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Issues when investment platform runs into financial difficulties
chriss8
Posted: 03 June 2018 21:52:10(UTC)
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The recent collapse of Beaufort Securities and the problems its investors are facing by not being able to access their investments for months while the firm is under administration and worse, losing part of their investment in order to cover the administrator's £55m fees, is a vivid reminder of the dangers with holding investments via online investment companies which may run into financial difficulties.

What is the feeling out there about the best way to protect oneself from this risk, investing via a larger (and probably more expensive platform?), spreading investments over a number of platforms (is that practical?), other ways?

I would appreciate your thoughts on the matter.
3 users thanked chriss8 for this post.
Mr Helpful on 04/06/2018(UTC), Keith Thomas on 05/06/2018(UTC), Michael Edwards on 05/06/2018(UTC)
Mr Helpful
Posted: 04 June 2018 13:19:31(UTC)
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Comes back IMO to Investment Rule No 1.
"Diversify, Diversify, Diversify"
and at every level possible.
Brokers, ETF providers, Fund Managers, Currencies, Asset Classes, Sectors, etc

As investors we are used to putting money at risk.
The broker issue à la Beaufort, is just another risk to be addressed.
Unrealistic to expect our best interests to be automatically safeguarded by other parties.

Own approach is to stray little above the £50k limit for less well financially backed brokers.
Where brokers backed by a major bank, content to hold rather more substantial amounts, but still spread monies around somewhat such that a failure would not be a life-changing disaster.

The recent comment in the Beaufort thread, about brokers carelessly encouraging consolidation, resonated!!!
4 users thanked Mr Helpful for this post.
John Grant on 04/06/2018(UTC), chriss8 on 04/06/2018(UTC), Tyrion Lannister on 05/06/2018(UTC), satish mittal on 05/06/2018(UTC)
Nigel G
Posted: 04 June 2018 13:29:45(UTC)
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chriss8;63323 wrote:
What is the feeling out there about the best way to protect oneself from this risk, investing via a larger (and probably more expensive platform?), spreading investments over a number of platforms (is that practical?), other ways?

Yes, yes and yes.

My SIPP and ISA investments are spread across a couple of the larger players, I have an account directly with Fundsmith, the bulk of my non-ISA shares are in a Crest personal account and I also hold some in certificated form.
3 users thanked Nigel G for this post.
chriss8 on 04/06/2018(UTC), Guest on 05/06/2018(UTC), Mike L on 06/06/2018(UTC)
Blue S
Posted: 04 June 2018 14:22:43(UTC)
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Totally agree with the diversification comments.
I use 5 different platforms - 2 for SIPPs and 3 for ISAs. These 5 are also major players.
I also have various other pensions with the life assurers.
For long term non-ISA/SIPP holdings such as VCTs I hold in certificate form.
The most I have with any one institution is around 15%. This is with one of the platforms and also with Blackrock (3xITs & 3x iShares ETFs)
I view the additional platform costs as an insurance payment. A 15% loss would not be a life changing disaster.
2 users thanked Blue S for this post.
chriss8 on 04/06/2018(UTC), john_r on 05/06/2018(UTC)
Law Man
Posted: 05 June 2018 16:44:10(UTC)
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Interesting prior responses.

I have all my SIPP and ISA money with HL. I have relied on the securities being held in a trust account. However, the Beaufort experience suggests that the administrators (?) are able to use the client money to pay creditors and administration expenses.

Any £50,000 compensation scheme (FCS?) will be inadequate for me and most others.

Any thoughts?
1 user thanked Law Man for this post.
Keith Thomas on 05/06/2018(UTC)
Tyrion Lannister
Posted: 05 June 2018 16:49:14(UTC)
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Mr Helpful;63354 wrote:
Comes back IMO to Investment Rule No 1.
"Diversify, Diversify, Diversify"
and at every level possible level.
Brokers, ETF providers, Fund Managers, Currencies, Asset Classes, Sectors, etc

As investors we are used to putting money at risk.
The broker issue à la Beaufort, is just another risk to be addressed.
Unrealistic to expect our best interests to be automatically safeguarded by other parties.

Own approach is to stray little above the £50k limit for less well financially backed brokers.
Where brokers backed by a major bank, content to hold rather more substantial amounts, but still spread monies around somewhat such that a failure would not be a life-changing disaster.

The recent comment in the Beaufort thread, about brokers carelessly encouraging consolidation, resonated!!!


Diversification vs costs is a dilemma.

