While on leave, in my lead up to joining IAM, I noticed conjecture in the media about potential changes to wholesale/sophisticated investor status. A deeper dive revealed that the Parliamentary Joint Committee on Corporations and Financial Services had opened an inquiry into the wholesale client tests. I think that most people would agree that protections put in place to safeguard investors interests are clearly a good thing. However, to my mind, the retail/wholesale investor split has always been a highly arbitrary way of discerning who is deemed to be financially literate and who is not.
As it stands if you have had a net income of $250k per annum for the last two financial years and/or net assets of $2.5m then you could qualify as a wholesale, or sophisticated, investor. You need your accountant to sign the appropriate form (a section 708 certificate) which is valid for 2 years. This brings with it a number of benefits including access to a much wider universe of bonds and access to credit ratings from global agencies such as Standard & Poor’s and Moody’s. I am not sure how banning retail investors from accessing credit ratings protects them however it must have made perfect sense to some committee once upon a time.
In addition, my experience tells me that the current system is extremely arbitrary. Put simply there are some highly sophisticated investors that only qualify as retail and there are also many wholesale investors who, for a variety of reasons, may not be particularly financially sophisticated. The current designation also means that you can end up with a perverse situation whereby a retail investor could have their entire investment portfolio in a single share and yet they may be legally prohibited from buying a bond, a less risky asset, in the same company.
Putting all of that to one side, these are laws, enshrined within the Corporations Act 2001, and the potential changes are material. When the wholesale designation was first introduced as part of the Act in 2001 only 2% of the wealthiest and highest earning Australians qualified. This has now expanded to 16% of the population. So, perhaps similar to the ‘bracket creep’ argument that will see some relief come to taxpayers in July as part of the stage three tax cuts, the Government is looking at tightening up the wholesale qualification. It has been theorised that the new hurdles might be $450k annual income (for 2 years) and net assets of $4.5m which is a material step up. The Financial Services Council has gone further and is pushing for a net asset test of $5m. There is some uncertainty about whether this net asset figure will include the family home although it seems most likely to include it.
If this change does eventuate then it is likely to reduce the qualification of sophisticated investors down to a low single digit percentage of the population. This seems excessive to me. The regulators are effectively saying that the entire population, with the exception of say 2%- 3%, are not particularly financially sophisticated.
There are obviously some who will be unaffected by the potential changes however for those that sit in-between the existing and proposed thresholds, I think it is worth considering getting your wholesale certificate updated. This may allow that you will still be considered as a sophisticated investor for a further two years. A key date in all of this is the 15th May which is when all submissions must be presented to the governmental joint committee considering this matter. They will also no doubt cogitate on it for a while, but it feels like some change is likely.
I fully understand that the cost of getting these certificates signed can be frustrating however ultimately it is a relatively nominal amount that provides you access to a much wider range of investment opportunities for an extended period. We will keep you up to date with further developments in this space.
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