Falling adviser numbers sees rise in wholesale investors
With the number of advisers declining, increasing numbers of investors are being transitioned to wholesale investors, which may be exposing them to risks in some cases, an advisory firm has warned.
BDO wealth partner Guy Taylor said with the decreased number of advisers in the market, his firm has noticed a lot more investors being moved across to become wholesale investors, in some cases to their detriment.
Mr Taylor explained that retail investment offers more protections to investors, as advisers are obliged to provide disclosures and outline all the recourse avenues should things go wrong.
“A retail investor enjoys the safeguards of full disclosure of investment options, as advisers are obliged to provide disclosure documents, and retail investors receive a PDS, which is a regulated offer document that includes specific content,” he said.
In order to be classified a wholesale investor, an investor needs to meet financial eligibility tests which are either earning $250,000 in income per year or having $2.5 million in net assets.
“Wholesale investors don’t benefit the same consumer protections as retail clients. A wholesale investor is considered a sophisticated investor and, in effect, takes the responsibility for investment decisions,” he said.
“Wholesale investors may only receive an information memorandum, which may vary greatly from one offer to another, leaving it up to the investor to request or research other important information to make a sound investment decision.”
Mr Taylor said while investors may have substantial sums of money, this doesn’t necessarily mean they have expertise in the field of investing.
“Wholesale investors are often putting their investment at risk, as they may not have the experience or expertise required to make investment decisions in this environment; a retail offer presents more safeguards,” he said.
If investors sign off as a wholesale investor, it is usually a case of buyer beware, he warned.
“Wholesale investors effectively sign away their right to receive certain disclosure documents,” he stated.
“[They also] lose access to important protections set out in the Corporations Act as well as access to external dispute resolution schemes.”
Investors, he said, should be assessed as a wholesale investor against more than just their income or net wealth.
“Worryingly, the industry is seeing a greater number of clients with low levels of financial literacy being treated as wholesale clients,” he said.
In some cases, this is occurring where individuals are coming into large sums of money through inheritance or other means without the financial literacy to manage these funds.
“It would be beneficial to see something like a wholesale investor test or education requirement be implemented to better protect consumers,” he said.
Miranda Brownlee is the deputy editor of SMSF Adviser, which is the leading source of news, strategy and educational content for professionals working in the SMSF sector.
Since joining the team in 2014, Miranda has been responsible for breaking some of the biggest superannuation stories in Australia, and has reported extensively on technical strategy and legislative updates. Miranda has also directed SMSF Adviser's print publication for several years.
Miranda also has broad business and financial services reporting experience, having written for titles including Investor Daily, ifa and Accountants Daily.