumulating that HSBC fund, particularly as I have discovered that I can hold funds without ongoing platform fees in iWeb. Now if they go titsup I am in deep trouble. There’s no easy respite as the HL ISA which is my 1+1 redundancy has snuck up past 85k.
I’m still not going to join TI’s band of unhappy folks with more money stressing them out more than when they had no’wt.
TA’s got the right angle on that in this post 😉
Excellent piece @TA nicely complimenting the one updated on 21st August. The FSCS compo restrictions make vety little sense to me. The ‘onshoring’ excludes ETFs (as Irl, Lux based) and, sadly £85k, isn’t going to pay the big pills if it’s all that’s left after a fund provider apocalypse. Alongside the separate platform risk issues, seems best options practically are either:
– carry on as you were, and just hope for the best; or
– foreswear ETFs for OEICs, use trackers across multiple providers (favouring BR and Vanguard as TBTF) and, at same time, split ISA, SIPP & GIA across three different platforms.
@Time like infinity
Trouble is
> at same time, split ISA, SIPP & GIA across three different platforms
still only gives you 255k FSCS protection, if perfectly optimised. Although I agree, the big difference is between total concentration and a 1+1 resilience, perhaps after that you’re in the long grass.
255k is not enough to retire on, even at the thin-Fire end. So either you balkanise the holding across an ever-increasing number of platforms, or you favour the TBTF. I only use FTSE100 owned platforms but TA reminded me I need to diversify the index stuff better. If all my Vanguard ETFs were a single firm in a share portfolio, people would say it’s way overconcentrated 🙁
I think I have a type of SIPP, holding a tracker fund, that offers 100% protection with no limit, but this seems too good to be true. Can anyone confirm if I’ve misunderstood?
The SIPP is with Aegon (Aegon Retirement Choices), and is only available via financial advisors. It’s where the proceeds of a final salary pension transfer were placed. The tracker fund is from Scottish Equitable, which is part of the same group as Aegon.
Their document about protection says:
“The Aegon SIPP is an insurance contract provided by
Scottish Equitable plc……The underlying investments held in the SIPP will determine the level of FSCS protection.”
Then, under the section on “in-house insured funds”, it says:
“If Scottish Equitable plc default, then the trustees of
our SIPP can claim compensation on behalf of each SIPP
investor under the insurance contract part of the FSCS
scheme. This provides cover for 100% of the total value
of the claim without limit.”
I had originally planned to transfer out into a SIPP of my own choosing, but I’m now more inclined to see if I can transfer my other pensions into this one.
Am I being horribly naive in thinking that I’m fully protected?
> The SIPP is with Aegon (Aegon Retirement Choices), and is only available via financial advisors.
I would ask the financial advisor, since you’re paying good money for it. IANAL but if I were looking for the devil in the detail I would say it lies in this misdirection
> The underlying investments held in the SIPP will determine the level of FSCS protection.
You are probably OK if the platform goes titsup. The managers of the underlying investments, not so much. But if they each make up a part of the whole, then you probably have diversification. Nothing is guaranteed in this world. After all, if you have the appetite for risk to swap a final salary pension for an equity fund, presumably you have some appetite for risk in exchange for reward?
@ermine – Good advice, except that I’m not paying an advisor. They had to do the initial transfer, per the relevant rules, but I declined ongoing advice for an outrageous fee. (And the pension scheme paid their fees for the transfer.)
The second quote above was specifically for in-house funds, which is what I’ve got. The relevant quote for other funds is as follows:
“If Scottish Equitable plc defaults, then the insurance
contract part of the FSCS will cover the claim for
100% of the value without limit. This includes the
value of any external fund links. If the other provider
defaults, there can be no claim under FSCS rules. This
is because the FSCS rules don’t allow claims in these
circumstances.”
So this suggests that I’d have LESS protection if I went outside their in-house funds.
I do indeed have the appetite for what I see as an extremely low risk, but I’d still rather have no risk at all. And I’m also just generally interested, because no-one told me about this apparently extra protection.
@ Dave S – 100% FSCS insurance based protection is a thing. I’ve written a section on it here: https://monevator.com/investor-compensation-scheme/
Scroll down to:
100% FSCS protection for insured personal pensions and annuities
Some funds offered by these schemes do not qualify for 100% protection whereas some will. So I’d want clear guidance from Scottish Equitable on that.
