How Safe Is Your Money ?


The financial crisis prompted a significant reappraisal of just what constitutes ‘safe’ in financial services. Previously, few would have considered whether money held with a major institution, such as a high street bank, would disappear but the experience of Northern Rock forced a rethink. Since then, investors have been understandably cautious about how their money is held – and by whom.

These concerns, naturally, spread to investment funds – is money at risk if a fund manager goes bust?

While, in theory, the platform where assets are held or the fund management group can go bust – in both of these scenarios an investor’s money would be protected.

There is an important distinction here between a fund management firm and a bank – a bank holds the assets of its clients; platforms and fund management companies do not.

Money is held on the investor’s behalf by a custodian. Custodians are large, specialist institutions that focus solely on safeguarding a firm’s or individual’s financial assets. They do not engage in any traditional ‘banking’ activities such as lending and operate under strict regulatory constraints. Clients’ investments are ring-fenced from any failure by the platform or asset manager. If either falls into difficulty, the money is secure – the assets belong to the investor and creditors have no claim.

The custodian must be independent from the manager of the authorised fund and in the UK the custodian is not permitted to be part of the same corporate group as the manager.

 Of course this does beg one final question – what happens if the custodian collapses? This is a remote scenario. Custodians are forced to hold significant levels of capital and endure high regulatory scrutiny to ensure customers are fully compensated in the event of any problems. Of course, they are also selected with considerable care by the asset management groups who use them.

 It is, however, theoretically possible in the case of fraud but, in this scenario, holders would have recourse to the Financial Services Compensation Scheme. In all cases, the level of pay-out received from the scheme is the same – whether or not capital is spread among lots of different fund management groups or limited to just one.

The apparent insecurity of UK banks has left a legacy, but investment management is a very different industry and has long had checks and balances in place to safeguard assets in the event of a fund management group or platform getting into difficulties. Whether or not investment assets are held in one place or spread around, investors are well-protected.

If you would like more information on investment options, please contact us >>
Written by Sean O'Shea | Senior Consultant

Sean joined has been an IFA for over 20 years. Read more >>

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