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How safe are fund supermarkets?

Investment | Unit Trusts Helpful? 28

Asked by hdeakin299, submitted 24 January 2011.

Open Quote Fund Supermarkets have been discussed here on this site recently.

One drawback is that they offer a lot of choice but the investor protection is still set at the level of "one provider" rather than being multiplied by the number of funds they offer ! (I wish!!) .They offer so much but "investor protect" so little !!

To mitigate this I tried a bit of investor "exploration" in January last year and tried some new fund supermaket "vehicles": one of which a Fund Supermarket called JP Morgan Wealthmanager Plus. I think I pay £3 a month fee: so far I have only made a small investment to see how it works. So far it seems OK.

Do investors really need to worry about investor protection limits with fund supermarkets and diversify like this ?. Is the kind of "small scale" diversification that I have been doing a bit of a waste of time? How many fund supermakets does one investor need?

The word "platform" leaves room for the idea of a "super station" where all the "investor protected" platforms can be parked in one place : Is this possible yet?.

The idea of all investments in one place is used a powerful advertisement by the providers to draw in business but ultimately it is undone by the miserly investor protection offered by each. Are fund supermarkets still in an early stage of development or will these "investor protection" aspects improve in the future?
End Quote

Answered by Justin on 25 January 2011

Let's start by answering your main question: the extent you're protected when using a fund supermarket versus holding your investments directly with fund providers.

Two elements of protection apply when using fund supermarkets:

1. The fund supermarket platform itself should be covered by the Financial Services Compensation Scheme (FSCS), giving you 100% protection on the first £50,000 invested.

2. The funds that you hold within the fund supermarket should also be covered by the FSCS, giving £50,000 of protection per fund management company.

[While fund supermarkets and onshore funds are invariably covered by the FSCS, it's always worth double checking in the relevant 'key features document' if unsure.]

The fund supermarket protection relates to the investment platform itself, not the underlying funds. Is there a risk a platform could vanish with your money? Very little.

When you hand over a cheque to a fund supermarket they place the money in their nominee account, then use it to buy units in your chosen fund(s) in their name with you as the beneficial owner. The nominee account must be held separately from the platform's own business and supervised by a 'custodian' to ensure it adheres to FSA rules.

If a fund supermarket goes bust then the nominee account should be unaffected and your underlying funds can be re-assigned to you. In the unlikely event that an insolvent fund supermarket has dipped its fingers into the nominee account then the FSCS would step in and pay compensation.

Provided you use a reputable fund supermarket/platform then I wouldn't lose sleep over having more than £50,000 (the amount covered by the FSCS) invested. Although, of course, you can never say never.

The situation is similar for the funds themselves too. Unit trusts must hold your money in trust, which effectively ring-fences it from the fund management company. So if the fund manager goes bust your fund investment should be unaffected. If anything untoward did happen then the FSCS would apply.

So to summarise. Fund investments covered by the FSCS are eligible for up to £50,000 compensation per fund management company. And the fund supermarket in which they're held is covered for up to £50,000 overall, but for failings at the platform level and not the underlying funds.

In an ideal world you'd use just one fund platform, as the benefit of simplifying administration is lost somewhat if you use several platforms. Much easier to hold everything on one place.

If you're holding more than £50,000 on a platform and don't fully trust it then by all means diversify. But personally I prefer to use just one or two platforms whom I trust not to dip their fingers into my pocket. The same goes for funds too, although you'd have to have a pretty large portfolio to justify holding more than £50,000 per fund group in any case.

It's quite straightforward to view holdings from several platforms on one screen (Bestinvest, for example, has long done this), but switching funds from one platform to another is less straightforward, especially until platforms are forced to allow 're-registration' of funds between each other (due by 2013). So I think there's currently little incentive for anyone to develop a 'platform of platforms'.

Please note this answer does not constitute a recommendation or financial advice and should not be relied upon when making specific investment or other financial decisions. You should always undertake your own research into whether a product or service is appropriate for your needs and, if necessary, use a qualified professional adviser.

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