I think the risk that Vanguard, iShares or SPDR go bust is very small. And if it does happen, then the investments that count are gold & guns.
The risk that brokers go bust is significant though. It happened to a friend some years ago. It was stressful and took a long time until he eventually got his money back.
The 85k limit is just too low for SIPPs, so it comes down to which platform to trust. The safest option is probably Vanguard, and a second SIPP with a big broker as a backup.
Great piece, TA! I couldn’t agree more with your remark near the end about it not being worth the stress. Personally, I just bother to diversify across platforms as that is very easy to manage and adds the extra benefit of having access to different ranges of ETFs and funds. In fact, in one of my platforms, I only invest in ETFs as that dramatically reduces the platform fee for that particular venue. I do stick to the big three though: Black Rock, Vanguard, and State Street (which as you know launched the first ETF back in 1993). More reassuringly, all of the big three are on the list of financial institutions that are too big to fail by the Financial Stability Board in America.
I couldn’t help noticing that for simplicity your criterion for low cost was the percentage of OC. Recently, when I was reviewing my asset allocation, I was surprised to find out that the iShares Core FTSE 100 tracker ETF, which has an OC of only 0.07%, actually incurs 0.20% in trading costs! So the State Street US value ETF with OC of 0.2% and no trading costs is actually cheaper! The P/E is about the same, P/Book is better, P/Sales is better and you swap a top allocation to Shell PLC in the FTSE 100 for a top allocation to Intel in the US large value tracker. I can increase my US allocation from 25% to 30% and decrease my homebias from 15% to 10% whilst keeping the same valuation. What’s not to like? 😉
@various: re platform/investment redundancy, etc
IMO, there is some relevant chatter on this subject (with other links) at: https://simplelivingsomerset.wordpress.com/2023/06/13/isa-transfer-weirdness-again-and-the-tribulations-of-property/
@Sparschwein (#10):
I think this post should be recommended reading as it describes a real-world experience and not a theoretical/abstract risk , see: https://fireandwide.com/asset-liquidity/
@ Tom-Baker – cheers! I didn’t know they were on the Too Big To Fail List – very reassuring.
Re: transaction costs – they tend to change frequently (and are quite volatile) so aren’t a terribly reliable guide unless you track them across time. For example, that iShares FTSE 100 ETF is currently reporting 0.07% transaction costs.
(Could be that transaction costs spike for FTSE 100 trackers when index composition changes are significant.)
There’s a L&G UK Equity ETF reporting 0.57% transaction costs. Its transaction costs were 0.07% last time I looked.
The implementation of transaction costs reporting has been botched. I’m not sure how often they’re reporting, perhaps every quarter? The FCA should have told the fund managers to report an annual average which would be more comparable and less volatile.
The FCA know that fund managers are reporting the figures in a confusing way and some may be doing to to mislead:
https://monevator.com/transaction-costs/
Another big shout out to @TA. This article really is an excellent resource for less experienced investors, and even for those who are, as many are not certain what is covered by FSCS. It is a fantastic guide on what funds we can use to give protection to our portfolios.
It is brilliant for those of us of a nervous disposition (or in my case paranoia!) when it comes to investing and the risk of your funds disappearing and so would not really be confident enough to invest – just leaving money in savings accounts and then losing it to inflation instead.
I probably would not have thought like this before the GFC brought it home to me when I had some banks I had savings with go bust on me. I was very lucky as I was considering putting above the 85K limit but fortunately didn’t so eventually got all my savings back but could have been very different. Before this I felt, like many do with investing now, that it was so very unlikely to happen that I shouldn’t worry about it much – after all they were UK regulated/authorised banks – and with this country being so stable and well governed and all that – what could possibly go wrong!!!
Now I think very differently and realise that when the crap hits the fan it can all go south very quickly so I currently hold mainly low cost global/dev world trackers all in funds split between fund managers and also split between quite a few of the lowest cost decent brokers I can find.
Obvs not possible with larger amounts to keep all under FSCS limit but I think best to split it, so if one explodes you don’t stand to lose so much (even if having more increases the chances slightly). You also tend to think who would be less likely to go down – whether that be brokers/fund managers but really I don’t think anyone can really say – it is usually sudden/unexpected – some may be supposedly too big to fail but who knows? When companies have gone down before the last people to know and the most in shock at the time are the general public/retail investors – like I was when my banks suddenly collapsed in short order.
