This article appeared in its original version in the Financial Standard on 7 January 2019.
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.
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.
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