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Platform Concentration Risk ?

Investment discussion for beginners. Why you should invest your money, get help getting started
Relaxer
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Joined: January 16th, 2020, 5:07 pm

Platform Concentration Risk ?

#277900

Postby Relaxer » January 16th, 2020, 5:21 pm

Is there a risk in being too consolidated onto a single platform/distributor?

We have about 60% of our ISA savings on one of the big distributor platforms (2 accounts between myself and my wife). I am comfortable that the savings are well diversified between fund providers, funds, geographies, assets types etc. But I am becoming a bit concerned that we may have an exposure to the Platform itself. Few of the funds we are invested in are from the Platform's own Provider though.

To make matters worse, my largest occupational pension wound-up a few years ago and my pension was transferred to the same Distributor Platform. I also have a SIPP which I opened a few years ago with the same Platform. The end result is that 50% of my Pension assets are now with the same Platform as well.

Am I exposed to the Platform going bust ?

I guess that there are some people who will argue that diversification is essential at every level and would perhaps advise that I spread out over a couple more Platforms. There are consequences to diversification though in that fees are likely to be higher and there will be more overhead in Platform management and use (security, familiarity, avoiding mistakes etc) and possibly an increased risk of fraud as a result – I cant remember all of those passwords!

What should I do?

JohnB
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Re: Platform Concentration Risk ?

#277908

Postby JohnB » January 16th, 2020, 5:46 pm

Your holdings are ring-fenced from the platform's finances, so you are protected from incompetence, though not fraud of course, thought the latter is very unlikely. A bigger problem is that if the platform does get into difficulties you might lose access to your holdings for a period of time. perhaps 6 months, and be unable to trade or withdraw cash, which could be an issue.

I use 2 platforms, but for convenience while both have general unsheltered investments, one has the SIPP, the other the ISA. At the moment I have no plans to withdraw from either for 5 years, so access delays aren't a big thing.

Having lots of managers and lots of platforms may be safer, bit the admin, my dears!

SalvorHardin
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Re: Platform Concentration Risk ?

#277910

Postby SalvorHardin » January 16th, 2020, 5:58 pm

Relaxer wrote:I guess that there are some people who will argue that diversification is essential at every level and would perhaps advise that I spread out over a couple more Platforms. There are consequences to diversification though in that fees are likely to be higher and there will be more overhead in Platform management and use (security, familiarity, avoiding mistakes etc) and possibly an increased risk of fraud as a result – I cant remember all of those passwords!

1) Yes, it is a good idea to not have everything with the one platform operator once you go over the compensation limit. If they go bust, your investments should be safe as they are ring-fenced in nominee companies. The provider has no claim on them and neither do the provider's creditors. The problem is that your investments will be frozen in place for many months, during which time you almost certainly will be unable to sell them, transfer them elsewhere or draw cash from your account. There was a recent case (Beaufort Securities) where the administrators claimed some investors' assets to pay their fees because the broker had insufficient assets to meet these fees.

https://www.investorschronicle.co.uk/managing-your-money/2019/11/07/what-to-do-when-your-broker-goes-bust/

Then there's the risk of having everything in one place in that if there's a fraud then all of your assets are potentially exposed. The same goes if there is a systems failure where the audit trail of who owns what is compromised (e.g. terrible record keeping by the broker's back office).

In order to diversify my platform and custodian risk I use: three online brokers; a full service old school offline broker (they hold an ISA); several investment trust regular savings plans and ISAs held by the management companies; also hold twelve certificated holdings (these 12 represent roughly one-third of my portfolio). Yes it's a bit more administration and a bit more in fees, but I'm happy to pay the cost in time and money.

2) How to remember passwords? If you only need them at home and have problems in remembering them, write them down. Seriously, unless your home is likely to be compromised (e.g. a multi-occupancy dwelling, lodgers, dodgy relatives, etc.), write them down. See the links below:

"Microsoft security guru: Jot down your passwords. Jesper Johansson says the security industry has been giving out the wrong advice on passwords for 20 years."

https://www.cnet.com/news/microsoft-security-guru-jot-down-your-passwords/

https://www.vox.com/2014/4/16/5614258/the-best-defense-against-hackers-writer-your-passwords-down-on-paper

https://www.macworld.com/article/3006939/write-your-passwords-down-to-improve-safety.html

If you're really being paranoid, make sure that the accounts which use these key passwords are not easily identified from where you've written down the password. You could even make things even more secure by using a simple substitution cipher when you write it down, e.g. B means A, C means B, etc. (just remember the substitution!).


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