DIY super fund trustees could be exposed to risky and complex investments by advisers and lose the protection of financial advice laws after clarification of the definition of “retail” and “wholesale” investors by the regulator.
There has been confusion about the division for years. Mainstream financial advisers such as members of the Financial Planning Association treat all of their clients as retail investors.
Retail investors receive all of the disclosures and protections provided under the law. Wholesale investors are considered to be financially savvy without the need for the same level of disclosure and protections.
For example, a wholesale investor does not have to be provided with a statement of advice from the adviser, which, among other things, discloses any payments or benefits the adviser and their employer receives. And many of the protections under the law do not apply. For example, the wholesale client loses access to complaints resolution schemes.
For non-super advice, one of the definitions of a wholesale investor is that they have assets of $2.5 million or can show income of at least $250,000 for the previous two years. The Australian Securities and Investments Commission (ASIC) used to interpret the law on who could be classified as a wholesale investor with regards to superannuation as the definition of a “professional” investor, which is at least $10 million in the self managed super fund.
Many in the financial services industry thought that ASIC’s interpretation was wrong, but it has always been unclear. ASIC sought to clear up the uncertainty last week when it said that the $2.5 million or $250,000 rule can be applied to DIY super fund trustees.
While there has been no change in the law, what has changed is how ASIC will enforce the law. There can be good reasons for accessing investments as a wholesale investor.
DIY fund trustees can access investments such as share market floats and bond issues that are only available to wholesale investors, often at lower costs than retail investments because the compliance costs are lower. Many DIY funds are under-diversified with most of the money invested in cash, term deposits and Australian shares. They could benefit by investing more widely. To be classified as a wholesale investor, the investor’s financial circumstances have to certified by a qualified accountant.
However, under the test it looks as if the $2.5 million can include the family home, other investments such as a shares portfolio and superannuation assets. The majority of trustees would qualify as wholesale investors. Many with their own funds are savvy investors, but there is potential for problems. Some wholesale investments are so complex they cannot be understood by ordinary investors.
These investments, some of which include hedge funds, strategies that use financial derivatives, include leverage and other financial engineered products, can be suitable for large superannuation funds with the resources to independently evaluate the investments.
Consolidated debt obligations (CDOs), for example, were sold to local government councils without the level of disclosures that would have been made to retail investors. Complex investments like these and other financially-engineered products destroyed wealth during the global financial crisis. DIY fund trustees have to think whether the benefits of investing in wholesale investments outweigh the loss of protections.