I think it is worse when you are just in that middle ground, like myself, where you have built up a nest egg to have a reasonably comfortable retirement but are not rich by any means. If you are younger/do not yet have too much you can make sure you are totally covered by FSCS and if you are pretty wealthy and split between a handful of accounts then one going pop, although still devastating, isn’t probably going to send you back to having to buy from charity shops and living on beans & rice for rest of your life.
As I said a very useful and informative article as usual and many thanks to TA for the time and trouble putting it all together.
@TA – thanks for another great post.
Incidentally as discussed in your post above #13 – what is the best way to find the most up to date transaction costs as sometimes when I have looked on various broker websites they sometimes differ/are not that accurate and as you say they are quite volatile and as @Tom Baker says they can sometimes add a big chunk onto the TCO which you were not expecting unless you can research them and what you thought was a very cheap fund may not end up being so.
@J:
IIRC, most folks, myself included, prior to the GFC had no idea about limited (£50k at the time) FSCS protection in the event of a failure. I am sure I have textbooks from that time which stated there was no risk!
@Al Cam – I agree and I think many still don’t, or pay much attention to it. Less still know that some UK funds are the only ones that have FSCS – like the question at post #1 from PC asking if ETF’s are covered – not a criticism of them at all as I am not a seasoned investor and had to find all this stuff out myself over the last few years but that it isn’t widely enough publicised/advertised by brokers/fund managers or anybody else much then people throw all their hard earned into possibly just one broker or fund manager (sometimes just all into one particular ETF) believing their money will be protected. So the chances may be low but not zero so at the least probably best to play a bit safe.
Also thanks for pointing out my error with FSCS limit at that time – yes it was only 5oK back then and I remember now you said it was then was increased not too long after that if I remember rightly but thank god I was not over that limit when my banks got torpedoed! It definitely sharpens you up though and makes you think when it has happened to you.
@J:
FWIW, my own experience went as follows: I consolidated several cash ISAs into one cash ISA with N. Rock – as it offered the best [fixed IIRC] rate at the time and would be so much easier to handle, etc, etc. Then we went on holiday and, as usual, took little/no notice of the outside world. Returned from hols to find the financial equivalent of a Dear John letter in the post that [sort of] explained what had been happening. Yikes! I then scrambled to de-consolidate (as the balance exceeded the FSCS limit and you could back out of fixed rates in those days too) which was also a mistake as ultimately NR became amongst the safest institutions going.
One hopefully lives and learns; but there are no guarantees.
I guess you just have to steer a course you can live with and be aware that even with your best due diligence the rules of the road often get clarified or even just plain changed.
@ Sparschwein “I think the risk that Vanguard, iShares or SPDR go bust is very small. And if it does happen, then the investments that count are gold & guns”.
Yes, well said. The more I have thought about where the world may be going (ballooning government debt, polarised politics, authoritarian regimes, societal breakdown due to climate change, machine worlds taking control), the more I have invested in precious metals. To be clear in case the authorities are reading this , I have not invested in any weaponry.
@ J – thank you for taking the other side of the debate. You’re absolutely right that we can never say never. Whenever I think to myself “what are the chances?” I usually come up with the word, “Enron”.
For anyone who scrupulously sticks to the £85K limit, it’s worth saying that you’d expect some of your assets to be recoverable. So you have some wiggle room with FSCS protection topping up another £85K beyond whatever was recovered.
@ Confuzed – Morningstar have transaction costs for funds but not ETFs for some reason. I look up ETF transaction costs on a reliable broker site such as AJ Bell.
However, if you want an accurate transaction cost figure across a year, the only way I know of is to track them manually for a period of time. I could imagine doing that for my top 3 candidates, say, for a big holding like a global tracker.
I’d probably invest in my best bet then keep an eye on its rivals for a while before settling on my final choice and leaving it at that.
In reality, I haven’t done this. Though my sense is that transaction costs for the leading global trackers are relatively stable – due to periodically updating: https://monevator.com/low-cost-index-trackers/
@Hospitaller, Sparschwein & Tom-Baker Dr Who #19, 10 & 11: Problem here is everything’s dematerialised. Precious metals as disaster insurance fails unless actually held physically in transferable form (e.g. Krugerrands). Gold ETCs not much good if: fund platform or product provider go under; it turns out physical gold behind the ETC wasn’t there; or was loaned out & not returned, with inadequate collateralisation. Will be even less use if there’s full scale societal collapse, as no electricity = no internet = no access to ETC or ability to trade it. And, if you invest in gold, it’s a historically poor diversifier with low and inconsistent returns. It just won’t put petrol in the return tank like equities. Better to either have a balanced allocation or to go all in equities, and then split ISA, SIPP and GIA across different providers sticking with the biggest names for ETFs and funds, and possibly thinking about whether or not the reduced fees of ETFs compared with OEICs are worth the lack of FSCS compo cover.
