Sophisticated investor? Financial planners want new rules on who qualifies

The peak financial planning group is calling for an increase in the income threshold for access to wholesale investments.

An FPA submission to the Australian Law Reform Commission recommends a lift in required investor income for sophisticated investor status to $350,000 per annum.

The controversial sophisticated investor regime where investors can access a range of “special” investments not open to the wider public should be overhauled with a higher entry barrier, says the Financial Planning Association.

An FPA submission to the Australian Law Reform Commission – timed to force the issue on the next government – recommends a lift in required investor income for sophisticated investor status to $350,000 per annum.

Crucially, the FPA has also recommended a tighter financial criteria would also be indexed to wage inflation – the existing criteria are not indexed, effectively allowing the entry levels to be diluted with each passing year.

As debate intensifies over the scheme, the submission also calls for a tightening of the assets test to genuinely reflect net assets.

READ MORE:Mayfair 101 investors far from ‘sophisticated’ | ‘Sophisticated’ investors are wealthy — but are they wise?

Importantly the submission calls for the exclusion of the family home as an investible asset: the inclusion of the family home is one of the most debated aspects of the current scheme.

An Australian National University study found that when the scheme was launched in 2002, only 1.9 per cent of the population were eligible to classified as wholesale clients. ”However, this figure had risen to 16 per cent in 2021 … and if unchanged could rise to 29.1 per cent of the population by 2031 and by 2041, 43.6 per cent of the population,” that study found.

Many private investors have recently sought sophisticated investor certification in order to access unlisted investments especially hedge funds along with specialist crypto funds.

Investors can qualify as a sophisticated investor at present if they meet one of the tests set out in the Corporations Act and have an accountant sign a certificate to confirm their gross income for each of the last two financial years has been more than $250,000 or their net assets more than $2.5m.

The call for an overhaul to the regime follows a range of problems where everyday investors claim they have been misled by the promoted advantages of sophisticated or wholesale status:

According to FPA chief executive Sarah Abood, the assets test should also be reviewed “to be in line with the transfer balance cap for each individual” – which works out at $1.7m per individual under current settings.

“Clients should also be provided with a warning covering the loss of consumer protection and opt-in to wholesale advice every two years,” she says.

Among the most high profile issues in recent times has been alleged exploitation of the status by the Mayfair investment group and legal action taken against the Morgans stockbroking firm.

Separately, financial advisers have been accused of moving to convert their client lists to exclusively “sophisticated” lists in order to avoid a range of regulations designed to protect retail investors.

As Rodney Horin, managing director of Joseph Palmer & Sons, has written in The Australian: “More and more Australian investors have satisfied the numbers side … of the sophisticated investor definition, but it is clear that many are not really ‘sophisticated’ in any sense of the word”.

Though the concept of a test of investor skill had been mooted as a solution to the failings of the system, the FPA has not pushed this – rather it has called for a tightening of advisor obligation.