Clients Money and Ring Fencing?

love2learn

Hi,

When a clients money with an investment broker such as Hargreaves Lansdown or Fidelity is considered ring fenced, the way I understand it is the money is kept seperate from the broker should the broker go into administration, and as such it can't be touched.

However, the money is held at a bank or banks... if the banks were to be allowed to fail which I know is unlikely as the government usually steps in (please no debates on that lol). If the bank or banks the client money is held in were to fail, my understanding is that the investor is covered up to £85,000 should the bank fail. And £50,000 per investment fund should the fund manager fail.

So am I right in thinking, all though the money is protected through ring fencing in it's entirety should the broker go bust. It's not protected in it's entirety should the bank or fund manager go bust?

This is important to me as I'm considering moving away from Hargreaves as they are more expensive than other providers, but Hargreaves has clients money spread across more than 5 banks with no more than 35% of the money held at any given time at any bank, and fidelity has all the clients money in Barclay's alone which in my opinion is more risky should the government ever allow Barclay's to fail in the future.

Reaper

I don't think you've got it quite right. The £85,000 [STRIKE]and £50,000[/STRIKE] [EDIT: Oops, see post below] figure you are quoting relate to CASH held with the managers. I can't imagine you plan to hold sums that large uninvested.

Once you buy your investments these are normally ring fenced, even nominee share holdings, though you can always check if worried.

This article might help explain what is a complicated subject:
http://www.telegraph.co.uk/finance/personalfinance/investing/9989436/Cash-deposits-are-protected.-What-about-investments.html

grey_gym_sock

the £85k is for a deposit taker failing. so it's only an issue if you have more than that with 1 deposit taker. e.g. if fidelity's platform is using barclays, then it's the total cash you hold on the fidelity platform + in any accounts you hold directly with barclays (+ anywhere else you have cash which is indirectly with barclays).

the £50k is not for deposits. the limit is per regulated firm that defaults on its liabilities in relation to investments, not per fund. it's only an issue if the ring-fencing is not done properly, which would imply fraud or very serious administrative errors. i.e. it doesn't matter if the fund manger, broker, or anybody else goes bust, so long as the ring-fencing is correctly in place.

love2learn

Thanks for the replies, and thanks for the link explaining it. If I've digested the information properly, basically once my money is invested in a Unit Trust, the fund manager has any money I've put in either invested in company stocks or deposited with a trustee. The trustee has the money ring fenced so even if it goes bust the money can't be touched.

Essentially the biggest risk is having more than £85K in any one bank, as if they don't manage their lending properly and go bust anything over £85K is not covered, and only a government bailout would save the saver.

By the way, Hargreaves Lansdown is only a tiny bit more expensive than Fidelity for me. HL is 1.21% and Fidelity is 1.19%, it's not worth the hassle moving all my families accounts with them. And HL's customer service, online platform and risk management is better anyway. Fidelity has all client money deposited through Barclay's only (according to their customer service team) and HL has it spread over 5 banks, with no more than 35% of client money in any one bank.

Archi_Bald

love2learn wrote: »

Fidelity has all client money deposited through Barclay's only (according to their customer service team) and HL has it spread over 5 banks, with no more than 35% of client money in any one bank.

This is only relevant for cash that you have deposited, or gained from sales, but as yet not invested. Surely you don't keep £85K of cash lying about uninvested?

love2learn

Archi_Bald wrote: »

This is only relevant for cash that you have deposited, or gained from sales, but as yet not invested. Surely you don't keep £85K of cash lying about uninvested?

Occasionally I switch to cash when I think there's potential for a market correction. But mainly I'm fully invested in unit trusts. When I'm in cash, it's only for a small period of time... but it's still a consideration.

Ifts

There is a write up about this over on the Monevator blog too:

http://monevator.com/investor-compensation-scheme/