The Lemon Fool

Hi all,

I’ve recently started about thinking about sensible investment protection and the FSCS, and it’s made me think about the way to invest. If you have say £240k in cash in banks you would be advised to split it across 3 banking groups with £80k in each to gain full FSCS cover. Should I be looking at trackers the same way?

I use the AJBell platform and invest in predominantly a Vanguard world tracker, nice and simple. Looking ahead if I got that fund up to £240k for arguments sake should I really be looking to split that into 3 equal trackers - say a Vanguard, Fidelity and an ishares for example. Same question if someone had £1m in a world tracker should they really hold it across about 12 trackers?

Am I over thinking this or is this what people do?

Follow up question, I have VEVE and I’m happy with that as a tracker, if splitting it out is the way to go what would the best alternatives that track identical index’s?

Interested to hear your thoughts

Thanks Gumble

Gumble wrote:H If you have say £240k in cash in banks you would be advised to split it across 3 banking groups with £80k in each to gain full FSCS cover. Should I be looking at trackers the same way?

No

There are numerous threads on this site discussing the fundamental differences between FSCS protection for deposits as against FSCS protection for investments.

Alaric wrote:

Gumble wrote:H If you have say £240k in cash in banks you would be advised to split it across 3 banking groups with £80k in each to gain full FSCS cover. Should I be looking at trackers the same way?

No

There are numerous threads on this site discussing the fundamental differences between FSCS protection for deposits as against FSCS protection for investments.

https://www.ii.co.uk/about-us/your-protection
https://forums.moneysavingexpert.com/di ... -platforms

In theory, all your investments are held in nominee accounts and 'ring-fenced' so therefore protected, but I believe there are, in theory, circumstances where a company dealing with a broker going bust may have the right to access some of these funds if there's nothing left.

https://www.fosterdenovo.com/my-resourc ... -happened/

Re. FSCS protection, it's also important to be aware of who owns what. e.g. Since Halifax is in the same group as BOS and i-Web, you should avoid having accounts with two of them since there will be only one £85k protection limit applied. Although all of these are also in the Lloyds group, I think that Lloyds has a separate licence, but not sure. Likewise for HSBC and First direct, RBS and NatWest etc.

The general feeling is that the chances of your investments/ssISAs being stolen by the manager in a large briefcase or disappearing overnight are pretty close to zero.

I'm sure someone will be along shortly to point any errors. Hope so!

Steve

PS It's become clear over the years that although banks drone on about their obligations wrt AML, KYC etc, it is far more important for the customer to do their own AML, KYB and due diligence!!

Diversification is better than a single concentration risk factor. FSCS protections may not include covering fraud, which is the more probable, albeit very low risk factor. Money 'deposited' into a bank nowadays becomes the banks money. Shares bought are bought in the brokers name. Regulations insist they be ring-fenced, fraudsters typically target weaknesses. Some brokers have custodial ring fencing of the shares with agents who are under the same umbrella, have a common potential weak-point. However low the risk may be the question should be if that risk were to arise how would you stand - and the solution is diversification of assets, currencies and geopolitical risk factors.

The ancient Talmud millennia ago advocated that for safety one should diversify around equally across burying in land, business/merchandise and in-hand. In present day terms perhaps a third in a UK home, a third in US$ invested in US stocks, physical gold stored in another geopolitically diverse region (Australia, Singapore, wherever). Entirely losing a third would be uncomfortable, but isn't financially fatal, even single assets such as a stock index can at times lose a third in a single year.

1nvest wrote:Diversification is better than a single concentration risk factor. FSCS protections may not include covering fraud, which is the more probable, albeit very low risk factor. Money 'deposited' into a bank nowadays becomes the banks money. Shares bought are bought in the brokers name. Regulations insist they be ring-fenced, fraudsters typically target weaknesses. Some brokers have custodial ring fencing of the shares with agents who are under the same umbrella, have a common potential weak-point. However low the risk may be the question should be if that risk were to arise how would you stand - and the solution is diversification of assets, currencies and geopolitical risk factors.

The ancient Talmud millennia ago advocated that for safety one should diversify around equally across burying in land, business/merchandise and in-hand. In present day terms perhaps a third in a UK home, a third in US$ invested in US stocks, physical gold stored in another geopolitically diverse region (Australia, Singapore, wherever). Entirely losing a third would be uncomfortable, but isn't financially fatal, even single assets such as a stock index can at times lose a third in a single year.

equally across burying in land

Aha! A clue as to where you hide your gold?

Agree totally about diversification but it didn't really register till after the financial crisis, when I started to read about Asset Allocation. I haven't looked back since.

I would never include my own home as part of my investments, though I accept that not everyone agrees and we could argue till the cows come home.

