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Protection for index investments?

Hi,

I was reading on here that HSBC offer "private banking" to people with assets worth over 2m (not me).

I was puzzled by this. I guess they would be likely to offer diverse investments but how do high net worth individuals go about putting say 700k into a fund when I would guess there is no protection similar to that offered on bank accounts if the fund goes under or the institution collapses.

Equally , leaving aside the profitability of it, would it be safe for someone to self-invest and put 700k into a Vanguard fund or an Invesco product compared to keeping this in a cash account with one bank (so well above the 85k protection).

Comments

  • dunstonh
    dunstonh Posts: 117,926 Forumite
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    I was puzzled by this. I guess they would be likely to offer diverse investments but how do high net worth individuals go about putting say 700k into a fund when I would guess there is no protection similar to that offered on bank accounts if the fund goes under or the institution collapses.

    That isnt what investing is about and certainly isnt what discretionary investment management does either.
    Equally , leaving aside the profitability of it, would it be safe for someone to self-invest and put 700k into a Vanguard fund or an Invesco product compared to keeping this in a cash account with one bank (so well above the 85k protection).

    It would be very daft investing from an investment point of view but from an amount point of view it isnt an issue. FSCS protection for investments is different to deposits. Conventional retail unit linked investments actually get very little realistic protection under the FSCS as there is little to protect. if you go niche fund house or obscure investment then certainly you need to consider it but apart from that, there isnt really an issue.
    I am an Independent Financial Adviser (IFA). The comments I make are just my opinion and are for discussion purposes only. They are not financial advice and you should not treat them as such. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.
  • Linton
    Linton Posts: 17,708 Forumite
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    MarcoM wrote: »
    Hi,

    ....
    Equally , leaving aside the profitability of it, would it be safe for someone to self-invest and put 700k into a Vanguard fund or an Invesco product compared to keeping this in a cash account with one bank (so well above the 85k protection).

    If you put all your money into one bank you are dependent on the viability of that institution. The bank effectively owns your money and has just given you a promise to pay it back. It can and will use the money for any purpose it wants and you have no say in this. If the bank collapses your money disappears.

    If you buy a fund, you ultimately own shares in a large number of different companies. The role of the fund manager is purely to act on your behalf. The money invested in a fund is ring fenced from the fund managers own money. So, for example, they cannot use it to bolster their company's reserves. If the fund manager company collapses the fund still exists and can be taken over by another company. This has happened in the past.

    So as Dunstonh has said, its not an issue in the same way as it can be for a bank.
  • MarcoM
    MarcoM Posts: 802 Forumite
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    dunstoh why would investing a large amount in a passive fund be daft?
  • dunstonh
    dunstonh Posts: 117,926 Forumite
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    MarcoM wrote: »
    dunstoh why would investing a large amount in a passive fund be daft?

    100% in one area. Eggs all in one basket. e.g. if you went 100% UK equity then you are hoping that the UK is going to be the best place in future. A portfolio of investments is better (irrespective of type). There are some funds that are portfolio funds, including portfolio funds of passive investments. Although it is unlikely that someone with £700k would want to invest in such a way. They would either want to follow a more advanced strategy and pick and choose or pay someone to do it as options with that amount are likely to be different than someone with 70k.
    I am an Independent Financial Adviser (IFA). The comments I make are just my opinion and are for discussion purposes only. They are not financial advice and you should not treat them as such. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.
  • MarcoM
    MarcoM Posts: 802 Forumite
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    dunstonh wrote: »
    100% in one area. Eggs all in one basket. e.g. if you went 100% UK equity then you are hoping that the UK is going to be the best place in future. A portfolio of investments is better (irrespective of type). There are some funds that are portfolio funds, including portfolio funds of passive investments. Although it is unlikely that someone with £700k would want to invest in such a way. They would either want to follow a more advanced strategy and pick and choose or pay someone to do it as options with that amount are likely to be different than someone with 70k.


    What are the chances of someone willing to work on a fee basis with 700K + at stake?

    I have had difficulties finding someone who offers fee basis on few 10s of thousands. Somehow as soon as you mention the figure in mind they go all reticent in terms of whether they work fee or commission....
  • dunstonh
    dunstonh Posts: 117,926 Forumite
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    What are the chances of someone willing to work on a fee basis with 700K + at stake?

    Very high. They would be silly to work on commission basis. Fee basis is cheaper on that sort of money.
    I have had difficulties finding someone who offers fee basis on few 10s of thousands.

    In small cases like that, commission basis is likely to be cheaper and many firms who operate on fee basis exclusively already cannot offer affordable terms. Many wouldnt be interested at all.
    I am an Independent Financial Adviser (IFA). The comments I make are just my opinion and are for discussion purposes only. They are not financial advice and you should not treat them as such. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.
  • gadgetmind
    gadgetmind Posts: 11,130 Forumite
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    MarcoM wrote: »
    What are the chances of someone willing to work on a fee basis with 700K + at stake?

    The first rule of buying a used car is to never disclose your budget to the salesman.
    I am not a financial adviser and neither do I play one on television. I might occasionally give bad advice but at least it's free.

    Like all religions, the Faith of the Invisible Pink Unicorns is based upon both logic and faith. We have faith that they are pink; we logically know that they are invisible because we can't see them.
  • princeofpounds
    princeofpounds Posts: 10,396 Forumite
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    I was puzzled by this. I guess they would be likely to offer diverse investments but how do high net worth individuals go about putting say 700k into a fund when I would guess there is no protection similar to that offered on bank accounts if the fund goes under or the institution collapses.

    - People are often happy to take the risk to some degree. If you are financially aware there are ways to keep tabs on bank riskiness. It's not perfect, but you can manage it.

    - Also, if cash is a relatively small part of your wealth is might not be as worrisome as if you are someone with all your savings in a little nest egg.

    - Certain investments can be made that are held with the title in the name of the client rather than with the bank as a nominee. If something goes wrong with the bank, it is 'firewalled' from the bank.

    - You can hedge yourself against bank default by buying derivative instruments or insurance policies, if you care that much.
    Equally , leaving aside the profitability of it, would it be safe for someone to self-invest and put 700k into a Vanguard fund or an Invesco product compared to keeping this in a cash account with one bank (so well above the 85k protection).

    Although they are both investment products, they are different. Vanguard or Invesco don't promise you security of principal. Banks do.

    Let's imagine there is a low risk credit fund, which makes loans to companies on the exchange. If 15% of the loans go bad, you will lose 15% of your fund. That's pretty understood.

    But banks also make loans which carry risk. But their deposit holders don't expect to make losses. That's why you have bank shareholders standing between depositors and creditors. They make the extra profits, but also bear all the first losses.

    There were issues during the crisis with funds called money market funds. They make ultra-low risk loans - less than banks usually make - and in the US are often used as alternatives to bank deposits. But in the crisis they actually made some losses, and 'broke the buck' as they call it. They didn't promise total safety, but people accepted it was a convention.

    http://www.investopedia.com/terms/b/breaking-the-buck.asp
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