Diversifying large amounts across platforms

masonic

tg99 wrote: »

It's not actually free insurance though because as I diversify over more platforms then the aggregate costs (in terms of platform fees) of holding my investments goes up as it would mean holding less with my accounts where I am already paying a flat annual fee.

Yes, and there are other drawbacks as well. Trading costs might be higher as you would typically need to duplicate holdings between platforms. If you don't do that, rebalancing could become tricky, especially for ISAs and SIPPs where you cannot easily move money between accounts.

tg99

masonic wrote: »

As jimjames has clarified, I am just saying the loss is spread amongst the affected parties, presumably in proportion to their investment. The nominee account is collective, so you have a collective set of investments on the platform and a separate register of who owns what. So, taking your example, if 50% of the money invested (in this case £70k if there were no other investors in the fund) was embezzled by an employee, everyone would get a full refund, but if any more than that was taken, the person with £100k would start to lose out. If you are invested in a popular fund, there could be tens of millions invested in that fund by the platform and thousands of investors, so a lot could be taken before individual investors started to reach their limits.

Yeah though I was looking at worst case scenario whereby everything is lost to fraud in which case you lose anything over £50k I believe (assuming none is held as cash and none of the money can be recovered).

puk999

tg99 wrote: »

(Above assumes not holding any of your account as cash as appreciate this is treated differently.)

Though this would be open to fraud too, right? The platform claims that cash is held by trusted bank XYZ, but a dodgy platform employee has deposited it elsewhere.

masonic

tg99 wrote: »

Yeah though I was looking at worst case scenario whereby everything is lost to fraud in which case you lose anything over £50k I believe (assuming none is held as cash and none of the money can be recovered).

Well, if there is that much fraud going on behind the scenes, the FCA registration would probably also be fraudulent and you'd find yourself completely unprotected. But yes, if it transpired all client money taken by the platform was siphoned off to an offshore bank account or something, the maximum you could claim would be £50k in respect of your investments and £85k in respect of cash on the platform.

Given that there are certain controls that a firm has to show have been put in place as part of regulation, the above situation is vanishingly unlikely, but not impossible.

bowlhead99

tg99 wrote: »

Yeah though I was looking at worst case scenario whereby everything is lost to fraud in which case you lose anything over £50k I believe (assuming none is held as cash and none of the money can be recovered).

Large investment platform groups have £billions of assets under administration or management; AJ Bell has about £25bn and H-L about £50bn, and they are not even the biggest players in town.

Admittedly, the £25bn or £50bn of holdings will be spread over multiple nominee companies, but the nominee companies' holdings will still be worth billions of pounds each.

So, if it emerged that the management had, instead of putting your money into their Nominee Co #1 Limited and buying investment funds on your behalf, just trousered it, and generated you a fake contract note pretending they had bought you some units in the ABC Fund, but actually there were no assets at all in the nominee company because it had all gone to fund an enjoyable retirement (and private army) in a country without an extradition treaty...

...then yes 'everything is lost to fraud' and the scale of the fraud is say £5 billion. When the 100,000 customers who thought they had money in that ISA nominee account realise there are only £0 of underlying assets to go around, the average loss is £50k but some investors are only in for £500 and others are in for £500,000. The ones who were in for £500,000 will wish they had spread their assets around with other platforms. But is it right to pay much attention to this theoretical 'worst case scenario' of a £5bn fraud?

Of course, if the dodgy platform managers had been smarter they would not have stolen the full £5 billion out of the account that was supposed to have £5 billion in it. That might carry a rather high rate of detection, given people can ask for their money back at any time. Instead perhaps they would just, over time, syphon off a paltry 10%, or £500 million. A hundred million each for the five guys perpetrating the fraud will still easily help them pay off suspicious colleagues, buy that ticket to Venezuela and set up a new life with a suitable array of bodyguards.

Fortunately if only 10% of the money was siphoned off in that way, then even the person with £500k in his ISA account has only lost £50k which is within the limits of the FSCS protection. If the dastardly fraudulent management also ransacked his SIPP nominee account and his unwrapped trading account, because they wanted to share a billion or two of spoils, and not just a paltry half a billion or so for their Venezuelan retirement adventure, then he would be out of luck.

