By Darren Withers

A growing number of Australian investors are now meeting the criteria of ‘sophisticated investor.’ But should they be looking into what kinds of protections they may be giving up, before they leap into it? In this article, we explain just what it means to be a sophisticated investor, and the pros and cons of stepping into the role.

On moneysmart.gov.au a sophisticated investor is described as a person with a certificate from a qualified accountant certifying they have a prescribed net asset or gross income level. This gives them an exemption under the Corporations Act 2001.That means they can buy financial products without a regulated disclosure document such as a prospectus or product disclosure statement.

Under the Corporations Act 2001, a sophisticated investor is defined as someone with net assets of at least $2.5 million or an annual income of at least $250,000.

According to a recent submission from the Financial Advice Association of Australia (FAAA), when this law was first made in 2002, about 1.9% of the population qualified. Today, approximately 16% of the population meet this test. But of course, just because they can be defined as a sophisticated investor, doesn’t necessarily mean they should.

On the positive side, sophisticated (aka wholesale) investors can gain access to some more complex and potentially high-risk investment opportunities.

On the negative side, many of the safety nets offered by a traditional advice model, are no longer there. Specifically, there are nine things that an adviser, broker or accountant doesn’t need to do for a sophisticated investor.

They are not required to:

  • Provide a Financial Services Guide
  • Provide Product Disclosure Statements for recommended investments
  • Give a Statement of Advice detailing their recommendations
  • Give advice that is in their client’s best interests
  • Comply with Professional Standards and a Code of Ethics
  • Have Professional Indemnity Insurance
  • Provide clients with access to a free dispute resolution service
  • Register their advisers with ASIC
  • Pay their advisers in a non-conflicted manner

Essentially, if you are a sophisticated investor, you will be left to make your own assessment of the risks and merits of investments. And if things go wrong, you will have little recourse against the products you invest in, or those advising you.

Elston is firmly of the view that all clients should be able to rely on the advice that is provided to them. This advice should be in the best interest of each person and those investors should have the ability to seek recourse if poor quality advice is provided. This is why as a firm we have never sought to treat clients as sophisticated.

We are not alone in this view. In her Quality of Advice Review for the government, Michelle Levy included a recommendation that clients should have to be made aware of what they are giving up and consent to losing these protections.

In submissions to a Treasury review of managed investments, a number of Associations and professional firms have argued that the qualifications to be Wholesale should be raised or altered.

Ultimately, just because someone has a large sum of assets does not mean they are qualified to assess if complex advice given to them is in their best interests.

Elston supports proposals calling for amendments to these laws. Investors should be confident that the advice they receive benefits them, rather than merely benefiting those providing the advice.

Until then, we caution investors from allowing themselves to be treated as Sophisticated or Wholesale investors. While the benefits may sound appealing, you could be giving up far more than you realise.

If you would like more information please call 1300 ELSTON or contact us.