Quite sensibly, we constantly reminded 1) to diversify and 2) to cut costs. In deciding how many brokers to use, it isn't possible to do both.
2 users thanked Tyrion Lannister for this post.
Michael Edwards on 05/06/2018(UTC), Mike L on 06/06/2018(UTC)
Tyrion Lannister
Posted: 05 June 2018 16:52:47(UTC)
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Law Man;63429 wrote:
Interesting prior responses.

I have all my SIPP and ISA money with HL. I have relied on the securities being held in a trust account. However, the Beaufort experience suggests that the administrators (?) are able to use the client money to pay creditors and administration expenses.

Any £50,000 compensation scheme (FCS?) will be inadequate for me and most others.

Any thoughts?


I'm in exactly the same position and it feels uncomfortable.

If you are going to chose just one broker, HL are probably the best one to chose. They are bigger than most and claim never to have been in debt and to have a positive cash flow.
Usuallycynical
Posted: 05 June 2018 16:57:40(UTC)
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The issue for me is to examine the platform itself. HL, ATS, AJ Bell etc. are all vanilla platforms which are continuously monitored for capital adequacy by the regulators and if they get into trouble are an easy business to sell on or wind down. Beaufort is a much more complicated business with various subsidiaries, including stock broking, and as a result of FBI investigation, will take quite a while to unravel (although PWC fee is disgraceful) and due to lack of ring fencing in this scenario means investors will lose out.

In short, stick to the platforms with simple well regulated businesses.

4 users thanked Usuallycynical for this post.
Tyrion Lannister on 05/06/2018(UTC), raybd on 05/06/2018(UTC), Alex Peard on 05/06/2018(UTC), Mike L on 06/06/2018(UTC)
David Trigg
Posted: 05 June 2018 17:10:43(UTC)
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AJBell claim to be debt free.

https://www.youinvest.co...g-your-investments-safe

If they are transaction only and solely trade with their custodian holding the electronic share certificates doesn’t that make them foolproof except for cash and their own funds?

I apologise if this is the naive statement of the century but grateful for confirmation.
Harry Trout
Posted: 05 June 2018 18:11:12(UTC)
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At 30 April 2018 HL reported assets under management of £88.8 billion.

Suppose client X has a portfolio worth £888k (to keep the mathematics easy)

If the government underwrites £50k, wouldn't the diminution in value of the separate trust that holds client X's portfolio need to be in excess of £5 billion before client X was affected?

I have assumed here that investors' accounts would be affected in proportion to their holdings, which seems reasonable?

I believe the compensation limit is going up to £85k from April 2019

Anything wrong with my logic?

Edit: For information, all my investments are with HL
Mr Helpful
Posted: 05 June 2018 18:11:26(UTC)
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Re post #9
AJ Bell is being lined up for an IPO.
http://citywire.co.uk/we...-172000-clients/a1100197
1 user thanked Mr Helpful for this post.
Mike L on 06/06/2018(UTC)
satish mittal
Posted: 05 June 2018 18:16:28(UTC)
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Hello,
I have been worried about this matter. The answers above does not help much but only worsen the worries. I tried to get the answers from Fidelity & Interactive Investor (iii) in the past but was not satisfied. I use Fidelity, iii, Jarvis, & a bit in HL but not to full guaranteed amount due to the expense. Has any one got a written reply from these firms or will an Ombudsman clarify the position.

I do not like merger of iii with TD. I think the web site is more complex, fees up and some agents rude.
There are no 'Vanilla platforms'; is there some regulators watching them? as mentioned above, or does absence of debt make them completely safe ? If so, there won't be sudden administration of big Cos. How does Fundsmith's position differs except that £ 80,000 will be guaranteed per person.
Satish
RichardT
Posted: 05 June 2018 21:32:55(UTC)
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I’m not too concerned. I think HL with whom I have SIPP and Isa (value greater than FCA compensation limits) is a very different sort of broker from Beaufort which specialised in AIM stocks, miners and, if US claims are to be believed, engaged in some highly dubious practices. This is what HL has to say: http://www.hl.co.uk/secu...afe-is-your-investment. I imagine the other big players would say something similar.
3 users thanked RichardT for this post.
Tyrion Lannister on 05/06/2018(UTC), Haleric on 06/06/2018(UTC), C Blockley on 06/06/2018(UTC)
David Trigg
Posted: 05 June 2018 21:43:05(UTC)
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Thank you Mr Helpful - much appreciated. I just wondered at the logic of my thoughts. Am I correct?
andyT
Posted: 05 June 2018 22:59:42(UTC)
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I agree with the concern expressed. I recognise the risk in investing but incorrectly assumed client accounts meant that the client owned the asset. There are solutions:-

