CPA

Where to for wholesale product advice

RICHARD WEBB is financial planning and superannuation policy adviser at CPA Australia. Treasury’s Quality of Advice Review provides an opportunity to clarify some burning issues involving wholesale investments for SMSF trustees. But in an environment where so many Australians are having difficulty accessing quality retail financial advice, will there be space for these issues?

The federal government released the terms of reference for the Quality of Advice Review in March. The intention of the review is to see how the regulatory framework can better enable the provision of high-quality, accessible and affordable financial advice. The review came about as a result of the recommendations in the final report of the Hayne royal commission.

It should be noted that while the review is underway, another is also being undertaken by the Australian Law Reform Commission, which is reviewing the legislative framework for financial services law more broadly.

One issue that provides a level of confusion for trustees and their advisers is the rules around wholesale investment. Although the terms of reference do not consider how these terms should be defined, the review will consider consent arrangements in place for wholesale clients.

When products are available to wholesale clients, it is usually the case that a number of protections provided to retail investors are not required. The rationale for this policy is that wholesale investors, a term that also includes sophisticated and professional investors, are better able to understand the risks and disadvantages of such products.

Consequently, a much larger selection of investment opportunities is available to wholesale investors. However, it comes at a price. Eligibility to invest in these products is limited to high net worth investors, such as those with an initial investment of $500,000 or more, net assets of $2.5 million or more or gross income of $250,000 annually.

SMSF trustees often consider that a benefit of pooling a small group of investors’ funds may be to obtain the critical mass needed to invest in such products. However, superannuation is normally ringfenced from the net assets total, unless the fund holds $10 million or more. Following restrictions imposed by the total superannuation balance limits since 2017, recently lifted from $1.6 million to $1.7 million, it is expected fewer and fewer funds will be able to achieve this scale in the future.

Mixed messages from the Australian Securities and Investments Commission (ASIC) on this issue have caused confusion. In 2014, ASIC issued a media release suggesting it would not take action where trustees were determined to be wholesale by a person providing advice in the event the fund had net assets of more than $2.5 million. However, by 2017, the corporate regulator returned to issuing guidance that did not mention this previous commitment and emphasised an SMSF with $10 million or less would be treated as a retail client.

The issues paper to the review notes the terms of reference include the ability to look at financial advice generally, not just financial product advice. This is a refreshing change to the lens through which financial advice has been viewed since the Financial Services Reform Act regulated financial services in 2001. It is perhaps this view of financial advice that may finally provide a direction for trustees looking to access wholesale products where access to advice is presently difficult.

However, there are considerable drawbacks to the idea that financial advice not related to retail financial products could be made available to SMSFs. For example, wholesale financial products are not subject to the design and distribution obligations, meaning there are fewer responsibilities on product providers. Neither are they subject to the same fee and cost disclosure regime that applies to retail products.

Another question arises as to how financial advice that is not reliant on the use of retail financial products might be subject to regulation if property is involved.

We expect the review will improve the advice experience for many Australians. However, it is likely the problem of financial advice involving wholesale products will be kicked down the road. This will be a considerable lost opportunity to improve the quality of financial advice.