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.
As an investor, I resent PDSs full of boilerplate rubbish. The nanny State has gone mad and it makes no difference. The effective preventatives against fraud are prosecution and class actions against directors. ASIC is incompetent at the first and the directors’ club is gutting the second. Caveat emptor..
Try explaining to retail clients that wholesale investors are offered placements in shares at 5 to 20% discounts and they take a different view of which side of the rort they are on
In other words people are rorting the system because the system has broken down. The true number of wholesale investors if the test is applied correctly is an exceptionally small percentage of those that are treated as wholesale investors at the moment.