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When you find a financial services provider that does a great job at a good price, it’s amazing. Everything just works. Even an ok job at an ok price (more realistic) is useful. But even the best companies can go through difficult times. Don’t let your investment flow grind to halt and, even worse, don’t get dragged down with them.
For every step in the chain, you need a backup. Another company that provides exactly the same service, where you have an account set up already and you can find your login details. Yep, that’s going to take some planning. But it will give you resilience, which means less stress for you and your family, even when the world is falling apart.
Keep your eyes and ears open for news about your financial service providers. One hint of trouble and you should switch to your backup, immediately. What if you can’t find your login details? Well you can find your login details, because you planned for this, right?
Always have accounts with at least two banks in the country you live in. Otherwise one day you are going to get annoyed with your bank, or they will get annoyed with you and freeze your account. Most banks are annoying, so it helps to diversify a bit.
One bank doesn’t let me send money to exchange houses, because it wants to keep the transfers fees for itself. Another bank has decided not to transfer 40,000 AED and is just keeping it in limbo for 15-21 working days(!) for no good reason. It will be hard to abandon them, but having other options is keeping me calm.
I would do the same for offshore accounts or home country accounts. They may suddenly block your account if they discover you are non-resident. Or you may have to route your money in some weird way due to previously undiscovered rules or limits, and that extra bank relationship saves you.
Financial companies are at increasing risk of being hacked, taking your personal data and maybe your money. That’s why bigger is usually better, as larger companies can spend more on security. Has this institution been hacked before?
Current accounts are more at risk of getting hacked, as it is fairly easy to skim your account details from your debit card. Don’t let your debit card out in public except for a trip to the ATM, and certainly don’t let it out of your sight in a store.
Banks can and do blow up. Look at the Icelandic banks in 2008, or the Lebanese banks today. Your deposit money is sitting on their balance sheet and they are lending it out. If too many people want their deposits back at once, either the bank fails or they freeze your deposits so you can’t access your money.
Banks are actually less safe than brokers or asset managers, who at least don’t have your money on their balance sheet. What will protect you, eventually, is a government deposit guarantee. For example, bank accounts in the UK are protected up to £85,000. Most governments of developed countries provide one, the rest don’t. Do not keep more than the deposit guarantee in any one bank for the long or medium term.
If the local government does not provide protection, then you are going to risk at least some money. It’s another reason for expats not to keep too much money onshore. Common offshore banking destinations like Jersey ($50,000) will have their own scheme, so it’s well worth researching. Check individual accounts vs joint accounts also, as joint accounts sometimes double the protection.
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Brokers keep your money as Assets Under Management, so it is not technically on their balance sheet. Some could dip into this separate account and steal money, but in practice it is very rare and you often have protection if this happens.
Some brokers (Saxo and Swissquote) use a custodian to hold your stocks and bonds. This is a (very large) bank that keeps your assets in a separate account so the broker can’t reach through and grab them, even if they wanted to. You will pay a fee for this and, typically being a percentage of assets, e.g. 0.1-0.15%, it can start to add up as your portfolio gets bigger.
Other brokers (Interactive Brokers) are protected under a scheme such as the SIPC. This, compulsory for all US brokers, protects $500,000 of stocks and bonds or $250,000 of your cash, in case the broker fails and SIPC can’t find your assets. A joint account or account with another US broker doubles this amount.
Try hard not to go beyond these amounts. It can be a pain having multiple brokers, but it could save you. Because everything is fine until it suddenly isn’t. As Frank Abignale of Catch Me If You Can fame says, you can either have security or convenience. When it comes to your life savings, it’s best to go for security.
Currency houses and online exchange companies can be a great way to send your money so you don’t get ripped off by the banks. But you are still entrusting them with your money. What if they disappear or the broker at the other end doesn’t accept money from them. Even worse, what if your money doesn’t emerge at the other end?
Always do a test transaction up to $1,000 to make sure all the stages of the transfer process work. Then once you have found your perfect transfer company, look out for a backup. Not being able to move your money fast can create real problems, especially in times of personal crisis or global crisis.
Check with your transfer company how you money is protected while under their care. And if you hear any rumours of problems, switch to your backup, even if it costs more time or money.
Insurers are quite capable of going bust or not deciding not to pay out, quoting some obscure small print. If you have made the mistake of handing over your life savings to an insurance company, e.g. through a savings plan or whole life insurance, you will definitely lose a big chunk through high fees but could also lose the rest if they go bust. My parents had their pension with Equitable Life, the UK’s oldest mutual assurer, and when the company imploded they lost a lot of their hard-earned money.
Hedge yourself against companies not paying out by getting multiple policies. Where you are covered by a specific amount, such a term life insurance or critical illness, it may not hurt to get two policies from two different companies and divide the coverage between them.
This post has tended to dwell on worst-case scenarios – don’t worry, these problems don’t happen often. But it’s worth a couple of unexciting evenings sorting these details out, so you don’t spend a week pulling your hair out when something inevitably goes wrong.
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