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The question is whether to integrate or not. In a recent column, I suggested that those who want to reduce the stress of being an investment manager should consolidate their pensions and annuities.
This can be achieved by moving to a single investment platform. This is essentially an online supermarket that allows you to buy a variety of funds, stocks, and other investments, similar to a brokerage firm.
There are many things to consider before you do this, including checking the fine print to avoid incurring high fees or missing out on the benefits that come with your investment. But there is another important question regarding integration. Does consolidation significantly increase the risk that the platform will not be available when you need it?
Like all financial companies, platforms and pension providers can go bankrupt. Furthermore, in November the Financial Conduct Authority (FCA) highlighted wealth management and securities firms (including platforms) as an “inherently high-risk sector for financial crime”, stating that the sector was “incurring significant losses”. “It’s happening,” he accused. [customer] It amounts to fraud and fraud. ”
Rowan Moore, which offers self-invested personal pensions (SHIP), collapsed last year under the weight of hundreds of complaints related to failed offshore investments. And the collapse of brokerage Beaufort Securities in 2018 remains a painful memory for the industry, as the administrative costs of liquidating the business hit customers.
In both cases, the Financial Services Compensation Scheme (FSCS) existed to compensate investors. But how much of the investments made on the platform can actually be covered?
While you can’t claim poor investment performance, the FSCS is there to protect you if a regulated provider goes out of business and you run out of money or assets.
In theory, if your broker goes out of business, you still own all the stocks, funds, and other investments on the platform, so you don’t need an FSCS. This is because the client’s assets are locked away and kept separately in a nominated account. These are legally separate from the platform’s assets and liabilities.
But critics say this separation is unlikely to provide protection when it’s needed most. Companies on the verge of bankruptcy may have shaky records that make it difficult to identify customer holdings, and worse, they may have to use customer assets to survive the crisis. You may be tempted to “borrow”.
When it comes to platform investments, the FSCS can pay up to £85,000 per person and per company.
Exceeding the FSCS fee limit by holding everything in one company is a big problem for wealthy investors. Very cautious people want to diversify their investments at all levels, and some wealthy investors are using a myriad of platforms to stay within the FSCS limits.
However, this means giving up all the benefits of integration. One could be extra cash. Some of the largest platforms offer bonuses to new customers who bring in funds or existing customers who add to their investments. No company wants a customer base of many small investors, especially since they are difficult to manage. Even though the FCA asked chief executives in a November letter to “ensure that consumers understand the restrictions on Financial Ombudsman/FSCS consumer protection status and the associated risks of their investments”, you It is in their interest to collect assets.
Perhaps the bigger benefit of consolidation is the ability to reduce fees by switching everything to a lower-cost platform, and even small annual savings add up to significant amounts over decades. You may also be able to better manage your investments and gain a deeper understanding of your assets.
Additionally, you may be able to better organize your investments and increase tax efficiency with a single line of sight. If you’re spread across a few platforms, it can be difficult to see the big picture unless you like admin and are comfortable with spreadsheets.
As a result, it is not uncommon for platforms to host investment “millionaires” and pension millionaires. At the latest count, Interactive Investor alone has over 850 Isa millionaires.
One of the worst elements of a broker’s failure may be being removed from the market and unable to trade your investments while the bureaucratic procedures involved in unwinding the business are underway. Even if you’re a “buy-and-hold” investor, this won’t be a fun experience, especially since there’s no official deadline for when you’ll gain access again.
Meanwhile, in the case of Beaufort Securities, investors were furious when they learned that the administrator’s fees for winding up the business would be paid from savings that would otherwise have been accumulated. The FCA needs to eradicate this risk, no matter how small.
Asset managers and financial advisors say they often get asked questions about consolidation and its risks. Their common response is something like this: “If your investments are made through reputable and financially robust brokerages and platforms, there is little to worry about.”
Still, we urge you to check your advisor’s due diligence when choosing a platform.
Investor group ShareSoc recommends those conducting independent research to focus on large, financially stable UK-based companies. Some investors may prefer a listed broker who makes announcements about business activities and status. Those who are more concerned may consider paying extra for a so-called Crest account, which allows them to “prove” ownership of shares. I am content with just printing hard copies of my holdings once a year.
Ultimately, find a middle ground and follow ShareSoc’s recommendation to “use multiple brokerages, or two brokerages.”
But you don’t have to compromise. Therefore, we have concluded that the FSCS limits need to be revisited. Putting aside the fact that it’s woefully outdated, it would have been well over £100,000 by now if it had risen in line with inflation since 2019, but this means platform investors will move on to the best deals. It has become a barrier.
At the very least, it’s time to give retirement investors withdrawing from ships held on the platform the same protections given to pension investors: 100 percent of the value without a cap.
Moira O’Neill is a freelance money and investment writer. X: @MoiraONeillInstagram @MoiraOnMoneyEmail: moira.o’neill@ft.com
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