The gap between the standards of retail and wholesale advice has never been wider, but if not handled delicately, a change in the wholesale client threshold could create clients that can’t be serviced.
The separate classifications of retail and wholesale investors were introduced as part of the Financial Services Reform Act 2001 to provide retail investors with a different level of consumer protections from those who can take on more risk with their investment decisions.
An assessment of the current wholesale investor threshold is part of the ‘Review of the regulatory framework for managed investment schemes’, which the Government earmarked funding for in October last year during the interim budget by the newly elected Labor Government.
Financial Advice Association general manager of policy Phil Anderson tells Professional Planner the difference in professional standards between retail and wholesale advice has drastically shifted over the last couple of decades.
“It’s not just that the thresholds have not changed, it’s also the fact the difference between the standards that applied to advisers providing personal advice to retail clients and the standards that apply to someone providing advice to wholesale clients only,” he says.
Anderson pointed to FOFA, and the FASEA regime that oversaw professional standards and adviser exam as examples of those obligations.
“The gap between has opened up so substantially and yet at the same time the thresholds have stayed the same,” Anderson says.
“We are genuinely concerned about whether people are being classified as wholesale clients. If they don’t have the level of knowledge and financial literacy to be able to protect themselves then there are genuine concerns here from outcomes from a consumer perspective.”
Unintended consequences
However, Stockbrokers and Investments Association CEO Judith Fox says raising the wholesale test amid an advice supply shortage could end up creating orphaned clients who can’t be serviced.
“If we were to increase the individual wealth threshold test – which I know there are calls out there to do so – suddenly a whole lot of advisers who only provide wholesale advice and don’t do any retail would [need to] be re-classified as retail advisers and considered new entrants,” Fox says referring to the professional standards required of retail advisers.
Currently there are five tests to determine who is a wholesale investor, with the most notable being the individual wealth test, which stipulates a person has net assets of at least $2.5 million or a gross income of at least $250,000 per year in the last two financial years. This must be supported by a certificate given by a qualified accountant, which is valid for two years.
The asset threshold includes all assets in the person’s name, including their primary residence and superannuation balance.
Additionally, there is the sophisticated investor test, which Fox says is often confused with the individual wealth test, and requires a client to have adequate experience investing in financial products that them to assess the merits, value, risks and information about a product or service.
The three remaining tests cover product value (when the price for the provision of a financial product or the value of the financial product to which the financial service is related equals or is greater than $500,000), professional investors (AFSLs or trustees) or the small business test (where the financial product or service is provided for use in connection with a business that is not a small business).
Raise the roof
Research from the Australian National University estimated that almost half of adults will classified as wholesale investors, highlighting the need that even if the threshold is raised, it should additionally be indexed.
Cited in the consultation paper for the review, research in 2021 from ANU Associate Professor Ben Phillips estimated 16 per cent of Australian adults were eligible for the wholesale investor test – a stark increase from 2 per cent when the rules were introduced in 2002.
Furthermore, Phillips projected this to increase to 29 per cent by 2031 and 44 per cent by 2041.
Fox says she is not opposed to indexing any financial threshold and says the association’s membership is still deciding on a stance.
But despite the rise in potential coverage, Fox argues there is more discretion exercised by advisers before committing a client to the wholesale investor regime than might be expected, referring to a discussion paper the association released last February.
“We were interested in how the tests are applied in practice and what we saw was quite a lot of checks and balances in place,” Fox says.
“There’s a much more nuanced approach. Certainly, our members don’t just rely on the asset or income threshold as an objective measure. They do use that as an objective measure but then they also understand that a client’s assets level is not a reliable indicator of financial knowledge or sophistication.”
The review consultation has also whether any specific assets should be excluded from the test, opening the door for primary residences to be partially or completely excluded.
“Just because houses in Sydney and Melbourne are worth significant sums, there’s an awful lot of people outside of Sydney and Melbourne,” Fox says.
“Their house prices haven’t gone through the roof in the same way, so we need to think about what will be the impact on clients who own real estate in regional areas and other capital cities.”
