Really basic platform question!

ChilliBob

Disclaimer: this is probably a simple question for you guys but it's just occurred to me.. And I need some validation... 

Say you wanted to invest in a global tracker fund.. 
1. You'd need a provider/platform to execute this for you, right?
2. The cash is then invested in this index, owned by whoever
3. Assuming this index is 'safe' I. E been around for years, how do you know your cash is safe? 
4. Surely this depends on the platform provider you use..do these have the same protection bank accounts have, or greater) eg. More than 85k)
5. But I guess the money is invested in whoever is managing the index? E. G. Morgan Stanley or something? So... If there was a platform issue would your investment still stand but need to be transferred to another platform?

Probably very noddy questions but just occurred to me this morning! Thanks 

EdGasketTheSecond

See the thread on SVS Securities for what happens when a platform folds. What should happen is that your fund holding gets transferred to another broker but as can be seen from that thread, it is far from plain sailing.

You also need to look at how the fund is tracking the index i.e. does it buy the actual shares that make up the index or does it use derivatives to emulate the index? The latter would involve counter-party risk such that under stress, the fund could well underperform the index.

Linton

1.  Strictly speaking you dont absolutely need the platform however most fund managers will only deal with the seriously rich if they deal with investors directly at all.  Otherwise, yes you need a platform of some type.  Think wholesale and retail.

2.  The cash can be invested in funds that follow indexes or in thousands of others that dont.  You dont invest in indexes directly.  A fund is run by a fund manager.  The fund manager could be a major bank or other financial services company or could be a relatively small specialist.

3. What do you mean by safe?  If you mean that you dont want to lose all your money then yes most funds are very safe since they typically invest in hundreds if not thousands in some cases of individual companies.  The chances of them all going is bust virtually zero.

However if you mean that you dont want the vvalue of your investments ever to go down you should stick with cash savings.  Any investment has a chance of falling in value.  For example many funds fell in value by 30%-50% in the 2008 crash.  However most more than recovered in a few years.

4. On the other hand if you mean safe from the provider going bust then investing through a patform is inherently safer than putting your money in a bank.  If you put your money in a bank you are effectively lending that money to the bank.  All you own is the promise by the bank to pay it back on request, which may not be worth anything.  Money invested in funds remains your legal property and so cant be used to pay the platform or fund managers debts.  The platform and fund manager just have the right to manage the investment within rheir remit.

You are covered up to £85K (I think) with both the platform and the fund manager but the circumstances when this would apply are very "niche".  Major frauds bankrupting the caompany perhaps but this is extremely unlikely with a mainstream provider.  So most investors with large pots on this forum are happy to place a lot more than £85K with an individual platform or fund manager.

5.  Assuming you are investing in mainstream funds and not scams or near-to-scams were the platform to go bust it is highly likely that another platform would buy them out and your investing would carry on as before with only minor disruption. A platform's set of customers is very valuable. Eventually the two separate systems would be merged.

ChilliBob

Thanks that's really helpful, this whole area is totally new to me but something I will need to get my head around in the next few weeks, with the first, hopefully low bar, aim of making sure I'm getting over inflation 'safe' returns. 

Would you recommend any websites or guides I should read? I know there is literally thousands if not millions out there but I'm sure a near equal number are a big dodgy! 

As regards this specific thread, does this mean someone with a serious wedge might consider using multiple platforms instead of all eggs in one basket? 

ChilliBob

Thanks Linton, for some reason that message seemed to come in after my reply. 

That all makes perfect sense, I'm actually familiar with the concept of funds, fund managers and investors (I used to work in alternative assets!) but much less so in public markets.
Yeah by safe I guess I mean if you were thinking of say 5 year horizon, cash in savings is getting eroded by inflation really, where as say a global index tracker would have blips, but would likely outperform inflation over this time (one would hope!) 