However, when you say a third in US$ invested in US stocks do you mean actually held in the USA or via UK brokers? Just that if there were to be a revolution in the UK, I guess that my ii and AJBell ITs invested in the USA would be of no use whatsoever.

Steve

Here is recent thread on a more appropriate board:

viewtopic.php?f=88&t=36869

The bottom line here is keep each account down to £1 million if you can. Sitck to the big online brokers that are owned by bigger financial services companies. Stick to big global fund managers. Do not be scared of your own shadow.

GeoffF100 wrote:Here is recent thread on a more appropriate board:

viewtopic.php?f=88&t=36869

No. You, like the other respondents, have not properly read the OP and what they are asking.

0/10 the lot of you! Try again.

Gumble, while the world has taught us that it'd be foolhardy to dismiss any such concerns as zero risk, I think for major providers such as Vanguard and iShares the risk is very very small. OTOH the cost of "insurance" in splitting across more than one, with sizeable holdings, is also very small and if it helps you sleep at night, why not?

Indeed, I did much that with my SIPP, which is all trackers/ETFs. Well, if you count Vanguard LifeStrategy as a tracker, which is the "core" and biggest holding, and when I started to consider other passives to put around it I specifically decided to look at iShares offerings instead just to not have the whole SIPP egg in the Vanguard basket, so to speak.

I didn't do it 'cos of the FSCS limit though, and I certainly wouldn't suggest looking for 12 tracker providers for a £1m portfolio. Aside from anything else that's likely to push you into looking at less inherently safe providers; just go for two or three really big'uns.

mc2fool wrote:

GeoffF100 wrote:Here is recent thread on a more appropriate board:

viewtopic.php?f=88&t=36869

No. You, like the other respondents, have not properly read the OP and what they are asking.

0/10 the lot of you! Try again.

Gumble, while the world has taught us that it'd be foolhardy to dismiss any such concerns as zero risk, I think for major providers such as Vanguard and iShares the risk is very very small. OTOH the cost of "insurance" in splitting across more than one, with sizeable holdings, is also very small and if it helps you sleep at night, why not?

Indeed, I did much that with my SIPP, which is all trackers/ETFs. Well, if you count Vanguard LifeStrategy as a tracker, which is the "core" and biggest holding, and when I started to consider other passives to put around it I specifically decided to look at iShares offerings instead just to not have the whole SIPP egg in the Vanguard basket, so to speak

I didn't do it 'cos of the FSCS limit though, and I certainly wouldn't suggest looking for 12 tracker providers for a £1m portfolio. Aside from anything else that's likely to push you into looking at less inherently safe providers; just go for two or three really big'uns.

Bang on Mc2fool, exactly the point and glad the answer wasn’t to buy numerous funds (not that I have £1m yet!). Thank you for your comments which are pretty much in line with what I’m doing anyway using the common sense approach so my Gold tracker is with invesco (my only other fund alongside VEVE and cash (below £85k cash).

All the same some useful comments from others, asset allocation/diversification etc… which I like to think I do well and like to think about so comments and suggests are always good to hear.

Stevensfo/1nvest, appreciate the long well written responses, always good to read up on as much as possible, I’m not worried about either AJ Bell or Vanguard but did start wondering if people did split out investments. Interestingly the 3rd/3rd/3rd split one of you mentioned is not a million miles off my own strategy (BTL property/index Trackers/Gold)

Thanks all

In my case, I do not believe there is an issue. I have an unshelered holding of Vanguard Developed World ex UK (managed by Vanguard UK). VEVE in my SIPP (managed by Vanguard Ireland). My ISA has three Vanguard funds, Ireland and UK based. Each Vanguard fund is said to be managed by a separate organisation with a "fire wall" around it. I also have gilts, NS&I, deposits with a dozen banks, and a holding of Royal London money market fund. That is pretty safe. Even if you have separate fund managers, they may use the same custodian. In the UK, we have only two registrars.

stevensfo wrote:

1nvest wrote:Diversification is better than a single concentration risk factor. FSCS protections may not include covering fraud, which is the more probable, albeit very low risk factor. Money 'deposited' into a bank nowadays becomes the banks money. Shares bought are bought in the brokers name. Regulations insist they be ring-fenced, fraudsters typically target weaknesses. Some brokers have custodial ring fencing of the shares with agents who are under the same umbrella, have a common potential weak-point. However low the risk may be the question should be if that risk were to arise how would you stand - and the solution is diversification of assets, currencies and geopolitical risk factors.

The ancient Talmud millennia ago advocated that for safety one should diversify around equally across burying in land, business/merchandise and in-hand. In present day terms perhaps a third in a UK home, a third in US$ invested in US stocks, physical gold stored in another geopolitically diverse region (Australia, Singapore, wherever). Entirely losing a third would be uncomfortable, but isn't financially fatal, even single assets such as a stock index can at times lose a third in a single year.

equally across burying in land

Aha! A clue as to where you hide your gold?