@TA (#13) – Thanks for the link on transaction costs. I’ve just checked the AJ Bell link in your Monevator piece and it says UVAL has less than half a bp in transaction costs whereas iShares Core FTSE 100 has 10bp in transaction costs.
I was implicitly assuming that these transaction costs would be some long term average over the whole life of the ETF that would then be annualised. It really seems to be instead some sort of instantaneous measure that is very volatile. Thanks for alerting us to this lack of transparency in the ETF information that is made available to retail investors like us.
@ Time like Infinity
You are right that holding gold in ETFs and suchlike would not meet the case. Physical gold and silver and possibly platinum is, however, a different kettle of poissons and may well prove viable for bartering in cows and so forth.
@Time Like Infinity (#21) – Yes, Physical Gold ETFs still have a fair amount of counterparty risk just like ordinary equity trackers with physical replication. You shouldn’t rely on them for protection against total Armageddon. You invest on them because they provide reliable exposure to gold and because gold is a unique asset with almost zero correlation to equities and bonds. A bit of gold can dramatically reduce the volatility of your portfolio and even increase your total long term return. Gold on its own though is a terrible investment: more volatile than equities with a real long term return of only about 1% annualised according to academic studies. It can spend decades with large double digit negative returns.
“still only gives you 255k FSCS protection, if perfectly optimised.”
That is a half mill for a couple though. An easy way to spend down to that (a problem we have never faced) would be for each of you to buy an index-linked annuity (I assume you can still get them with uncapped RPI-linking?)
Or, how about plunging a chunk of capital into index-linked gilts held by the DMO? (Have I got that right: will the DMO effectively act like a broker for you? Or will you be in the hands of Computershare Investor Services PLC?)
Or buy some gold sovs at the Royal Mint maybe.
Is there any obvious reason why many a childless couple shouldn’t buy annuities? It would cover longevity risk and reduce the cognitive demands of management in ultra-old age.
I would direct you to William Bernsteins categorisation of risks into shallow risks and deep risks.
Google provides plenty links. Pfau gives a summary at: https://www.forbes.com/sites/wadepfau/2020/03/04/inflation-deflation-confiscation-devastation-the-four-risk-horsemen/
IMO, the best bit (paraphrased from Wealth Management by Jason Butler) goes as follows: Bernstein concludes that there is not much you can do to protect yourself against confiscation and devastation (two of his four types of deep risk; the others being prolonged (over about a 30-year period) inflation and deflation) beyond having an interstellar spacecraft. More practically, he suggest a few gold coins and foreign real-estate.
Thanks TA for another cracking post. You said you were thinking about writing this in your recent article “Where to invest a low amount of money UK” @post #8 (after my earlier comments). It’s very useful to be able to easily compare well diversified passive tracker funds and what can be obtained at low cost AND with the FSCS safety net in the background.
My observations are that it’s quite difficult to diversify though with truly global low cost passive funds as there aren’t that many – as most are ETF’s, which I don’t have too much of because of lack of FSCS. I can’t believe there are so few to invest.
For instance the Fidelity Allocator World Fund W, is a fund of funds so I believe, is active and not passive so puts passive investors off, whilst the only other – Vanguard FTSE Global All Cap Index Fund is a bit more in cost than Vanguard FTSE Dev World ex-UK Equity Index Fund, so I use the latter for my Vanguard investments as I tend to think of keeping to the rule of low cost even though it doesn’t have the EM and UK exposure – not sure if that’s for the best but who knows what will win out and got to balance cost against diversity I think? In any case I do hold a lot more than the FSCS limit in the HSBC FTSE All-World Index Fund C – which is truly global – surely nothing will happen to that low cost fund as every passive investor and his dog invest in that – must be huge and hopefully HSBC are considered safe!
But if you want to diversify risk across a number of fund managers you’ve soon run out of the truly global ones so have no choice but to use some dev world in the mix anyway (can add in an extra EM tracker if it bothers you).
