Where to for wholesale product advice

Author: Richard Webb, Policy advisor - Financial planning and superannuation, CPA Australia

The 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 (Review) in March 2022. 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 which 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 which 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 are available to wholesale investors. However, it comes at a price. Eligibility to invest in these products is limited to high value 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 that fewer and fewer funds will be able to achieve this scale in the future.

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

The Issues Paper to the Review, notes that the Terms of Reference is able 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, which 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 which isn’t 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 that there are fewer responsibilities on product providers. Neither are they subject to the same fee and cost disclosure regime which retail products are subject to.

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

We expect that the Review will improve the advice experience for many Australians. However, it is likely that 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.