extreme asset liquidity trading platform collapse

An Extreme Tale Of Asset Liquidity – Are You Prepared?

Asset liquidity – what is it and why should you care?

Now before you groan and think this is going to be yet another Gamespot post, relax. Nope, not going there. It’s a fascinating story for sure but not one I plan on jumping on the bandwagon for. Plenty of people have already done it justice and you don’t need my 2p on it.

Instead – I’m going to share a very different experience of how asset liquidity has played out for me personally over the last two years. Sharing a few lessons learned at the end which may help you prepare better if needed.

But before we dive in – let’s take a quick look as to what I mean by asset liquidity.

What Does Asset Liquidity Mean?

The short version of how to define Asset Liquidity is;

At it’s simplest, asset liquidity is basically how fast you can convert an asset into cash without impacting on its value unduly. 

To get into it just a little more, let’s start by reminding ourselves that cash is generally considered the most liquid form of an asset. I.e. if you want to buy yourself fish and chips it’s a pretty simple transaction.

You hand over your tenner, the nice guy/gal gives you back a steaming pile of cod and chips. And hopefully some change too, though not legally obliged!

Regardless – the fact you have the ready cash makes it a simple transaction. Now envision the same thing but this time all you have in your pocket is a shiny Swiss army knife. Being a good boy scout,  always prepared and all that.

The knife is clearly worth a lot more than a single portion of fish and chips. So you proudly pull out the knife to offer up to the owner (let’s call him Steve).

Assuming he doesn’t call the police on us – we’re likely to find that Steve already owns a lot of shiny knives and has no real interest in ours. Three things can happen from here;

  • Steve decides to accept the knife anyway, knowing he can sell it on for a profit. But he refuses to give us change, meaning we have to accept a drastically reduced value for our asset                                                              
  • Steve refuses the knife and you spend the next hour trying to find someone in the street who wants to buy a knife for a reasonable value                                                                                                     
  • You go home hungry and ransack the pantry for that outdated porridge that must be lurking there somewhere still

Ok, a slightly exaggerated comedic example but hopefully it illustrates the point;

An asset may be worth a lot on paper – but you can only realise that value when it’s supported by a liquid market.

For a fuller and less poor comedy version, try here if you want to learn more. But if you’re still with me – let’s take a look at when asset liquidity can really matter to us.

Why Should You Care About Asset Liquidity?

I’m pretty sure that any one with more than a passing interest in personal finance already understands the typical asset liquidity ladder. I.e. cash is king, instant access bank accounts next before getting towards the top rung assets like houses, rare art, etc and etc.

What I think a lot of people don’t consider or aren’t so aware of is how quickly external events can impact on asset liquidity.

And how much of an impact that can have on your finances.

How would you handle not being able to access your financial resources for a month? Just fine, I hear you say. I have my emergency fund sorted thank you very much.

How about two months? Six? Now try over a year. Still feel the same?

This has actually happened to us. In the first year after quitting my job.  Nice. This is why having a decent contingency plan and diversification of income streams is pretty essential. Especially if you want to minimise those financial stress levels once FIRE’d.

So what actually happened and how did we mitigate the impact? Let’s take a look at the first one – which was the collapse of one of the trading platforms we used regularly.

Case Study One: - What Happens When Your Trading Platform Collapses?

It’s an interesting moment when you go to log on to your trading platform and it doesn’t work. You tend to assume you’ve just got something wrong or it’s a temporary problem their end.

It didn’t take long though before Google confirmed the bad news – our trading platform (SVS) had gone under and the administrators had been called in.

Oh deep joy. Sure enough, not long after the official email version arrived from the administrators. Confirming the news reports and outlining the steps that would be taken etc. This was back in Aug ’19.

It sounded simple enough and I was reasonably unconcerned. There was no suggestion of dodgy behaviour or mis-use of client funds.

Legally I still owned all the shares in my ISA and trading account. Likewise the surplus cash from various dividend payouts. I was just simply unable to access them. 

After all, how long could it really take to tie up a few numbers and return access to their rightful owners? Ha – how little I knew!

How Long Can It Take To Recover From A Trading Platform Collapse?

As it turns out – it can take an extremely long time to get access to your assets back when your trading platform collapses.

A year later and the administrators finally completed their task of organising a transfer of our assets to another broker.

At this point it’s worth noting it’s a good job the bill for this “service” was being picked up by the FSCS protection. They sure did seem to manage to rack up the billable hours without achieving a lot. 

That aside, you would hope this was the end of this particular saga. After all, being unable to access your funds for a year seems bad enough, right?

It’s a long time to be unable to sell out when you want to – though perhaps that was a good thing for many through the crazy Covid dip period. But in all seriousness – it’s not exactly a lot of fun being unable to risk manage your funds.

The assets may well have a liquid market but if you can’t access them – they’re as illiquid as it gets.

Unfortunately that wasn’t quite the end. As it turned out the administrators had managed to pick perhaps the most unsuitable platform available as a replacement.

Bizarrely they went for someone called ITI Capital. For those who haven’t heard of them ( which included us! ) they are about as different in style and approach as you could get from our previous execution-only, low fee SVS solution. 