Also other observations are that the dev world fund – L&G Global 100 Index Trust C – although a very low OCF cost it is not as well diversified as it only has 106 total holdings according to HL (hence the fund name). I’d come to expect that a world tracker would contain a couple of thousand funds at least to fit the bill but maybe this would suffice after all?
Is the L&G Global Equity Index Fund considered only dev world as it only includes the “advanced” emerging markets as it says it follows the FTSE World index and that it covers 98% of the world’s investable market capitalisation?
Still it covers more than the L&G International Index Trust fund, which I am already invested in, as although this also follows the FTSE World index it excludes the UK market and appears to be a similar cost so maybe the L&G Global Equity fund would be the better choice of the two.
With the remaining Global/Dev World funds left to choose from in your list being the Fidelity Index World Fund P which is dev world only and the Aviva Investors International Index Tracking Fund 2 which excludes the UK (and is a bit more in cost) it is not terribly easy to build a truly diversified passive portfolio of low cost global funds that have FSCS safety as well.
@ dearieme – annuities and linkers are excellent ideas. 100% FSCS protection for annuities.
@ AS – Cheers! Your comment was 100% the inspiration for this post. re: Fidelity Allocator World Fund W – this fund is effectively passive. As a fund-of-funds it doesn’t have an index to follow but it’s no more active than Vanguard LifeStrategy. (LifeStrategy being another option for a global fund.)
The best data I can get for Legal & General Global Equity Index Fund reports its emerging market share at about 2.5%. I don’t think that’s high enough to count as a meaningful emerging market allocation.
Just as a back of an envelope calculation, let’s say it’s safe enough to allocate £100K to each fund manager because some assets will always be recoverable. And let’s say you’ve got a large portfolio. We could allocate as follows:
HSBC – global
Fidelity – global
Vanguard – global
L&G – developed
Aviva – developed
ishares – gilts
Abrdn – global gov bonds
Royal London – global linker bonds
That’s an £800K portfolio covered. 62.5% equities, 37.5% bonds. It means not being too precious about the exact asset allocation (e.g. caring too much about precise UK or emerging market percentages) but it’d be highly diversified by anyone’s definition and low cost.
It’s only 8 funds which isn’t too bad. I suspect many people on here will be juggling more than that already.
A couple could cover £1.6 million this way.
If the portfolio grew then you could explore reasonably priced offerings from active managers.
I also really like dearieme’s suggestion of investing in individual gilts and annuities if you want to push this further. Not sure about the gold sovs though 😉
Quick sidenote: I do know someone who keeps gold bars in their unassuming suburban house – and is dumb enough to brag about it. (Just putting the finishing touches to my heist plan right now…)
Can I ask why are people concerned about the investment manager failing? If they fail, you just replace them. It’s the fund custodian that matters. I feel I’m missing something here. The major risk from the IM is that they tell the custodian to execute some shenanigans and the custodian doesn’t realize that it’s dodgy.
Or when people say Vanguard as the “fund manager” do they really mean say JPM or State Street who is the actual custodian for the fund? From my perspective, the counterparty risk I’m mainly concerned about is the concentration to a small number of custodians.
@ ZX – As advertised by FSCS – it’s the bankruptcy of the fund manager that is protected by the scheme – should assets be otherwise irrecoverable.
So if Vanguard go down and the custodian is able to return assets then no need for the FSCS.
But if Vanguard go down, and there’s a shortfall in fund assets, then in step the FSCS – apparently. I’ve always assumed the main use case would be fraud i.e. assets were diverted to the Cayman Islands instead of the custodian, though the probability seems small.
Presumably if a custodian blew up and Vanguard couldn’t meet their obligations then they’d declare bankruptcy and then… FSCS time. Or ideally, bail out at governmental level ref: Tom-Baker’s too-big-to-fail comment.
@ZX & @TA: all excellent points. It would be really great to have a future article on how the mechanics of asset custody, fund and platform management fit together, both with each other and also with FCA regulatory & FSCS compo roles. Woodford (thank God dodged that bullet) shows how badly things can go awry even in absence of any shenanigans.
Did read somewhere something to the effect that BNYM had custody of over $26 trn and then complaining that they were maybe pushing the envelope a bit – TBTF risk et al.
Broker failures happen, the custodian system isn’t foolproof (I think it was Finumus who wrote about this), and the FSCS rules are murky.