Agree totally about diversification but it didn't really register till after the financial crisis, when I started to read about Asset Allocation. I haven't looked back since.

I would never include my own home as part of my investments, though I accept that not everyone agrees and we could argue till the cows come home.

However, when you say a third in US$ invested in US stocks do you mean actually held in the USA or via UK brokers? Just that if there were to be a revolution in the UK, I guess that my ii and AJBell ITs invested in the USA would be of no use whatsoever.

Steve

The buried in land is one translation of the original written recordings of the Talmud advice. Some suggest that to have indicated owning land, others as burying in the ground. In the broader context they were discussing security, so IMO advising to keep a third in-hand, a third in merchandise/investments, a third hidden away such as being buried.

Some holders of gold do actually bury a chunk of their gold in their back garden in water-tight/sealed tubing or suchlike.

If you hold physical gold that is stored outside of the country, and own UK land/home, then a Irish ETF holding a US stock index fund is perhaps diversified enough, no need to hold US$ in a US broker that holds US stocks. There can be complexities if you do directly hold US assets, such as more than $60K or so (IIRC) value and in the event of death you (or rather heirs) have to file for US Estate Tax before the assets/value will be released. Under UK/US tax treaty we get the same generous north of $10 million allowance before any estate tax (inheritance tax) falls due, but you have to file the correct forms at the correct times, or otherwise fall outside of US/UK generous tax treaty benefits. A Irish domiciled ETF avoids all of that, but in turn could see rules change where EU/UK reporting/whatever might not remain as free/easy as it was when we were in the EU.

If instead you were holding Gold ETF, US stock ETF, Bond ETF, then if all listed/recorded with a single broker and traded in a single market .. then that has single factor concentration risks, that as small as the risks may be if ever it did present could be a major issue. You deposit cash with a broker, who then buys the funds that you like - in the brokers name, that if all via say Vanguard UK has single fund provider risk. Whoops the brokers director has done a midnight disappearance trick and he had influence/control over both the brokerage and custodian (name/account in which the actual shares are held), and all the records for what assets the custodian actually held, along with the records that associate to individual investors - have all also disappeared. Or suchlike event. Billions lost to fraud, FSCS refuse to compensate as the incident was a fraud, whilst the director has a new identity and is living it large in a country that has no extradition agreement with the UK.

A further consideration is the probability of failure. A UK investment platform becomes insolvent every few years. The have been countless thousands of OEIC and Unit Trust managers and many times as many funds. As far as I know, there has never been an insolvency cased by anything other poor performance of the underlying investments. The risk of being shot dead in the street is much larger. Do you always wear body armour when you go out?

Probably your biggest practical problem as a retiree is maintaining a continuing cash flow if problems occur
A platform or fund getting into difficulties will be sorted eventually by its compatriots providing you stick to mainstream products
However this might take some time
Most retirees keep 2-5 years of living expenses in cash or equivalents- it might be wise to have 2 or 3 providers so you don’t run out of money if one of these has problems
xxd09

GeoffF100 wrote:A further consideration is the probability of failure. A UK investment platform becomes insolvent every few years. The have been countless thousands of OEIC and Unit Trust managers and many times as many funds. As far as I know, there has never been an insolvency cased by anything other poor performance of the underlying investments. The risk of being shot dead in the street is much larger. Do you always wear body armour when you go out?

My understanding is the if AJBell were to become insolvent, then my underlying holdings would be transferred to whomever takes over, and the cash I have held by AJBell would be protected by FSCS as long as it is under £85k. This is referring to SSIP and ISA accounts. So I want concerned by that potential outcome. My reason for this thread was suddenly thinking ‘however unlikely what is vanguard were to become insolvent’. Wasn’t a worry as such more I wanted to check I was not doing something stupid by having say £250k in a single vanguard tracker, I think yours and others comments have put my mind at rest that this is fine.
Incidentally glad you answered as you are one who helped focus me a year or so ago when I was holding several funds without clear direction (many BG funds and others), since simplifying my strategy to passive investing I’ve felt a lot more at ease and have been able to just let things run rather than panicking about market movements. I’m in for the long haul now, so thank you for that.

xxd09 wrote:Probably your biggest practical problem as a retiree is maintaining a continuing cash flow if problems occur
A platform or fund getting into difficulties will be sorted eventually by its compatriots providing you stick to mainstream products
However this might take some time
Most retirees keep 2-5 years of living expenses in cash or equivalents- it might be wise to have 2 or 3 providers so you don’t run out of money if one of these has problems
xxd09

It’s a good point, I’m mid 40s so not needing to think about that as yet, so for now will stick with a single platform and see if my memory in 15 years kicks in a reminds me of this information. Although I would hope that other non stock investments see me through anything like that… so in theory my eggs are in different baskets by the fact I have property too.

xxd09 wrote:Probably your biggest practical problem as a retiree is maintaining a continuing cash flow if problems occur
A platform or fund getting into difficulties will be sorted eventually by its compatriots providing you stick to mainstream products
However this might take some time
Most retirees keep 2-5 years of living expenses in cash or equivalents- it might be wise to have 2 or 3 providers so you don’t run out of money if one of these has problems
xxd09

I thought I had posted a reply.... that has been lost, but this sums up all you need to know in a succinct manner.

