Phil Anderson (left) and Judith Fox

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.