The FSCS website is useless (e.g. ETFs and funds are “possibly protected”) and their helpline go out of their way to avoid explaining which kinds of assets are actually covered. With the brokers, it is like getting blood from a stone too.
AJ Bell eventually said “FSCS coverage only relates to UK domiciled investments/assets, so it would not include ETFs based in Ireland.”
Have others here got the same information?
If true, this means that in any UK brokerage account, only UK-domiciled funds, and maybe ITs (?) are covered in case the broker goes down. ETFs are not protected as they are all domiciled outside the UK.
@Sparschwein
Yes what you found is what I found and mostly correct. I did a fair bit of research into it when I started investing and found the FSCS website and telephone line pretty much useless/ambiguous/misleading. Most of the staff don’t know what they are talking about. You are given the run around and like you said not even brokers give the correct information much of the time – I’ve had the same from AJ Bell/iWeb /Vanguard and even ones with decent customer service, usually, like Hargreaves Lansdown. When I complained to FSCS they told me to email a dept. there with my questions and when I did they never replied to it – so fat lot of use FSCS are – not interested!
You are right – the custodian system through the CASS rules etc. are not foolproof as it is mainly self-regulated by the brokers themselves and relies on them to undertake the correct actions in recording assets etc. which they may not especially if in financial trouble or if fraudulent in using customer assets for their own ends so personally I would not rely on that as Finumus said – I read his article as well and other info I saw on it.
I suppose you have seen the other Monevator article on FSCS here:
https://monevator.com/investor-compensation-scheme/
which gives some useful info also on it.
Basically what you have to remember is that there are 2 different levels of protections that apply (I wasn’t aware of this in the beginning):
(1) Broker/Investment platform level – you are protected if your broker goes out of business up to the FSCS limit (85K per broker) and it does not matter what you hold – funds (unit trusts/OEICS), ETFs or whatever. All should be protected as long as broker is UK regulated/authorised etc. and listed on FCA website as such. THAT IS ONLY IF THE BROKER GOES DOWN THOUGH AND CAN’T RETURN YOUR ASSETS.
(2) Fund Manager level – you are only protected up to 85K by FSCS if the fund manager goes up the swanee for your UK domiciled FUNDS (and by funds this does not mean ETFs or ITs – only unit trusts/OEICS have any protection from the FSCS). ETFs/ITs are classed exactly the same as individual shares and you take the risk – it has nothing to do with domicile – these types of funds are not ones protected by FSCS (at the fund manager level). Apparently ETFs are classed by FSCS as being “share like” as they are traded live on stockmarket (unlike funds traded once a day/not live). The only exception to this is that *some* ETFs may have a very small amount of protection (up to 20K euros only) via the “EU protection scheme” such as some irish domiciled ETFs but not all do. It is difficult finding out which do and even ETF fund managers provide misleading/inaccurate information when you call them. Vanguard for example first told me they did have 20K protection on theirs then said they may have some and when I took it higher and complained they said their irish ETFs actually had NO PROTECTION at all. Blackrock/iShares I believe have no protection for their ETFs and TA confirmed this in one of his articles previously. So I just take it they all have none – it is that small a level anyway – is it worth the bother trying to find out?? It seems a very grey area even though it shouldn’t be. Or are they just trying to mislead us into a false sense of security?
Another exception is if you hold “traditional pensions” with pension providers which are usually managed for you (not diy SIPPs with brokers/investment platforms) such as personal pensions taken out yourself or workplace pensions/master trust pensions (such as Nest etc.) which all have 100% protection in these schemes (i.e. all your money in these is protected)
At first I was worried by all this and just invested in UK domiciled funds and:
(1) spread them between different UK FCA regulated brokers around 85K each
(2) made sure didn’t have more than around 85K with any one fund manager (e.g. Vanguard, HSBC, Fidelity, Legal & General)
But if you build a larger pot you soon find you run out of fund managers to use for protection (and even if you can use your partners/spouses accounts as well to split it between – if you are confident in doing that) and although there are more brokers to choose from the fees get more expensive as you burn through the cheapest ones.
So I find it becomes a balance between safety/costs and how much you are prepared to pay in extra fees for the relatively unlikely event that they would go bust. I think brokers, being smaller would be more likely to go bust than a fund manager so best to be a bit cautious with them particularly.
