More than 3 million Aussies are now ‘sophisticated investors’

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Under the law, consumers who meet the yardstick can access risky and complex investments usually reserved for big institutional investors and off limits to regular, retail punters.

But crucially, they also forgo protections against inappropriate advice and conflicted remuneration accepted by advisers. Product providers limiting their audience to wholesale investors have fewer disclosure requirements.

Dr Phillips, a taxation and welfare expert at the ANU’s Centre for Social Research and Methods in Canberra, told the Financial Review the growing size of the qualifying cohort represents “off the charts bracket creep”.

Millions of “mainstream consumers” are now captured, especially given the family home is included in the net asset test.

With a median house price of $1.41 million in Sydney and $1.02 million in Melbourne (and well north of that in desirable enclaves of both cities), many home owners would be considered “sophisticated” investors due to rising property valuations regardless of their level of financial literacy.

“Clearly the share of Australians earning $250,000 in gross income over two consecutive years, or those with more than $2.5 million in net assets, has changed dramatically over the last two decades because of income and asset price inflation,” Dr Phillips wrote in a paper detailing the findings.

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“These changes arise as a result of the failure of the legislation to index the … wealth tests in the Corporations Act’s sophisticated investor definition … to the increase in both income and wealth over the 20 years since the definition was introduced.”

Raise the bar

Ordinarily, economic public policy contains an in-built indexation mechanism against inflation, at the very least, or wages, Dr Phillips said. This is the case for almost all tests set out within Australia’s tax and welfare eligibility frameworks, he said.

ANU associate professor Ben Phillips has quantified the number of Australians who meet the wholesale investor test.  Alex Ellinghausen

The findings will likely reignite calls for the net wealth test to be raised or indexed.

The collapse of investment manager Mayfair 101 threw a spotlight on the loophole after investors who met the definition based on assets claimed they were told not to worry after informing the firm they did not know what the term “wholesale” meant.

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As Dr Phillips said: “Meeting the requirements of the sophisticated investor definition is unlikely to guarantee that an investor is immune to poor investment choices or being misled by shady deals.”

He described the lack of indexation in the 20-year-old test as an “oversight” by policymakers. But some market sources said the decision not to update or amend the test was more deliberate and the result of vested interests in the wealth management industry.

Financial advisers who restrict their client base to wholesale investors are not required to meet the stringent requirements of Labor’s landmark 2012 Future of Financial Advice (FoFA) laws, which banned advisers from accepting commission payments from managed fund manufacturers and introduced a fiduciary duty to act in clients’ best interests.

They are also exempt from ASIC’s register of financial advisers, which lists the education qualifications of all retail advisers and any banning orders or disqualifications against them.

Retail retreat

The Morrison government’s 2020 ban on so-called stamping fees paid by listed investment companies and trusts to wealth managers and stockbrokers placing clients in initial public offerings was also limited to retail advisers.

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Wholesale-only advisers are a growing segment of the market. All four of the major banks have exited the business of providing personal financial advice to retail investors, but at least two, Commonwealth Bank and National Australia Bank, have committed to investing in their private wealth arms catering to sophisticated investors.

“The absence of income and asset price inflation indexation in the Corporations Act has driven a shift of more and more Australians out of FoFA’s retail protections,” Dr Phillips wrote.

“This continued creep has considerable implications for investors and their livelihoods, for the way that advisers and institutions potentially organise themselves to exploit these changes, and, more broadly, for the integrity of Australia’s financial system.”

The research is believed to be the first that quantifies the number of Australians who have shifted into the sophisticated investor definition over time and projects future bracket creep.

Financial Services Minister Jane Hume has been approached for comment on the research.