Pandora's box well kind of

Well well well. Look who it is. You’ve come back for more ay? Well, thanks I guess.

Today’s post might be an eye-opener or it could mean that I’ve put a fly in your ointment. I might have opened Pandora's box on this one, so sit tight while I talk you through what has happened/happening.

The situation

It was a sunny day when I had a quick thought. “What was to happen if Sharesies were to go bust?” A grim thought. I know. But stay with me here. I wanted to make sure that everything we are working so hard for wasn’t able to slip through our hands through something we cannot control.

In my naivety, I thought this was a simple “Don’t worry Milan the process is Xyz.” And to be honest it kind of is. Let me take you through what happened and then what I/you could do about it.

What happens to the money?

This was the question I posed to both Sharesies and Hatch and then eventually Reddit. The answers were both fascinating and confusing. Both Sharesies and Hatch have pages that explain their money process, custodian accounts and who holds what and where.

I went a step further to ask the question directly to them through their support channels and got the following.

Question to Hatch

Q: The reason I ask is, let's say Citi goes under what do I as an investor do?

A: Fair question! Under US regulation, the customer (you) is the first creditor. This means that your cash and your securities flow back to you before any other creditor.

What SIPC is protecting against is a scenario of fraud or mismanagement where all of your securities or cash are not returned to you. If this is the case and there is a shortage, this is where SIPC comes into play to ‘make you whole again’. It’s not an ideal process to go through for any party, which is why the industry is so highly regulated since the GFC.

Question to Sharesies

Q: Hi there,

I was just hoping you could expand on how the Drivewealth process works and how I am identified as the securities holder.

This is from your article which is quite comprehensive, however, I would love to know the answer to my question above, please.

“DriveWealth also organises the custody of your US investments. This arrangement means we can offer access to these US exchanges with no minimum investment and competitive pricing. Remember, you have control over your investments through our service, and they belong to you.”

A: Hey Milan,

Thanks for your message! DriveWealth holds US shares in its own name, but for the benefit of Sharesies Nominee Limited.

Sharesies Nominee is your appointed custodian who holds those US shares for your benefit. It acts under your instructions about what you’d like to do with them.

Regardless of this custodial service, you own your shares. Sharesies Nominee records the number of shares that every Sharesies investor owns. This is matched with what DriveWealth holds on its behalf for Sharesies investors.

You’ll receive a contract note for each investment you own.

You can find this in Sharesies through your Portfolio by selecting an investment > Your Investment > Investment Activity.

You also have access to details of your investment purchases, holdings and sales in your Investment Report. You can find this in Sharesies through your Portfolio by selecting an investment > Your Investment > Investment Activity.

Custodial services are a common way to hold investments in the US, New Zealand, and globally.

Hope this helps! Shout out with any questions

What does it all mean?

Alright. Now that you’ve read the above, you would have one of two responses.

1.) Oh my goodness… I can’t believe that my money is held for me by a different company!

Or:

I’ll try to make it as simple as possible. Let’s look at how it all works on a broad view.

You (invest your money) ———> Platform you use (Sharesies, Hatch etc) ———> Custodian (Citi, Drivewealth ———> Stock Exchange.

With all that in mind, what does it all mean? Well if you are a little OCD like me, you are still annoyed that your money is held somewhere. However, from my research and of course, through their pages linked above, this is commonplace.

I thought this was the end, and although it’s a little unnerving around the process and how many companies are in between, I was Ok with it. I am ok with it because it does not matter how ‘secure’ you think something is, nothing is 100% guaranteed.

I am happy with the level of risk and or regulation involved in this process to keep investing exactly the way I am. (I did the math on moving my money across to Hatch as their prices are slightly better, however, to move my money would really not be worth the cost. At least at this stage.)

The real pandora's box

Ok up until this point, even though things are confusing, you probably should not be worried and you can go on with your life. Last year I created a post on how I will be saving quite a bit of money by moving directly to VOO.

During my discovery and research, I came across another article that piqued my interest. The long and short of this article. The US might be entitled to 40% of your entire investment portfolio upon your passing.

Now I like the US, but not that much…

The article does a wonderful of explaining exactly what it all means, but this is something I am currently looking to solve for myself and my own portfolio.

I will keep you posted on what I decide to do.

Sorry to leave you with such uncertainty… however I want to make sure that the money we all work so hard to get, we keep!

Until next time.

Thanks for reading Firelife! Subscribe for free to receive new posts and support my work.