The Administration and Safe Custody of Client Assets
When clients are choosing the financial advisory firm with whom they wish to form a relationship, they are quite rightly concerned to understand the credentials of the organisation that will be looking after their wealth.
At this point, many individuals fall prey to several common misconceptions and wonder whether they might be better served by working with a ‘household name’. The three most common misconceptions make up what we describe as ‘The Big Brand myth’:
1. Security
The first misconception which investors can have is that their money will somehow be ‘safer’ when it is being advised on or held by a big company.
This can happen because investors may not be fully aware of the laws that govern the way assets are held in custody. They may form the impression that a specialised adviser may somehow be less ‘credit worthy’ than a large corporate institution. In turn, this causes them to worry that if the specialised firm encounters financial problems then their personal wealth may be at risk. This misconception is completely incorrect.
Firstly, at Fensham Howes we never take direct possession of your money or assets. Our relationship with you is advisory - we do not seek authority to trade on your behalf. Your money therefore always remains safe in a custodial account in your name, operated and overseen by a professional custodial firm.
Secondly, we do not make any changes to your investment portfolio without first obtaining your agreement as part of our ongoing dialogue and advisory relationship. You never have any surprises about what investments you own and how you came to own them.
Thirdly, the custodial firm we currently use is Transact, a well established specialist in this field with over £3 billion under custodial arrangements in the UK. More information on Transact, and on how the custodial arrangements work, is given below.
Finally, it is also worth noting that as a client of Fensham Howes you are protected to the full extent of existing UK financial services regulation, just as you would be with any large firm.
2. Performance
By far the most significant risk to your money relates to the performance of your investments. The second misconception common amongst investors is that getting advice from a big company or a household name will somehow guarantee investment results. This is simply not the case. Investment results are determined by investment philosophy, portfolio structure, and the associated costs. And no large company will guarantee your investment results – unless the expected return is commensurately low (for example a fixed rate short term bank deposit account).
In addition, larger ‘branded’ firms will often direct you to their ‘in-house’ investment products which may involve inefficient active management strategies and very high levels of internal fees and charges. At Fensham Howes we have no such conflicts of interest. We consistently focus on offering you sound, impartial and academically verified solutions in the key areas of importance.
3. Service
Large companies often try to project an image of consistency and ‘brand standard’ to the public at large. The basic idea is to instil confidence in you that the large institution will somehow provide a consistent level of individual attention and care, regardless of which member of the department is ‘assigned’ to your case. Unfortunately the opposite is often true, with perennial high staff turnover in departments resulting in a different person picking up your file from one year to the next.
At Fensham Howes we operate in a close-knit environment, where your affairs are truly understood by a number of key people in the team – this, we believe, is the best way to offer you true continuity of service.
More information on Transact
Transact is a specialist investment administration company that acts as the “custodian” for many of our clients’ assets. The process of investment typically involves four parties:
- you (the client)
- us (the adviser)
- the custodian
- the fund manager(s)
The custodian acts purely as an administrator of the investments (ensuring that deposits are correctly invested, the right tax is paid, income is paid out when requested, et cetera), and charges a fee for providing these services.
It is important to note that your money is not actually being invested into Transact itself, all direct investments are made into funds managed by professional fund managers. It is the role of Transact to administer and hold these different fund investments within your various accounts (ISA, PEP, pension, et cetera).
In the past, the provider of custodian services and fund management were often the same company. For example, if you took out a Norwich Union ISA then Norwich Union would be administering the ISA and also providing the investment vehicles into which your money could be invested. This approach can present disadvantages as it often means that you could only chose from a limited number of funds, restricting your ability to pursue a co-ordinated and properly diversified investment strategy.
However recent developments in the financial services industry have meant that these two roles can now be separated. We believe this is a large step forward, as it means for the first time that you can consolidate all of your holdings (pensions, ISAs, PEPs, bonds, et cetera) with a single administrator, but still have access to an unrestricted range of investment funds.
Fensham Howes recommends using Transact as the custodian for our clients’ assets, as in our opinion they are currently the leading organisation in the UK offering this service. Crucially, they also offer you access to passively managed institutional asset class funds that are not available through many other providers of custodian services. The decision to use Transact is regularly reviewed to ensure that we are always using the best custodian services available.
Who holds the assets? How do I know if they are safe?
When you invest using Transact, all assets are held in the name of a nominee company, Transact Nominees Limited, which is a 100% subsidiary of Integrated Financial Arrangements plc. The safety of those assets is described below.
So, what safeguards are there?
Firstly, it is worth describing the nature of custody in relation to Transact's activities.
Virtually all assets are ‘dematerialised’; that is, there is no physical asset representing bearer ownership. Instead, the assets are simply held as computer records at various fund managers or with CREST. Transact’s responsibility is therefore restricted to directions to buy and sell the assets, and keeping appropriate computer records.
Secondly, Integrated Financial Arrangements plc ("IntegraFin") is authorised and regulated by the Financial Services Authority ("FSA"). Before approving a company for membership, the FSA must be satisfied as to the good character and appropriate experience of all of its senior people based on the specific nature of the company’s activities. In addition, as a regulated financial services company, Integrafin may be subject to FSA supervisory visits to their premises.
IntegraFin is also required to maintain a designated level of capital adequacy. This requirement applies to all FSA regulated companies and is designed to protect investor assets by reserving enough capital to allow the FSA to supervise a suitable transfer of the business should there be a need to do so.
IntegraFin has appropriate indemnity and fidelity insurance in place to protect investors' funds.
Finally, IntegraFin has agreed that external auditors will conduct a program of continuous compliance monitoring of its systems and procedures. The reports from these audits go directly to the IntegraFin board and are available for review by the FSA