Buying ISA/OEICs thru a discount broker, default risks??

Loaded_Bachelor

I am considering investing in OEICs both inside and ooutside of an ISA using a discount broker because they offer zero or minimal initial charges and some small annual renewal rebates.

My question is, when purchasing funds through a discount broker who is your risk, as far as a broker, fund supermarket or fund provider going out of business, actually with.

If you invest direct with a fund your risk of them defaulting is purely with that fun provider and I believe you are protected on up to £50000 of investments (max £48000 compensation) that you hold with that fund provider.

When you invest via Hargreaves Lansdown the investment is held in their "Vantage Fund Account". If for example you bought five funds of £10K each through them each of which is with a different fund provider then how would any potential compensation work if either Hargreaves Lansdown themselves went out of business or alternatively if one or more of the fund providers went out of business? In other words, who have you actually, and in the eyes of the FSA got a risk of default with?

To further complicate things other discount brokers such as cavendish on line and chartwell investment seem to be offering funds via fund supermarkets, e.g. Fidelity and CoFunds. Presumably this then means there are 3 parties in the chain: the discount broker, the fund supermarket and the actual fund providers. Again, where would you stand as far as compensation goes in the event of any of these parties going bust?

I would be very grateful, before I plough money into OEICs via a discount broker if anyone could help me with these questions.

Thanks

(I am only asking about compensation if brokers, fund supermarkets, fund providers go bust and not if the investments themselves just go down the pan, that I can take on the chin!)

jawa1

Paul Varjak, have you tried asking Hargreaves Landsdown? If you do let us know the answer.

Loaded_Bachelor

I talked to Hargreaves Landsdown today and they told me something slightly different. They said that an investos risk would be with solely with them and any compensation would not be claimable against specific fund providers if it was Hargreaves Lansdown themselves that went out of business.

They did also mention about client money being "ringfenced". However, my personal opinion on "ringfencing" is that sometimes it is merely a word and is not always proven to be actually happening in a 100% sound way in a time of crisis. I would be interested to see proof of "ringfencing" from any company that claims to be doing it and an explanation of how they are prevented from getting to the "ringfenced" money in an unauthorised way.

Presumably, if there is rinfencing then a system of a low % maximum withdrawal from the total money held by the company would be one method of ensuring that it is not all withdrawn quickly.

I must emphasize that I have no evidence at all to suggest that the money isn't absolutely ringfenced or that safe procedures aren't in place but I am now worried about purchasing any funds from a so called fund supermarket as issues such as default risk (and which party you actually have the risk with) and ringfencing of client funds to my mind are not covered in a any literature I have yet seen from discount brokers.

My only reason for looking to a discount broker was to avoid initial charges on managed funds, plus the small yearly renewal rebate. Having now "binned" the discount broker route I have now found that you can buy into a selection of managed funds through HSBC with no initial charge. They are offering some of their own plus a small selection from 4 other providers. Thereis no renewal rebate in their offer but it is the best alternative I can find not using a discount broker.

To get the no initial charge offer you need to go to https://www.hsbc.co.uk and print out the application form and post it to them.

.............. intial charges, what a pain in the neck!!!

carnet

Legal & General also run a "Funds Supermarket" with a far greater choice than HSBC (although some of the funds do have a small initial charge).

There's about as much chance of L&G going bust as HSBC.

blinko

so am i right in thinking that if HL went bankrupt an investor would lose all there holdings but if you went via a fund supermarket and the fund supermarket went bust you wouldnt lose your holdings

carnet

The FSA Compensation Scheme covers the first £48,000 viz ;

"The Scheme covers two kinds of loss.

The first is when an authorised investment firm goes out of business and cannot repay money it owes to its client.

The second is when a customer has suffered from bad investment advice or poor investment management and the firm is no longer able to pay a claim against it. This will usually be because it is insolvent. The main types of investment covered by the Scheme are stocks and shares, unit trusts, futures and options, personal pension plans and long term insurance policies such as endowments.

The Scheme can only pay compensation for bad advice or poor investment management by an authorised investment firm if this took place after 28 August 1988, (which is the date when an investor compensation scheme was first established in the UK), and after a firm became authorised.

The Scheme pays the first £30,000 of a valid claim in full and 90% of the next £20,000. This means a maximum compensation of £48,000.

Web site address
www.fscs.org.uk"