It's always interesting to examine what might happen in a worst-case scenario. But it's rather more useful to examine what might happen in a not-worst-case-but-more-realistic scenario.

grey_gym_sock

bowlhead99 wrote: »

Fortunately if only 10% of the money was siphoned off in that way, then even the person with £500k in his ISA account has only lost £50k which is within the limits of the FSCS protection.

i think it may depend on which assets are missing. e.g. if the pooled nominee account's holding in fund X is intact, then holders of that fund won't have lost anything. and if 20% of the holding in fund Y is missing, then holders of that fund will have lost 20% of their holding - which they can claim back from the FSCS, subject to the £50,000 limit. i.e. even if 10% is missing overall, it may be that some ppl have more than 10% missing, other less than 10%.

if it were a big enough mess, it could take a long time to sort out precisely what is missing. to my mind, that is a good reason to use several platforms if you are a long way over the £50,000 limit; otherwise you could go spare worrying about whether you'd lost most of your life savings. but there are also limits to how many platforms it makes sense to use; splitting £1m among 20 platforms would be ridiculous.

i would be a bit more concerned about the security of some platforms than others. most of the major 1s have pretty big companies behind them, but there are also nominee accounts run by small stockbrokers (often just for shares, not funds). i wouldn't be so keen to hold amounts over £50,000 with the latter.

at least 1 small stockbroker, pacific continental securities, did completely fail to keep clients' assets safe. see e.g. https://www.smith.williamson.co.uk/news/2304-advice-to-former-clients-of-pacific-continental-securities-uk-limited-pcs-uk-on-how-to-claim-compensation ... the FSCS paid compensation (at the time, limited to £48,000); that article says:

The FSCS in paying compensation, will generally require a full assignment of the claimant’s claim against the Company.

does that imply you had a choice of taking either your share of the remaining assets or FSCS compensation? or did you get your share of the remaining assets + FSCS compensation to make up any shortfall (subject to the limit)? i don't know.

incidentally, i do still have a few share certificates, but i wouldn't assume they're 100% safe. however, i suppose the risks are at least different, so it's a bit like using 1 more platform.

redux

masonic wrote: »

Just out of interest, how have you calculated your "up to" £800k spread across 4 platforms and £883k spread across 6 platforms?

There are comments about protection of £50,000 per account.

Add that to my comment that they won't all fail at once. I'm assuming that only one fails.

Yes, ultimately that doesn't remove risk on the others, if that's what you're getting at. Maybe at that point the customer might play chicken and spread across more

masonic

redux wrote: »

There are comments about protection of £50,000 per account.

Add that to my comment that they won't all fail at once. I'm assuming that only one fails.

Yes, ultimately that doesn't remove risk on the others, if that's what you're getting at. Maybe at that point the customer might play chicken and spread across more

That's not really what I was getting at. I was just confused where the figure of £800k has come from. Your post seemed to imply that if you were spread between 4 platforms anything less that £800k was generally ok, but larger amounts were not. But £800k spread across 4 platforms means £200k in each platform, which is quite a bit more than the compensation limit. I was more confused by you using the figure of £883k when considering 6 platforms - if £200k per platform is ok, why not £1.2m?

redux

masonic wrote: »

That's not really what I was getting at. I was just confused where the figure of £800k has come from. Your post seemed to imply that if you were spread between 4 platforms anything less that £800k was generally ok, but larger amounts were not. But £800k spread across 4 platforms means £200k in each platform, which is quite a bit more than the compensation limit. I was more confused by you using the figure of £883k when considering 6 platforms - if £200k per platform is ok, why not £1.2m?

Again, people had said £50,000 protection per account, and I was thinking of being hedged on an assumption only one would fail at most. Whether this is sensible or not is a bit open-ended, but that's where I was.

I was replying to someone discussing the likelihood whether someone with £1 million would hold their funds across 20 platforms to have full protection of £50,000 per account.

My train of thought was £1 million spread across 4 would be £250,000 each, so I was thinking of £50,000 protected in a failing one, plus £750,000 remaining in the others

Likewise £166,667 per account spread across 6 accounts, £50,000 protection for a duff account, £833,333 left in the others.

So the numbers I mentioned were for the result of the catastrophe, rather than notional amounts to invest before. Sorry that wasn't clear.

So going along this line, someone willing to believe that the chance of two platforms totally falling is negligibly small, or they would rearrange things after one failing, can have 80% protection if using 4, 88% using 6, 92.5% using 8, any of which might be deemed acceptable enough risk compared to having to use 20 for 100% protection and probably losing some economies of scale in charges.