I do now use ETFs as run out of fund managers’ funds with reasonable fund charges and fees can be cheaper with some brokers than using funds such as AJ Bell/Hargreaves Lansdown as capped but I stick to the big ETF providers like iShares/Vanguard/SPDR (State Street) as less likely to go bust and spread between them for safety. Currently a bit weary of Amundi/Invesco even though they do cheaper global ETFs as their global funds haven’t been around too long/smaller AUM and less established so keep an eye on them for the future. Sometimes worth paying a bit more for safety.
I don’t stick rigidly to the FSCS limits now but I still limit my exposure to any one broker or fund manager so that if any did go kapput, I would lose some but not a large proportion. IMO if you have a large amount and stick it all in with just 2 brokers, then that is a disaster waiting to happen – one goes bust you lose half your investments (well apart from a measly 85K you get back courtesy of FSCS – how generous! In US they get half mill dollars I believe protected).
So okay I have quite a few brokers – 8 plus a master trust pension at last count and a fair few fund managers and many will scream overkill and too much hassle but what exactly is the extra admin – opening a few more accounts, managing them which is basically logging in now and then and downloading/printing a statement – what is the hassle really for the extra piece of mind and ability to sleep at night. The more you build you probably feel more easy letting it ride over by more but best to assess how safe those brokers/fund managers are first – you can never be 100% but just as careful as you can.
Like I’m not invested with the fee free ETF provider InvestEngine because I have asked them a lot of questions in the past (via live chat as they don’t have phones) and they often don’t know the correct answer/fob you off and lack clarity I found. I also looked at their past submitted accounts at Companies House and since they set up they have never made a profit in any year (up to last submitted accounts), they have a very limited number of staff and are crowdfunding to fund the business. I find all this not to my taste and if they continue to make no profit – what will happen to them?? Okay so if you keep below the 85K and they do go bust you should be covered by FSCS but do you want the worry and hassle. I’ve had it before with banks in the GFC when a couple of my smaller savings providers went bust and it is a worry although I did get it back eventually as I was under the FSCS limit in them. Same with some other cheap/no fee brokers who I found are lacking in customer service and ones who have had some issues in the past – so consider I might be selling out my safety for bit cheaper fees – is it worth it and these firms have to make a bit of profit somewhere to pay staff/stay afloat.
It is a bit of a minefield though – hope this helps.
@AS – thank you for your reply. It is such an opaque and absurd system, making each individual ask each of their platforms about which “activity” is covered. What does “activity” even mean here?
I too struggled with the distinction between (1) Broker/Investment platform level and (2) Fund Manager level, and getting clear information about each.
I only really care about (1); the big chunks are in funds/ETFs from Vanguard and iShares who are too big to fail, I hope.
> it does not matter what you hold – funds (unit trusts/OEICS), ETFs or whatever. All should be protected as long as broker is UK regulated/authorised
Do you have this point on good authority? This is what I asked AJ Bell about, are Ireland-domiciled ETFs covered if they go bust. They said nope, only UK-domiciled assets.
@Sparschwein
I think that AJ Bell staff member is getting mixed up with the FSCS fund manager level protection in that ETFs/ITs are not covered and it often says this on the internet that I’ve seen and doesn’t differentiate. As you’ve said the FSCS website itself is far from clear but says ETFs may possibly be protected because they would be through an authorised broker in the event IF THE BROKER GOES BUST but not if the fund manager does.
I originally believed for quite a long time that ETFs/ITs etc. were not covered at all by FSCS as, like you, I rang my brokers and was given wrong/inaccurate/misleading information on FSCS protection. Many staff themselves don’t know – I have an AJ Bell account and to be honest found them lacking on this and many other things. Many of them are clueless and only seem to know answers to the very basic questions but nothing in any depth. But it’s not just them – I have accounts with other brokers including iWeb/Vanguard/Hargreaves Lansdown/HSBC/Barclays and others and have asked them all stuff about FSCS protection and they have all come up lacking. I even complained about their info being inaccurate and took it higher, sometimes spoke to a manager, and only then got the correct information. The customer service staff, I found, are not well trained in actually knowing any detail. I was surprised at Hargreaves though who are supposedly noted for their customer service. Recently more than one staff member there did not even know the correct details regarding their recent transfer cashback offer – I knew it better than them and they had to apologise to me over it. I have found Interactive Investor slightly better in my experience but they are still far from perfect – depends a lot on luck and which staff member you get on the day. As I said I do not have an InvestEngine account but looked into them and asked them many questions over a period of time including FSCS and protection/custody of assets, stuff regarding ETFs and nearly all the time their staff came up lacking. They are the worst and seem to know nothing and fob you off or answer a different question to the one you have asked which is annoying on a chat service only. Unless it’s really simple i.e. “how do I add money to my account” they don’t know the answer. Based on this and their accounts (always made a loss since they started) and the number of staff – I think last accounts I saw said they only employed around 16 staff or so, IIRC, and I think that included the directors and in some accounts before that it was 12 0r 13. Doesn’t give me much confidence.
