Would it be advisable to have my investments (Stocks and Shares ISAs) on 2 or more platforms to reduce that risk?

04 February 2022

Question by Gareth

Good evening,

All my investments (Stocks and Shares ISAs ) are currently with one platform provider. I have been thinking recently about the consequences of that provider failing as a business. Would it be advisable therefore to have my investments on 2 or more platforms to reduce that risk?

Thank you


Answered by Boring Money

Hi Gareth,

Your question is a common one and understandable; not having all of your eggs in one basket is something we were taught when we were children and does apply to your money too. Following the 2008/09 banking crisis spreading savings between banks and keeping balances below, the FSCS compensation limit of £85k is prudent. Spreading (diversifying) pensions and investments around the globe and in different assets is good practice too.

When it comes to the number of platforms you invest via, the benefit/risk reduction requires a little extra consideration. Firstly, the compensation limit for failed eligible platform providers and fund managers has also recently been increased to £85,000 per person per failed firm.

But, if you have a substantial pension and investment pot it can be a pain having your money spread around the place, it may also cause you to lose cost-saving benefits and reduce the clarity you have on your overall financial position.

Since the days of Equitable Life's failure, the robustness of regulation and the obligation on pension and investment providers to ensure the security of investors' assets has improved considerably. To the point that relying on the FSCS is more of an absolute last resort. There are a couple of layers of protection before you get to that.

Firstly, all providers need to be able to demonstrate ongoing solvency (capital adequacy) to the Financial Conduct Authority and Prudential Regulatory Authority (two regulators of pension and investment providers). They can't operate if they can't demonstrate ongoing financial security and it is a high bar to clear so you can be confident mainstream providers are all financially sound. However, some smaller niche SIPP providers have failed in the past, often because they have been caught up in riskier investments that have failed.

Secondly, both providers and investment managers (fund managers in which you invest) must separate client assets from their own assets. So, should one fail they can't use investor funds to bail themselves out. Firms have to use third-party custodians to segregate client funds and these tend to be banks and other large financial institutions that manage $bns globally.

If you are invested in funds that are based overseas you should make sure they are regulated in Europe and have a UCITS/SICAV structure. This provides EEA regulatory oversight and provides one of the highest levels of investor protection in the world. Popular fund managers like Vanguard operate in this way.

These days, the greatest risk to an individual's wealth is most likely to be through their own behaviour; not spreading their investments broadly enough, buying into the hype of a 'star' fund manager, investing in funds that promise high returns or guarantees or panicking and selling out during times of market turmoil.

I hope this helps.

Kind regards,

Andrew

Answered by

Boring Money