Sophistication: More than money

The new FASEA Code of Ethics came into effect on January 1, 2020 and it has brought about a raft of requirements for all financial advisers.

The new FASEA Code of Ethics came into effect on January 1, 2020 and it has brought about a raft of requirements for all financial advisers.

One implication of the new Code of Ethics is is increasing scrutiny on how advisors determine who is a sophisticated investor.

Sophisticated investors, also known as wholesale clients, can often access a wider range of investments than retail clients, and have reduced disclosure and compliance requirements..

Under the 2004 Financial Services Reform legislation, most clients are classed as a retail client unless proven otherwise.

To change this, a client can receive a two-year certificate from their accountant after passing an individual wealth test.

By the law, a sophisticated investor is someone with at least $2.5 million in net investable assets and $250,000 in annual income.

While this may be technically correct, a good financial adviser would not look at their clients in such simple terms.

The concern is that some investors may not in fact be “sophisticated investors”, if they lack good financial judgement. Simply because a client has assets over a certain value doesn’t guarantee that they have investment experience and knowledge.

This is because wholesale or sophisticated clients can be left without the same level of consumer protections in place for retail clients.

For example:

A couple has a family home in Teneriffe worth $2.8 million whose stockbroker and financial adviser declare them wholesale clients.

When the husband comes into a $25,000 inheritance he tells his adviser that he has no clue about money and asks for a recommendation.

The stock the adviser suggests crashes by 30% and, as the client is a wholesale investor, there is no Statement of Advice.

In this matter, a simple workaround to the risk might be to exclude the home from the total assets in the assessment.  It is also important to note that the asset threshold relates to net assets – therefore any debt attached to the assets should be removed from the calculation.

At Pitcher Partners, we adopt the philosophy that advice should always be tailored to the individual.

Even with our high net worth clients – some with in excess of $50 million in investable assets – we maintain the same levels of advice and disclosure that we do for retail clients.  We ensure that we explain the nuances of the proposed investments, and make sure that the risks are understood.

FASEA’s code hammers home the fact that you can’t just go off assets to categorise your clients.

At Pitcher Partners, we take the time to tailor our advice to our clients, and ensure they are educated on the investments that we recommend.

Disclaimer

This document has been provided for the exclusive use and benefit of Pitcher Partners Wealth Management, our clients and our Authorised Subscribers.  It must not be distributed to, used, or relied on by any other person, without our prior written consent.  Data is sourced from third parties and is considered to be accurate and reliable at the date of publication, although we cannot guarantee accuracy and reliability, nor do we accept responsibility for errors and omissions.  These figures are therefore subject to change.  This information is of a general nature and has been prepared without taking into account your objectives, financial situations or needs.  Accordingly, before acting on the information, you should speak to your Pitcher Partners Wealth Management representative and consider the appropriateness of the information having regard to your objectives, financial situation, or needs.  To the maximum extent permitted by law, neither we, nor any of our representatives, will be liable for any loss, damage, liability, or claim whatsoever suffered or incurred by you or any other person arising directly or indirectly out of the use or reliance on this information, or any changes made to this document without our prior written consent.

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