Mayfair 101 investors far from ‘sophisticated’
But an even bigger issue raised by this debacle is the status of so-called “sophisticated investors”.
Though we are a long way from getting the whole story at Mayfair 101 it is clear already the classification of “sophisticated” for investment purposes is not just inappropriate but dangerous.
Mayfair 101’s struggles with the regulator have now compounded with a new drama which has come as a fresh shock to investors.
Receivers were called in by the trustee Vasco to IPO Wealth and more than 13 other entities in the group after two repayments totalling almost $3m were missed. This follows last month’s implementation of a “liquidity prudency policy” resulting in redemptions of investor money being frozen noting COVID-19 as the contributing factor to this decision.
Investors in this enterprise, which is best known for its ownership of Dunk Island in Queensland, have been caught by surprise.
In an extraordinary case I came across during the week, one investor who had put their entire life savings in the group detailed the immense emotional stress caused by the uncertainty over when — and if — they will get their money back from a frozen fund.
Some investors in Mayfair seemed to think that after the Storm Financial debacle and royal commission into financial services there should be enough regulation in place to allow people to invest safely into a highly visible investment which included full page advertisements in major newspapers and promotion by senior financial commentators and radio personalities.
Wholesale investors
Importantly, all of the investors in IPO Wealth needed to be classified as “wholesale investors” which is distinctly different from the more commonly used “retail investor” profile.
A wholesale investor must satisfy the conditions set out in Sections 708(8)(c) and 761G (7)(c) of the Corporations Act 2001 to which an accountant provides a letter with this certification.
Guy Taylor, wealth partner at BDO, says: “Everyone is a retail investor unless they meet the financial eligibility tests to classify as a wholesale investor which is $250,000 annual income or $2.5m net assets.”
At best, getting classified as a wholesale investors is a privilege that allows you — or your self-managed super fund — to access investments you would never access otherwise, such as sharemarket floats or special purpose funds.
Wholesale investors may only receive an information memorandum, which may vary greatly from one offer to another, leaving it up to the investor to request or research other important information to make a sound investment decision.
Retail investment options offer more protections as advisers are obliged to provide disclosures and outline all the recourse avenues should things go wrong. A retail investor enjoys the safeguards of full disclosure of options, and receive a PDS, which is a regulated offer document that includes specific content.
Taylor says: “Often, investors who might be attracted to the notion of wholesale investments have made their money in their chosen field or through family divestment or inheritance. These large sums of money mean that they can access wholesale funds but often their expertise does not lie in the field of investing money.”
To put it bluntly, you can be utterly unsophisticated financially yet still satisfy the definition of a wholesale or sophisticated investor. Receiving a large inheritance or being the beneficiary of a family trust are two examples.
Simon Carrodus, solicitor director at The Fold Legal in Sydney, says: “Wholesale clients are presumed to be big and ugly enough to look after themselves.”
But many, including Carrodus, feel it is time to update the rules to better capture the profile of a wholesale investor.
Changes needed
“The current law and regulations are almost 20 years old. There is growing consensus that the various quantitative thresholds (e.g. $250k income, $2.5m net assets, $500,000 investment amount) are too low.”
So why have a wholesale category at all? Stockbrokers and investment firms will argue that they can be nimbler and more cost effective in their dealings under wholesale client arrangement.
A review and strengthening of the process to determine who is and who is not a wholesale investor would be welcomed by many. It would help to ensure that only people who are appropriately equipped to make large financial investments with no safety net can venture into wholesale investments.
Whether this is obtained via an exam or an application process with the regulator, there is still a place for wholesale investment offerings in the market, but only to the right people.
At present, it appears the rules at times allow for people to be deemed as a sophisticated investor in name only.
The debacle at Mayfair 101 is another episode in a long chain of events, there will be more.
James Gerrard is the principal and director of Sydney financial planning firm FinancialAdvisor.com.au
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