Platform, Broker or Direct: Where Should You Hold Your Funds and ETFs?

Access to the investing world has exploded in the last few decades. Investors may once have required brokers to do their trading, or apply directly to fund managers to invest. These days, investors have a range of options, direct and indirect for their holdings.  

The question therefore becomes which way to use. 

The answer comes back to the individual investor. There can be different costs and types of access involved depending on the structure you use for your investments. In this article, I’ll explore them. 

Direct Ownership 

You can invest directly or indirectly in ETFs and Funds. 

To own ETFs directly, you’ll need to use a broker or trading platform set up for direct ownership and purchase this way. To own an unlisted managed fund directly, generally you’ll need to apply directly to the fund issuer. Some fund issuers offer their own trading platforms to access their listed and unlisted funds, while others require individual applications to each fund for holdings. 

Owning directly means that your units in a fund or ETF are held in your name and you are the legal owner.  

• For an unlisted managed fund, this will mean the issuer will provide you with documentation and an investor identification for your holdings. 
• For an Australian-listed ETF, your units are registered on the ASX sub-register (this is known as CHESS-sponsored) and you’ll receive a Holder Identification Number (HIN). You can use your HIN for other holdings too which makes it easier to keep track of your investments. 

Investors seeking direct legal ownership do so for a range of reasons, such as: 

• Portability and access: direct ownership of ETFs can allow you to transfer your holdings into different broker accounts based on your preference. Indirect ownership doesn’t guarantee this option and you may have to sell your holdings – potentially triggering a capital gains event – then repurchase if you decide to change structures. 
• Protection: legal direct ownership can offer a layer of protection to investors if a broker faces insolvency compared to indirect custodial arrangements. 
• Cost management: using a broker may be more cost-effective than paying management fees on a custodial platform (though equally, direct structures can end up being more expensive). Investors applying directly to issuers for holdings in unlisted managed funds may avoid paying brokerage fees. 
• Estate planning: direct holdings can be transferred directly to beneficiaries and avoid incurring a capital gains event from selling holdings to distribute them. 

It’s not all rosy though, and some investors also find that owning directly can mean increased administration in managing their assets, greater costs from brokerage, less access to ETFs and funds due to high minimum investment thresholds or brokerage minimums, along with greater difficulties accessing foreign markets. Investors often need to use an indirect method for accessing foreign shares and ETFs for example. 

Investors can access direct ownership by using brokers, online trading platforms that are structured for direct ownership or in the case of unlisted managed funds, by direct application to the issuer. 

Indirect Ownership 

Indirect ownership is where your money is pooled with others to invest in different funds and ETFs under a custodial structure offered by a licensed financial institution. Typically, you’ll use a platform for investing this way – some online trading systems are also set up within a custodial structure rather than direct. The custodian has legal ownership of the holdings and is responsible for all administration, including record keeping. 

You don’t receive a CHESS-sponsored HIN, but rather the platform you use will provide you with an investor number to cover all your holdings and you can see your holdings via the platform’s investor system. 

An example of this is your superannuation fund – you don’t directly own the underlying funds or assets but you receive the benefits from your money being invested in them. This is also called beneficial ownership where you have the advantages of ownership, such as franking credits and dividends, but not legal ownership.  

Managed accounts are typically managed as custodial offerings too, and you can find more examples of these here. 

Typically, the decision to use a custodial arrangement comes down to the ease of use offered by the platform. Some examples might include: 

• Access to funds and investments that an investor might otherwise not have have the minimum threshold amount to invest in but can as part of the broader pool.  
• To reduce the administration burden: many of these platforms will provide tailored tax statements each year compared to an investor needing to individually track their holdings and any tax implications, like dividends and franking, across the year.  
• Everything in one place: meaning one password and online account to access, rather than many. 
• Cost efficiency: using a platform and indirect ownership can be more cost-effective than paying brokerage and other administrative costs.  
• Portability: in some instances, platforms allow investors to transfer their existing direct holdings into the structure – or out again if it meets specific rules. This is not necessarily an option for all investments or all platforms though. 

Investors looking at indirect ownership should also be conscious that this structure carries its own risks, such as custodian risk. If the custodian faces insolvency, they are the legal owners of the investments and it can create additional challenges in accessing funds. Using platforms offered by reputable and well-established issuers, such as banks, is one option for managing this concern. 

Another concern can arise in estate planning. Investments held indirectly cannot necessarily just be transferred to the beneficiary – it depends on the contractual restrictions of the platform. Investments may need to be sold and then distributed which can create a capital gains event.  

Where to Hold Your Investments? 

In deciding which option to use, investors might consider the below: 

• The amount of money they have to invest and what types of investments they are interested in. It’s also worth factoring in any existing holdings and what structure is currently used. 
• The extent of administration and management they are happy to do themselves or would prefer done on their behalf. 
• How they would like their estate managed after death, including direct transfer of assets compared to sale and distribution of cash. 

Both direct and indirect options can offer flexibility, but it depends on what the investor is looking for. An investor wanting access to unlisted managed funds that might have sizable minimum investments for direct investors may find using a custodial arrangement on a platform provides better access for them, while an investor wanting the ability to buy and sell, or transfer investments quickly as needed may find direct investment works better for them. 

There is also the matter of personal views. Some investors simply feel more comfortable having direct legal ownership, while others don’t. The fact is, most investors by default will find they have a bit of a mix between their superannuation and any holdings they’ve purchased on online trading platforms but over time, it can be valuable to consider what system will work best for your finances in and outside of superannuation.

Disclaimer: This article is prepared by Sara Allen. It is for educational purposes only. While all reasonable care has been taken by the author in the preparation of this information, the author and InvestmentMarkets (Aust) Pty. Ltd. as publisher take no responsibility for any actions taken based on information contained herein or for any errors or omissions within it. Interested parties should seek independent professional advice prior to acting on any information presented. Please note past performance is not a reliable indicator of future performance.