1] FCA or someone tells us we are correct that client accounts cannot be raided by providing proper protection.
2] We all open personal CREST accounts
3] An insurer agrees to set up a policy that covers for platform failure (I would be happy to pay a premium for this)
4] The compensation scheme is used to pay up to 50k per customer. In Beauforts case that means no individual loses out unless the average investment exceeded 50K
2 users thanked andyT for this post.
john brace on 06/06/2018(UTC), Mike L on 06/06/2018(UTC)
Jon Snow
Posted: 06 June 2018 00:13:04(UTC)
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I'm not clear about what actually happened at "Beaufort securities", maybe worth understanding the details before I/we sell out of our HL accounts.

Anyone ...
Harry Trout
Posted: 06 June 2018 06:02:30(UTC)
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Continuing with a (very) broad brush approach .....

Putting to one side that the failure of the HL core business is incredibly hard to imagine, with £89 billion of client assets under trust and 1 million clients then the average client has £89k of assets under management.

I think this means that with the limit increasing next year the average HL investor is largely covered.

For larger holdings (as per my post above) the scale of the winding up costs would have to be astronomical before a material loss occurs? This assuming that the vast majority of client assets will be highly liquid, which I think is a reasonable assumption?

Having said all that, and despite being a fan of HL and a shareholder, I may well diversify a little just for belts and braces. I like the idea of Fundsmith's own product and possibly Vanguard for Vanguard World VWRL.
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Rishan on 06/06/2018(UTC)
S_M
Posted: 06 June 2018 06:03:09(UTC)
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Jon Snow;63449 wrote:
I'm not clear about what actually happened at "Beaufort securities", maybe worth understanding the details before I/we sell out of our HL accounts.

Anyone ...


Beaufort Securities was a discretionary fund manager as far as I am aware, it’s hard to see if they offered an execution only service using a platform that is similar to the major players in the market , the key issue is how client money was held.

If it was ringfenced, in a third party trust then the creditors can’t touch client assets. I suspect from the limited information available that isn’t the case.

One thing this does highlight in my opinion is the need to carry out due diligence before selecting any platform, especially the niche players. A financial adviser would detail in any suitability report the financial strength and capital adequacy of his recommendation. By taking our own responsibility for our financial decisions, we should really follow similar guidelines.

HL give a perfectly good explanation of the investors compensation scheme and how client assets are ringfenced. They are much maligned for their charges, but at all levels offer the standout platform proposition in the UK.

The key concern for investors on a stable platform is what would happen if a bank or investment house fails.
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Mike L on 06/06/2018(UTC)
Mike A.
Posted: 06 June 2018 06:46:43(UTC)
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"If it was ringfenced, in a third party Trust then the creditors can’t touch client assets. I suspect from the limited information that is available that isn’t the case. "
As a dumb Beaufort investor, within my 'due diligence' I read within the Beaufort Sipp Terms & Conditions that (3.2 (Scheme Structure) the 'Scheme has been established and governed by Trust Deed and attaching rules..... and so on. So I understand, the problem stems from assets being held in a nominee account (in this case, Beaufort Asset Clearing services) It clearly states (3.3) the trustee will hold the individual fund in its name etc etc, and will administer the scheme within the trust rules etc etc.
You would have thought that would suggest the funds would be safe. Alas not, as I now know.
Sara G
Posted: 06 June 2018 07:22:51(UTC)
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Looking at what the FCA is saying about Beaufort (https://www.fca.org.uk/news/news-stories/information-customers-beaufort-securities-limited-bsl-and-beaufort-asset-clearing-services-limited) it would appear that wind-up costs are covered by the £50K and that 90% of Beaufort clients will therefore get all of their money back with no costs deducted.

While not ideal, given than 10% if clients will lose money, this suggests to me that rather than limit holdings to £50K per platform (as I had feared might be necessary), an individual's pot could be substantially more than this and still be returned in full (assuming that the assets held are fairly liquid and not lost through fraud).

I am looking a bit more closely at Interactive Investor though... HL make a point of emphasising that they have no debt that would increase wind-up costs, and I'm not sure if the same would apply to ii following the TD acquisition, although they do say they are a financially strong company.
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satish mittal on 07/06/2018(UTC)
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