As I looked into FSCS and read more, I am fairly certain as I can be (but cannot say 100% certain as I have never worked in the financial industry and so am no expert) that most regulated investments are covered at the broker level i.e. whatever you have invested with your broker/platform is covered to 85K provided they are authorised/regulated by UK FCA for those investments and something untoward has happened to the broker (such as insolvent/gone bust) and so unable to meet their liabilities to investors (and not due to the fund manager failure). As you will probably be aware cash held by your broker is another separate category from investments held with them as they normally hold these through a number of UK banks (although this is aggregated with any other cash you may hold separately yourself with those same banks to make up the 85K cash limit).
At the time when I researched it, I got information from various online finance/investment websites including Monevator but trying to remember exactly where I got it all from now.
However this is an article from Fund Expert which outlines it if you want to read:
https://www.fundexpert.co.uk/ugc-1/1/1/0/fscs_protection_-_explainer_-_fe.pdf
This paragraph from it outlines the 2 different levels (i.e. broker level or what they term “distributor” and fund manager level or “provider”):
“What are the limits?
The maximum amount of compensation payable to an individual under the FSCS will depend on the type of financial product that you hold and who the claim is against, the provider or distributor (see box below).
• If a provider is in default, the limit is £85,000 per provider for UK domiciledmutual funds (Open-ended funds (OEICs)
and Unit Trusts).
• If a distributor is in default there is a limit of £85,000.
• If one of the banks used to hold client money is in default then the limit is
£85,000”
They also define what a provider/distributor is (in the grey box) as:
“What is the difference between a fund provider and a distributor…?
Provider
• A provider is a company that creates and manages its own investments. Also known as a ‘fund provider’.
• You can usually buy investments from these providers, such as the Fidelity Special Situations Fund.
Distributor
• A distributor is a company that sells investments from a range of providers. Also known as a ‘fund distributor’ or an ‘investment platform’.
• You can usually use a distributor to buy investments from a wide range of providers.”
Also the Monevator article I linked to in my earlier reply to you (post #33):
“FSCS investment protection: are you covered by the investor compensation scheme?”
If you read TA’s reply at comment #66 where somebody was confused on this issue. TA outlines here these 2 levels of protection in play and the posts following this discuss it and interactions with some brokers on the issue and how they often get it wrong. It is worth reading them on this issue.
So as I said I believe this information is correct – if TA has got this wrong as well then we are all in bloody trouble!! I know TA has said he is invested in ETFs as well so I am sure he will have looked at this before he stated it on here as likelihood is greater that a broker could fail as opposed to a large reputable (TBTF) fund manager which should, hopefully, be as rare as finding dinosaur dung. I still spread it around though between fund managers (including my ETF’s) as well and not just brokers – just in case – ………….but I am paranoid. I would rather take the risk of spreading via more fund managers (with the slightly increased risk of one of them going down) and then losing a smaller proportion, than just investing with a couple and then one of those fails and you lose half your investments. I figure it’s worth a slight bit more admin for peace of mind and not having to go back to work in my old age to pay the bills.
“Banker on Wheels” website (can also sign up for free membership) also has an article on the safety of brokers and whilst all UK brokers aren’t listed, there are quite a few and gives information on them and discusses their safety and whether they are a classed as a Tier 1 or Tier 2 broker – is useful to look at. Mentions Trading 212 and that they even had some issues in the past – and I know many use them due to lack of fees.
Hope this is of some use to you.
@AS – this is very helpful, many thanks. Reading all this and the comment thread on the other Monevator article, I’m inclined to think AJ Bell got this wrong. It is a bit surprising because their customer service is usually good and the response allegedly comes from their compliance department.
Monevator as a well-known finance blog probably gets better information from the brokers than us.