Therefore, like a lot of investors, we took the option to pass on remaining with ITI and requested a transfer to another, far cheaper trading platform.Thinking it would be a few weeks max perhaps now before we had access to our assets again.

At the time of writing this (end Jan ’21) I’ve literally just badgered them into completing my transfer.

That’s a full 18 months since the platform collapsed without access to these assets!!

My other half is actually still waiting on his transfer to complete, as I know a lot of others are too. It’s an extreme situation for sure but not a totally unlikely one.

How Can You Mitigate A Trading Platform Collapse?

The first and most obvious point here is:

Diversify your investment platforms as well as your investments

You have doubtlessly read a lot of articles about diversifying your portfolio. Not keeping all your eggs in one basket. All excellent advice.

What doesn’t get talked about nowhere near enough is diversifying the platforms you use to manage those investments. E.g. don’t keep your emergency fund with the same company as your savings or investments.

Yes, it can be a pain to have multiple accounts. And yes, you have to manage it carefully to not end up paying more in fees.

But trust me – you’ll appreciate it if you ever have to go through this too.

Lesson learned = > Never underestimate just how long it can take a bunch of officials to wrap up an administration!

So that was let’s call it politely “an educational experience” to go through. Not exactly what you need in your first year after pulling the FIRE trigger!

Fortunately we had several strings in our financial bow to be able to cope well. Let’s take a quick look at what they were.

Managing Extreme Asset Liquidity - What Helps?

It’s worth remembering at this point that a trading platform collapse is an extreme asset liquidity event. A bit of a personal grey swan event, if we want to be precise about it. 

Interestingly, the recent GameStop saga has shown it doesn’t actually need to be a trading platform collapse. Just having certain trades or markets restricted unexpectedly can be just as impactful.

Either way – the big takeaway message is;

Understand ahead of time how you will respond if unable to exit or access an investment 

Always know your back-up plan and how you will mitigate the financial risk whilst you wait it out.

For us, the impact of this joyful learning experience was minimised by four key things;

  • This was largely our “buy & hold” portfolio, no plans or emergency requirements to exit positions            
  • We had other trading platforms to use for continuing to invest, though not being able to re-invest dividends was annoying and costly                        
  • We have multiple sources of income available to access if required. Being fully dependent on this source would have been a disaster post-FIRE                         
  • We have plenty of flex in our financial budget, giving us the ability to spend less if needed

Without those mitgations in place, this experience would have been a lot more stressful to live through

It wasn’t exactly a fun experience to go through, but those four things meant the financial impact has been a lot less than it could have been.

And whilst it has been irritating dealing with the drawn out saga and unresponsive companies – our ability to adapt and cope meant the stress was contained to frustration rather than any sizable financial concern.

So hopefully our experience and lessons learned here will help you avoid some financial headaches in the future. Whilst an extreme event, it is not entirely unlikely. And that’s why it’s worth putting some thought into how you would respond before it actually happens.

Infact, I suspect some of you have already been through it yourselves too. If so, be great to hear your story and how you dealt with it below. It all helps everyone to be better prepared!

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7 thoughts on “An Extreme Tale Of Asset Liquidity – Are You Prepared?”

  1. Lots of folks have written about this type of possibility from a theoretical standpoint.
    However, this is one of the very few “real lived experience” posts I have read on the subject.
    IMO, this post should thus be flagged as required reading!

    P.S. I know this will not make you feel any better but complaints via ombudsman’s are currently taking even longer to resolve.

    1. Now that’s a compliment – thanks!

      Yeah, it’s often a world apart knowing something in theory and going through it, right. Risks like this one though you can actually do something proactive to manage – and that’s what important I think. Hopefully this will help a few avoid something similar.

      P.S. I’m with you on the ombudsman – we’ve actually still got one outstanding from a year ago for those emergency Vietnam flights back home! I just view it as ‘expect nothing, upside if they do sort it’…

  2. Pingback: Wednesday Reads: Investing Lessons from Catan - Dr FIRE

  3. Thanks for sharing, Michelle. Crazy to hear that it took 12 months for the administrators to get your money back to you! A good warning for all of us. It’s probably very rare that this happens, but if it does, what a pain it is to sort it out.

    Note to self: make sure to open an ISA with a different provider at some point in the future, and try to have at least two different pension providers!

    1. Ha – I know – crazy or what! The perfect example of a grey swan – a known possibility with a very low chance of happening. But absolutely one it’s easy to protect yourself from at least. That way it defn stays in the “pain to sort out” box instead of the (oh…sh…) box!

      Cheers for stopping by – go get those new accounts sorted 😉

  4. Thanks for sharing this, which somewhat confirms that I’m not being paranoid by having 3 different investing providers, as well as several current accounts and emergency funds with different banks (I just keep tabs of them all via spreadsheet!).

    There was that time when Visa was down which caused a lot of issues – I make sure I also have a MasterCard card; what are the chances of both services going down at the same time??

    1. Ha – nope, not paranoid – sensibly diversified!

      With you on the credit/debit cards too, especially when we travel. We usually take 2-3 each, no fee/fx charge versions obviously 😉

      Whilst such services remain free to use, it just makes sense not to have everything in one place and yup, we have a s/sheet like that too. Now if we ever lost that……

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