Wholesale investment opportunities should not automatically be considered more risky than those available to retail investors provided an appropriate degree of scrutiny, disclosure and advice is conveyed to clients.
A general assumption when dealing with eligible wholesale investors is that they have a higher level of financial literacy and are better equipped to be able to evaluate investment offers.
On this basis, these clients are provided with access to opportunities that retail investors cannot access but in exchange for these opportunities, the investment risk is regarded as being borne by the investor and in such a way that is absent from the investor protections afforded to retail investors.
Self-managed superannuation fund (SMSF) trustees typically seek flexibility and control in the investment of their retirement savings and a good starting point for advisers when speaking to clients is the quintessential balance between risk and reward.
Advisers would be well-versed reminding clients — trustees — that they have a duty to think carefully before becoming a wholesale rather than a retail investor, due to the different levels of protection afforded to their investments.
In August 2014, the Australian Securities and Investment Commission (ASIC) clarified how it applies the wholesale investor test to SMSFs. ASIC makes clear that there are various tests for wholesale versus retail investors under the Corporations Act 2001.
Wholesale clients may have access to a wider range of investments but they do not enjoy all of the consumer protections that apply to retail investors.
ASIC’s revised interpretation provides that where a trustee of an SMSF can meet the wholesale test by virtue of an Accountant’s Certificate, then they are able to access wholesale products through their SMSF.
It is also important to remember that deciding whether the wholesale option is the correct one will vary from trustee to trustee.
In some cases, trustees might qualify by virtue of meeting a net wealth test; however this classification and service model may not be appropriate given the clients’ financial circumstances, knowledge or investment experience.
The benefits to trustees willing to balance the risk and opportunities can be appealing as it does open up a wider range of investments and this can also often mean lower costs for wholesale investors.
Further, hedge funds, absolute return funds, venture capital and other similar investments can now be considered by SMSF trustees. Some have been drawn to investing in direct bonds. It is a class that was hard to invest in before but which offers a more understandable route into the wholesale market, in contrast to more unfamiliar products.
Take caution
Remember to remind trustees that notwithstanding your investment counsel, if they set up an SMSF, as trustee they’re in charge — they ultimately make the investment decisions for the fund and are held responsible for complying with the super and tax laws. It’s a major financial decision. It’s important to bear in mind that when clients undertake to manage their own super the process can involve significant time and effort, as well as costs for advice, auditing and accounting.
Given the importance of the retail client consumer protections, ASIC will take regulatory action where financial service providers miscategorise their clients and, for example, treat investors as wholesale clients based on net assets of $2.5 million without a certificate from a qualified accountant.
Understanding a trustee’s objectives will make structuring that advice all the more straightforward. While the nature of SMSFs can vary widely, the process broadly remains consistent.
A trustee’s risk appetite will frame the investment decisions and guide the investment strategy which needs to be reviewed regularly. Importantly, too, they will need to understand the restrictions on the investments an SMSF can make.
In terms of structuring, the SMSF can be set up under individual trustees or a corporate trustee structure and there may be up to a maximum of four members in either structure, each with different account balances.
However, the individual needs and risk parameters of each member individuals may be different and is therefore prudent for these investment needs to be matched with tailored investment advice. While SMSFs provide greater decision-making when investing, they also represent an opportunity to better engage with clients around investment structuring to assist that process.
SMSFs may suit people who want more control of their super, but with greater control comes greater responsibility.
Ultimately, clients should be cautious when making investments with retirement savings and should always seek appropriate information and advice before making an investment decision and considering the range of investment options which may be tailored to their needs.
Janine Copelin is the head of retail bank at Citi.
