By Darren Withers

A growing number of Australian investors are losing some protections of the law, under an exception to financial services regulations. For those with above average wealth, it is possible to be treated as a Wholesale investor. Advisers often present this option as a positive, but the reality is their clients are often giving up crucial protections, which is a risk to them, and to their accountants.

Under the Corporations Act 2001, people meeting the criteria of a “Sophisticated investor” can be treated as a Wholesale investor. You may be familiar with this, as it requires an accountant to certify that they have net assets of at least $2.5 million or 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.

While this does give investors access to some more complex and high-risk investment opportunities, it also means that firms servicing those investors do not need 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, Wholesale clients are left to make their own assessment of the risks and merits of investments. They have little recourse against the products they invest in, or those advising them, if things go wrong.

As a trusted accountant, this is a risk to you too. It is possible that accountants could be held legally liable if your client suffers a loss, especially if they didn’t understand what they were giving up. At the very least, this could put a big strain on your trusted relationship.

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 accountants around signing these forms for clients, given the extra risk they could be exposed to. While the benefits may sound appealing, you could be helping them to give up far more than they realise. Elston can be a safe pair of hands for your clients as we will continue to offer all clients full protection, regardless of their financial position.

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