In today's episode Warren Ingram offers a deeper understanding of unit trusts, emphasizing their safety, transparency, and the rights of unit holders. We also journey through the South African stockbroker landscape, providing key insights to ensure a confident and informed investment experience in this Q&A.
Questions/ Topics:
Have a question for Warren? Don't forget to voice note your questions through our WhatsApp chat on (+27)79 807 8162 and you could be featured in one of our episodes. Follow us on Twitter, LinkedIn and subscribe to our YouTube channel for more Financial Freedom content: @HonestMoneyPod
In today's episode Warren Ingram offers a deeper understanding of unit trusts, emphasizing their safety, transparency, and the rights of unit holders. We also journey through the South African stockbroker landscape, providing key insights to ensure a confident and informed investment experience in this Q&A.
Questions/ Topics:
Have a question for Warren? Don't forget to voice note your questions through our WhatsApp chat on (+27)79 807 8162 and you could be featured in one of our episodes. Follow us on Twitter, LinkedIn and subscribe to our YouTube channel for more Financial Freedom content: @HonestMoneyPod
brought to you by Pressient Investment Management. Informed by science, guided by insight. Pressient Investment Management is an authorized FSP.
Speaker 2:Hi Warren, this is anonymous. I would like to know whether there's any reason to be concerned about the safety or security of an investment built up in a low-cost brokerage account, and whether a unit trust investment is considered a safer or more secure investment. Thank you.
Speaker 3:Thank you very much for your question. I think it's a very relevant one when we're doing investing, that we want to know that the investments that we're choosing are high quality so that they give us the chance to deliver capital growth over the next 5, 10, 15, 20 years. But equally we also want to know that the home of our investments, the custodian, the place where those investments live, that that custodian is safe and that we haven't kind of done all the homework on choosing a high quality investment but the home, the custodian of the investment is kind of really poor quality and potentially that thing falls over and we lose all our hard saved and hard earned money. That's very destructive. So let's maybe just talk, starting with, what's the difference between a low-cost brokerage account and a unit trust and then what are the pros and cons of each. So a unit trust in South Africa is they call it a collective investment scheme. So what happens is you form a company and that company is owned by a trust and what's important about that is that only people who actually own the assets of that unit trust are the unit holders who put money in.
Speaker 3:So if I go and launch Warren Ingram, you know fabulous 40 unit trust tomorrow. The fact that it's got my name on it, that I launched it, doesn't give me any rights of ownership of that unit trust. It would only be you as an investor who can go and buy those units. In that unit trust. You are the owner. I don't have the ownership rights. What I have is I've got the right to charge a management fee. It will be disclosed to you in that fact sheet or monthly disclosure document and you'll see that every month Warren is charging a management fee that gets paid to me. But the assets inside the unit trust are yours as a unit holder and all the other unit holders of that unit trust. So you pooling all the money together. Money gets invested according to a particular mandate. You know what that mandate is because you can see it on the monthly disclosure document. So the unit trust industry in South Africa is very regulated and will dictate that if I'm putting money into something that's meant to be a general equity unit trust and just explain that means that only invests in shares in the South African stock market, I'm not allowed, as the unit trust manager, to take that money and go and put it into a money market account or into cryptos or into a listed property fund only. I must put it into shares so you can take comfort that once you've bought a unit trust and you've seen what the category of the unit trust is and what the rules are on that, that will be monitored by independent auditors, independent custodians and by the regulator as well. And what you also know then is that if the Warren Ingram fabulous footy fund is going but Warren Ingram goes bankrupt, it doesn't affect your investments. Your investments are safe. What will have to happen is that some new manager will need to be appointed and you can decide as an investor whether you're comfortable to stay with that manager or whether you send an instruction and your money gets paid out to you.
Speaker 3:So unit trusts are highly regulated, very transparent. Yes, they can lose money because the investment decisions are bad, but you're not going to lose money because the company that started that unit trust goes bankrupt. Your money is safe. And we've seen that being battle tested in South Africa in the past, when one or two dodgy operators would buy pension funds and they would buy a unit trust company and they try and steal the money from the unit trust company. They couldn't do that and when they went bankrupt the unit holders were fine and unit holders were protected. So I think it's a very well regulated investment part of the market.
Speaker 3:On the other side of the equation, if you go and say, look, I'm not going to invest in unit trusts, I want to go and start my own portfolio. I'm going to go and choose to open an account at a stock broker or a low cost platform. What are you doing? So what's happening there is you're putting money with a company and that company then goes on your behalf. When you say to that company, go and buy me, you know, shares in the top 40 index or go and buy me X, y and Z Retailer, that that company goes and and buys the shares, and those shares then get stored at a custodian on your behalf. So so let's just say it's stockbroker a. They are not allowed to be the custodian of your assets. They need to go and pay a Separate, unrelated company to be the custodian. So what happens is those assets and in the old days they were physical shares, but nowadays it's it's it's the records of your assets. They they get stored somewhere else and and and the record keeping of who owns what is stored away from the Stockbroker.
Speaker 3:If the stockbroker goes bankrupt, what what will happen is there'll be some admin and so kind of an admin nightmare, in all honesty. But but the assets of the stockbroker are not your shares or your exchange traded funds that you own. The assets of the stockbroker are their furniture. Whatever money they invested of theirs into, into underlying investments, it's not your assets. So so I think the answer is that your, your, your shares and exchange traded funds will be, will be protected to some extent from from from from Collapse, from from from fraud, not fraud, sorry, but from from kind of a bankruptcy. But you might have a kind of an admin nightmare in for a while until the a new kind of administrator of those assets gets, gets appointed, and then you might get access to your money.
Speaker 3:We have seen Stockbrokers being bought and sold in South Africa quite a lot and and the no real nightmares that I can remember what really happens is just kind of real administration in at worst, and it could take a couple of months for that to be sorted out. But but I think your money is is reasonably safe. But that only applies when you're buying actual shares or Exchange traded fund instruments. So you need to know what it is that you're buying, when you, when you're using a low-cost brokerage account and that's important I'm not as convinced that your money is safe where you store cash. So just be careful that you know you don't store a lot of cash at a place like that. You want the money to physically be invested as quickly as possible and and then you'll be okay.
Speaker 3:So I think, just understanding who the cash custodian is of your money, there is an account called the JSE trust account. So if you've got a stockbroker account and your stockbroker on the statement reports that your money, your cash, is Invested in the JSE trust account, then you know it's being underwritten by the JSE and that means it's okay. And if you've got shares and exchange traded funds, then you're okay. Then your exposure is really just to an admin nightmare for a period of time, but but not a loss of capital. If you're in a platform, then then that might be a bit different and you need to understand where the cash is being held, who's the custodian of the cash and then who's the custodian of your shares or exchange traded funds. So there is a bit of a difference. I don't think we should be alarmist To say that. You know low cost accounts are generally unsafe relative to unit trusts.
Speaker 3:I think it's just making sure that you've done the homework and ask those questions up front. If you're already invested, ask the questions now and get get a sense of comfort. But the kind of normal big stockbrokers in South Africa, they are well regulated. You know, I think the stockbroking systems are a little bit archaic, but they are safe and and, and you know, we haven't seen Kind of kind of big collapses of large stockbrokers where thousands of retail investors have lost all their money. It's just been a hassle. I hope that helps. Thank you very much for your question. It's it's it's a really relevant one and and important to make sure you always do your homework to understand where you're going. Thank you so much and please keep sending your questions.
Speaker 1:Brought to you by prescient investment management, informed by science, guided by insight. Prescient investment management is an authorized fsp.