Risk & Allocation
What happens to your holdings if a provider fails
Investments held through a platform are generally kept separate from the firm's own assets, and the protections that apply differ from those covering cash deposits.
The failure of an investment provider is a different event from the failure of an investment. The arrangements protecting holdings in that situation are structural rather than compensatory.
Segregation is the primary protection
Client assets are generally required to be held separately from a firm's own assets, so they do not form part of what creditors can claim if the firm fails.
In practice holdings are registered in a nominee arrangement, with records identifying which client owns what. The firm administers them without owning them.
That structure is the main defence, and it operates before any compensation scheme becomes relevant. The assets remain the client's throughout.
Record-keeping is where the risk sits
Because ownership is evidenced by records rather than by direct registration, the quality of those records determines how straightforward recovery is.
Where records are accurate, an administrator can identify holdings and transfer them to another provider. Where they are not, reconciliation takes time and can produce shortfalls.
Delays are the more common experience than losses. Assets remain identifiable while access to them is suspended during the administration process.
Compensation schemes cover the gap, not the market
Many jurisdictions operate schemes that compensate for losses arising from a firm's failure, up to defined limits and subject to eligibility conditions.
These cover shortfalls attributable to the firm rather than falls in the value of investments. A holding that lost money in the market is not a claim on such a scheme.
Limits, eligibility and what counts as a covered claim vary by jurisdiction and change over time, so the applicable terms are those published by the relevant scheme.
Cash is treated differently from investments
Money held as cash within an investment account is usually deposited with banks, which introduces exposure to those banks rather than to the platform.
Deposit protection operates under different rules and different limits from investor protection, and which applies depends on how the cash is held.
Providers disclose where client cash is deposited. For anyone holding substantial uninvested balances, that disclosure is worth locating once.
Concentration across providers is a judgement
Spreading assets across providers reduces exposure to any one failing and multiplies fixed charges and administration, which is a genuine trade rather than a free precaution.
The likelihood of the event is low and its consequence is usually delay rather than loss, which is why the calculation is not the same as diversifying investments.
What is worth doing regardless is knowing which firm holds what, since that information is exactly what becomes urgent and hard to reconstruct in the situation it describes.
Questions readers ask
Is a target date fund a good default?
For somebody who would otherwise never adjust anything, it does a job that would not otherwise get done. It is weaker where a lot of your wealth sits outside it.
What does to versus through mean?
Whether the fund stops adjusting at the target date or continues reducing risk for years afterwards. The two produce quite different allocations on the day you retire.
