At Magenta, one of the most common questions new clients ask is, "How safe is my money when I invest?" It's a natural concern, especially when moving from the security of cash savings to the more dynamic world of investing. This blog will help you understand what happens if a financial institution were to fail and how your investments remain protected throughout different stages of the process.
Most people are familiar with the protections for cash savings in the event of a bank collapse. The Financial Services Compensation Scheme (FSCS) protects up to £85,000 per financial institution in case of failure. If you have larger cash reserves, we recommend keeping deposits under the FSCS limit at each bank. Please note that some banks share a license, meaning they are covered by a single FSCS limit—examples include First Direct and HSBC, or Yorkshire Building Society and Virgin Money.
When investing, it's important to understand the different levels of protection in place to ensure the safety of your money should an institution fail.
The Financial Planner - Magenta
At Magenta, we act as your dedicated Financial Planners, offering expert guidance to help you manage your investments in alignment with your goals and objectives. However, your investment portfolio is entirely yours, and at no point do we ever hold your money. In the unlikely event that Magenta ceases to operate, your portfolio would remain unaffected and continue to be invested through Transact. You would retain full control of your investments and could choose to manage them independently or appoint another financial planner to assist you.
The Platform - Transact
For most clients, we recommend using the investment platform Transact to hold their portfolio. While Transact securely holds your investments, they do not manage them directly. Your investments are kept separate from Transact’s own company funds. In the highly unlikely event that Transact were to go out of business, there is a slight chance your money could be used to cover administrative costs. However, FSCS protection would apply in such a scenario. We have conducted thorough due diligence on Transact and are highly confident in its stability and security for the future.
The Investment Manager – Timeline or EQ
We recommend investment strategies managed by either Timeline or EQ. These investment managers develop the overall strategy and select the specific funds in which your money is invested, making adjustments when necessary. However, neither Timeline nor EQ holds your money directly; their role is to provide expert advice on the best investment strategy. If either Timeline or EQ were to fail, your portfolio would remain unaffected. You would continue to be invested in the funds they previously selected and could either manage these yourself or appoint a new investment manager to oversee your portfolio.
Fund Manager – Vanguard, Dimensional, Legal and General
Timeline and EQ select the most appropriate funds to align with their investment strategies. These funds are managed by fund managers such as Vanguard, Dimensional, or Legal & General. Each fund is comprised of thousands of individual companies, and the fund managers determine which companies your money is invested in. Your investments are kept fully separate from the fund managers' own assets. If Vanguard collapsed, your money would remain invested in those individual companies, and a new fund manager would likely take over the management of the fund.
Underlying Companies – Apple, Barclays, Tesco
When you invest in a fund, your money is used to buy small portions of thousands of companies in the form of shares or bonds. For example, those investing through certain Timeline strategies will have exposure to over 30,000 different companies. While there is always a risk that an individual company within a fund may fail, resulting in a loss of the money invested in that company, the impact on your overall portfolio would be minimal due to the high level of diversification. The likelihood of a significant number of these companies failing simultaneously is very low, as your investments are spread across a wide range of sectors and regions.
Summary:
Unlike cash savings, investments do not have the same blanket protection as the FSCS. However, please rest assured that if Magenta, Transact, Timeline, or Vanguard were to cease operations, the value of your investments would not be affected, and your portfolio would remain secure. While individual companies within the funds may face difficulties, the impact on your portfolio is mitigated by the fact that your money is spread across thousands of different companies, providing a strong layer of protection through diversification.