I go for three providers, provided less than £1m per provider , multiple product providers, minimum all 3 major ETF providers, have plenty of liquid assets to keep you afloat pending resolution of any problems.

Gumble wrote:My understanding is the if AJBell were to become insolvent, then my underlying holdings would be transferred to whomever takes over, and the cash I have held by AJBell would be protected by FSCS as long as it is under £85k. This is referring to SSIP and ISA accounts.

Actually that's only true for cash "in transit" as AJBell shouldn't hold any client money itself, except in transit. For those funds the FSCS £85k applies. However, if it is following normal practice then non-in-transit client money should be spread and deposited between at least 5 banks, so the cash you have "with" AJBell should be returned in full and FSCS just wouldn't apply.

The unexpected flip side of this is that if, say, 1/5th of the client money held "with" AJBell is deposited in, say, Barclays, and Barclays goes belly up, then AJBell will tell all its clients that 1/5th of their money has disappeared and they should apply to the FSCS for compensation for the Barclays failure, and their £85K will be netted against whatever other deposits they may have with Barclays. And the problem with that is that most (all?) brokers won't tell you who they deposit client funds with, probably 'cos it changes regularly.

Gumble wrote:My reason for this thread was suddenly thinking ‘however unlikely what is vanguard were to become insolvent’. Wasn’t a worry as such more I wanted to check I was not doing something stupid by having say £250k in a single vanguard tracker

Stupid, no, but I think a lot depends on context. If the £250K is your whole invested wealth then I'd say why not take "insurance" against the however unlikely event by simply splitting it between the Vanguard tracker and the same tracker with iShares, it's very cheap to do so....

Specifically, If I invested

100k in fund 'Vanguard LifeStrategy' via Fidelity
100k in fund 'Fundsmith Equity Fund' via Fidelity
100k in 'Vanguard LifeStrategy' via Hargreaves Landsdown
100k in 'Fundsmith Equity Fund' via Hargreaves Landsdown

1) If Vanguard went bust what compensation would I get from the FCA
2) If Hargreaves Lansdown went bust what compensation would I get from the FCA
3) If the above accounts were joint (Mr & Mrs) what compensation would be received for 1 & 2 above

Thanks in advance
Cheers
Binlid

Binlid wrote:Specifically, If I invested

100k in fund 'Vanguard LifeStrategy' via Fidelity
100k in fund 'Fundsmith Equity Fund' via Fidelity
100k in 'Vanguard LifeStrategy' via Hargreaves Landsdown
100k in 'Fundsmith Equity Fund' via Hargreaves Landsdown

1) If Vanguard went bust what compensation would I get from the FCA
2) If Hargreaves Lansdown went bust what compensation would I get from the FCA
3) If the above accounts were joint (Mr & Mrs) what compensation would be received for 1 & 2 above

Vanguard is the second largest fund manager on the planet, after Blackrock. Fidelity is probably 3rd or 4th. On top of that fund management is a low risk business since it does not need a lot of capital nor leverage.

So frankly if Vanguard or Fidelity failed you have probably got a lot of other things to worry about. I would guess that they are more solvent than the FSCS/FCA.

Hi Lootman,
Thanks for your reply but that doesn't answer my question
Thanks
Binlid

Binlid wrote:Specifically, If I invested

100k in fund 'Vanguard LifeStrategy' via Fidelity
100k in fund 'Fundsmith Equity Fund' via Fidelity
100k in 'Vanguard LifeStrategy' via Hargreaves Landsdown
100k in 'Fundsmith Equity Fund' via Hargreaves Landsdown

1) If Vanguard went bust what compensation would I get from the FCA
2) If Hargreaves Lansdown went bust what compensation would I get from the FCA
3) If the above accounts were joint (Mr & Mrs) what compensation would be received for 1 & 2 above

Thanks in advance
Cheers
Binlid

Probably none, in all cases, even if we assume you mean the FSCS, not the FCA. Because, as has been explained, the assets in the funds are not part of the assets of Vanguard or HL. There could be delays in cashing them in, bit I don't think you'd get compensation for that.