Linton

Some investors will use more than one platform.  The main reason seems to be minimise any disruption should one go bust.  If you are putting money into both ISAs and pensions there is no strong reason to use the same platform for both.  Similarly there is not usually a good reason for a husband and wife to use the same platforms though some may offer a reduction in  fees for family members.
However there are good reasons not to split a single ISA or SIPP between platforms.  The problem is that you cant easily transfer money between the platforms and so you are liable to get into messy complexities if you want to sell a fund that happens to be held on one platform to buy more of another fund which is currently only held on another platform.

Notepad_Phil

ChilliBob said:

Thanks that's really helpful, this whole area is totally new to me but something I will need to get my head around in the next few weeks, with the first, hopefully low bar, aim of making sure I'm getting over inflation 'safe' returns.

I'll be interested to see what you mean by 'safe' returns.

Edit - your reply came in whilst I was composing this reply. Personally I would only invest money that I'd not be touching for 7 to 10 years rather than the 5 years that you mention as I think 5 years is on the low side unless you have other cash available to make up for the chance that your fund might be in a loss position at that time. Of course it's not guaranteed that you'll definitely be in profit even after 10 years

ChilliBob said:

Would you recommend any websites or guides I should read? I know there is literally thousands if not millions out there but I'm sure a near equal number are a big dodgy!

Personally I like monevator.com and the Savings and Pensions forums that you find here.

ChilliBob said:

As regards this specific thread, does this mean someone with a serious wedge might consider using multiple platforms instead of all eggs in one basket? 

I personally would always have at least two as although the chances of a mainstream platform going bust are vanishingly low, I would always want another platform available that I could access whilst the 'bust' platform was being sorted out. However you do need to make sure that the costs of the multiple platforms don't outweigh the small advantage that having different platforms gives you.

Linton

ChilliBob said:

Thanks Linton, for some reason that message seemed to come in after my reply. 

That all makes perfect sense, I'm actually familiar with the concept of funds, fund managers and investors (I used to work in alternative assets!) but much less so in public markets.
Yeah by safe I guess I mean if you were thinking of say 5 year horizon, cash in savings is getting eroded by inflation really, where as say a global index tracker would have blips, but would likely outperform inflation over this time (one would hope!) 

5 years is often stated as the absolute minimum for investing.  Really you should be thinking of 10 years unless you put together a moderately cautious set of investments.  The concern is that although the general trend is up there can be major crashes and you dont want to end up with less money than you started.

Alexland

Different platforms are better suited to different types of accounts, investment choices, valuations and contribution patterns so after enough years building up S&S investments you end up with lots of login details! While you can spring clean and consolidate there is often good reasons for keeping them separate.

ChilliBob

All good points guys, I guess 5 years was just chosen to convey I wasn't viewing this as a 6 month horizon.

Keen to know if any of you actually do this in place of paid employment, and if so how you 'simulate' a wage coming into your current account to pay for stuff like food/utilities etc?

Perhaps that's where buy to let comes in instead of investing in funds, or, if you have enough perhaps dividends, although I'd guess these usually tend to be annual and probably too small. 

Notepad_Phil

ChilliBob said:

Keen to know if any of you actually do this in place of paid employment, and if so how you 'simulate' a wage coming into your current account to pay for stuff like food/utilities etc?

Well I'm early retired so that would be me. I tend to take a once per year UFPLS from my SIPP which I keep in the best savings accounts I can find and then dip into as needed over the year.

ChilliBob said:

Perhaps that's where buy to let comes in instead of investing in funds, or, if you have enough perhaps dividends, although I'd guess these usually tend to be annual and probably too small. 

The money taken out has been generated via the dividends that the funds generate, some pay out once per year, others twice and some even pay out four times per year. Something like VWRL pays a dividend of 2% per year, whether that is too small for you depends on what your income needs are and how much you hold in VWRL.

Some people would sell down the funds they hold and then take the money out from those sells - but that does then need you to decide when to sell and perhaps when you should really skip the sell and live off other assets e.g. when stockmarkets have fallen significantly.