Investment apps are everywhere. But who really holds your money?

2 months ago 16

Australian investors have been urged to double-check the ownership structure of their shares, with many having little understanding of who controls their money, their trades, or who can see their personal information.

The Covid-induced boom in investing has seen an army of investors plough their savings into exchange-traded funds (ETFs), pouring a record $4 billion dollars last month into the asset class.

Chris Brycki of Stockspot says more investors need to know who really owns their shares.

Much of this is thanks to investing apps like Raiz, Stockspot, InvestSMART, SelfWealth, Stocklight, Spaceship and eToro, which can be a great starting point for investors wanting to try their hand at investing small amounts regularly.

But understanding who owns your shares is critical following a rise in cyberattacks on financial services, with trading platforms particularly vulnerable targets. Experts urge investors to read the fine print to understand who owns your shares.

Share ownership

In Australia, shares can be held either on a Holder Identification Number (HIN), where the investor is the registered owner of the shares, or through an omnibus or custodial account, where the platform holds shares on behalf of a number of investors under a single umbrella structure.

While both models are legitimate and widely used across global markets, neither approach is inherently better. Each approach also carries its own implications for transparency, ownership and control.

Stockspot founder Chris Brycki says investors need to look beyond slick looking apps and low brokerage when deciding where to invest and know what they’ve signed up for.

“When you invest, it’s not just about what you invest in, but how you own it,” he says. It’s important to understand who legally owns your investment and whether your money is held in your own name or pooled together with other investors.

“Custodial or co-mingled ownership is common. A custodian holds the assets on your behalf, which can be cheaper because the costs are shared. The trade-off is transparency and control. You don’t directly own the underlying shares; you just own a claim on a pool,” he says.

While most of the time it works out fine, when things can wrong, it can be messy. “The Halifax Investments collapse is a good example. Investors were exposed to $44 million of losses because assets were pooled and records were unclear,” Brycki says.

Stockpot uses a HIN ownership model, means investments are always held in your name.

“The biggest benefit is security and peace of mind. Your investments aren’t mixed in with anyone else’s, so you always know what you own. The second benefit is flexibility. You can move your portfolio to another broker more easily, which can help avoid paying capital gains tax when you change provider.”

Due diligence

The real risk comes from investors not knowing how their shares are held, what protections apply and what might happen if they switch platforms or want to transfer their shares, Craig Semmens, chief executive of stockbroking firm Phillips Capital says.

A plethora of apps and online services have made investing easier than ever.

While platforms disclose their ownership model in the fine print, the real risk is that most investors never read – let alone understand – are ownership arrangements.

“Your investment app may show your portfolio, but that doesn’t mean you hold the shares. And if you don’t know who’s holding your shares, you shouldn’t be giving them your money,” Semmens says.

“If something goes wrong from a cyber breach to a platform failure, thousands of Australian investors in pooled accounts are relying entirely on the trading apps’ internal records to prove what is theirs,” Semmens says.

Younger investors are particularly vulnerable because they rely heavily on brand awareness and may not do their due diligence, he says.

“People see an app on TikTok, or their friends using a particular one, and assume the awards and badges are legitimate when in fact its paid marketing – not a guarantee of security.”

Semmens also warns investors to think carefully about taking investment advice from random people online. “If you’re getting stock tips on WhatsApp rather than through regulated research or licensed advice, then you’re not investing, you’re stepping into someone else’s trap,” Semmens says.

Investing red flags include cold calls asking you to invest, offshore transfers, pressure to join messaging app trading groups and guarantee returns. “These are all signs to walk away,” he says.

Advice given in this article is general in nature and not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.

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