To consolidate or not to consolidate, that is the question. I suggested in a recent column that anyone who wants to cut the stress of investment admin tidies up their pensions and Isas.
You can do this by transferring to a single investment platform — essentially an online supermarket that, like a stockbroker, enables you to buy a range of funds, shares and other investments.
There’s a lot to consider before doing this, including checking any small print so you don’t incur high charges or miss out on any benefits attached to investments. But there is another important question about consolidation, namely does it significantly increase the risk of one’s platform being unavailable when you need it?
Like all financial firms, platforms and pension providers can go bust. Plus, in November the Financial Conduct Authority (FCA) highlighted wealth management and stockbroking firms (which includes the platforms) as an “inherently high-risk sector for financial crime”, castigating the sector for losing “significant [customer] sums to scams and fraud”.
Self-invested personal pension (Sipp) provider Rowanmoor collapsed last year under the weight of hundreds of complaints related to failed offshore investments. And the collapse of stockbroker Beaufort Securities in 2018 is still a painful memory for the sector as the administration costs of winding up the business hit customers.
In both cases the Financial Services Compensation Scheme (FSCS) was there to compensate investors. But how far does it really cover your investments held on a platform?
While you can’t claim for poor investment performance, the FSCS is there to protect you if a regulated provider goes out of business and there’s a shortfall in the money or assets it’s holding for you.
In theory you shouldn’t need the FSCS because if your broker goes bust you still own all your shares, funds and other investments on the platform. This is because customers’ assets are ringfenced and held separately in a nominee account — they are legally separate from the platform’s assets and liabilities.
However, detractors point out that this segregation is least likely to offer protection at the time you need it most. A firm on the edge of collapse may have shaky records that make it difficult to identify customers’ holdings or, worse, might be tempted to “borrow” client assets to tide it over.
When it comes to investments on platforms, the FSCS can pay up to £85,000 per person, per firm.
Exceeding the FSCS compensation limits by holding everything with one company is a big issue for wealthy investors. The ultra-cautious will want to diversify at every level, with some wealthy investors using myriad platforms to remain covered by the FSCS limit.
But this means you forgo all the advantages of consolidating. One might be extra cash. Some of the biggest platforms offer bonuses to new customers bringing in funds and existing customers who add to their investments. None of them want a customer base of lots of small investors, not least because it is trickier to administer. It’s in their interests to gather your assets, even if the FCA in its November letter asked chief executives to “ensure your consumers understand any limitations to the Financial Ombudsman/FSCS consumer protection status and associated risks of investments”.
A likely bigger advantage to consolidating is reducing fees by switching everything to a lower-cost platform — with even small annual cost savings amounting to substantial sums compounded over decades. You may also find you have greater control over your investments and a deeper understanding of your assets.
Plus, with a single line of sight, you may be better able to organise your investments to make them more tax efficient. Seeing the big picture can be difficult if you’re spread between a handful of platforms, unless you enjoy the admin and are a whizz with spreadsheets.
As a result, it’s not uncommon for platforms to host investment “millionaires” or even pension multimillionaires. Interactive Investor alone had more than 850 Isa millionaires at the last count.
One of the worst elements of a broker failure may be being out of the market and unable to trade your investments while the bureaucracy of unwinding the business unfolds. That would not be a pleasant experience even if you’re a “buy and hold” investor, particularly as there’s no formal timeframe on when you’ll be able to access them again.
Meanwhile, in the case of Beaufort Securities, investors were angered when they found that the administrator’s costs of winding up the business would be paid for with their supposedly ringfenced savings. The FCA really needs to eradicate this risk, however small it might be.
Wealth managers and financial advisers say they are frequently asked about consolidation and the risks. Their general response is something like: “Provided your investments are held via a reputable and financially robust stockbroker or platform there’s little reason to worry.”
Nevertheless, I’d ask to see your adviser’s due diligence on selecting a platform for you.
For those who undertake their own research, investor organisation ShareSoc recommends you focus on financially stable, large, UK-domiciled firms. Some investors may prefer a listed broker that provides announcements about its business activities and status. Those who are even more concerned might want to pay extra for a so-called Crest account, which allows them to “prove” their ownership of shares. I’m content with printing off a hard copy of my holdings once a year.
In the end, you may want to find the middle ground, and follow ShareSoc’s recommendation to “use more than one stockbroker”, that is, two.
But we shouldn’t have to compromise. Which brings me to conclude that the FSCS limit needs a review. Setting aside the fact it is woefully out of date — if it had risen in line with inflation since 2019, it would be well over £100,000 by now — it presents a barrier to platform investors moving to the best deal.
At the very least, it’s time to give retired investors drawing down from a Sipp held on a platform the same protection as is given to investors in annuities — namely 100 per cent of value with no upper limit.
Moira O’Neill is a freelance money and investment writer. X: @MoiraONeill, Instagram @MoiraOnMoney, email: moira.o’neill@ft.com
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