Updated Dec 19, 2022
This information has been reviewed by our SMSF Mates before it was published as part of our review process.
Welcome to SMSF Mate. Our general advice warning. We are required to warn you that any advice has been prepared without taking into account your objectives, financial situations or needs and because of that you should before acting on any advice consider the appropriateness of the advice having regard to your own objectives, financial services and needs. Where the advice relates to the acquisition or possible acquisition of a particular financial product you should obtain a product disclosure statement relating to that product and consider the PDS before making any decision about whether to acquire the product.
Ashwin: Welcome to SMSF Mate. Today’s topic is what type of investors are there and how we classify them or a guide to that.
Sonny: Ashwin, maybe you want to kick off from an accountant’s perspective or I suppose account certificate perspective?
Ashwin: Usually to be classified as a sophisticated investor part of the opportunities or the wholesale opportunities around that you need an accountant’s letter. That usually is around most commonly how much income, gross income that individual person earns or the assets that that person has. The threshold is 250,000 in gross income. I think it’s two and a half million in assets, net assets. Some people get caught up thinking their house is two and a half million. I qualify. You’ve got to factor in the mortgage in there. Some people also get confused and include their super assets in there. You can if you’re individual trustees in the super fund. I believe you can look through that way your portion of the member but if you’ve got a corporate trustee it’s actually segregated because your super fund is actually run by the company.
You’ve got to be very careful about how you add it up when an accountant is preparing that letter but it also gives some people the belief that okay, I’m a sophisticated investor because of those sort of things while the letter is just measuring those two aspects traditionally. Do you actually understand what you’re signing because that’s part of it as well right? You might have all these opportunities in front of you as a wholesale investor or a sophisticated investor. Still doesn’t exclude you from reading what you’re entering into and what the terms are. That’s where the PDS or the disclosure requirements by the investment you’re looking into is really important too.
Sonny: PDS being Product Disclosure Statement.
Ashwin: Thanks Sonny. You’ve got to read through what you’re investing. Yes there’s more opportunities available but it doesn’t exclude you from reading through anything you sign. When you put your pen to paper all that letter is doing is you have the ability to potentially lose what investment you put in there because you’ll earn enough to recoup it or you have enough assets to live off the whatever you put in if it goes bad. That’s all it is. It just introduces you to a higher risk investment. Doesn’t mean you should invest but it just gives you that opportunity to take in opportunities that aren’t available to retail investors because those retail investors have less ability to recover from these investments if they went bad.
Sonny: I’d encourage reading of our article on the website because it actually covers the topic really well but if we start focusing on some of the areas that are key to Ashwin’s point. It’s designed as a protection mechanism for retail or less sophisticated clients in their understanding of potentially complex and higher risk investments. It’s designed initially around that quantitative metric where there’s an assumption which is certainly changing that if you’ve got that man and money you have a level of sophistication around your investment decisions.
Nowadays and with the shift it’s definitely more to a qualitative basis and factor and less focus and reliance on just the quantitative metrics that Ashwin mentioned at 250K and 2.5 mil. It’s really on the onus of the investor to understand and make that decision. From a protection point of view and advice delivery there’s less requirements from an advisor advising a wholesale client on a wholesale investment than there is a retail investment on a retail client but again it really comes down to a qualitative assessment of the individual or the investor regardless of the quantitative metrics around are they suitable, do they understand in order to make the right decision.
Gareth: From like a naive individual’s point of view having not been too familiar with the terms I think the point is that there’s a whole heap of investment products available that is not available to people who are not sophisticated investors for the point of trying to protect them from potentially larger risks.
Ashwin: Even if you are a sophisticated or wholesale investor when you look at these opportunities you still got to go into the mindset that money is at a higher risk. You still don’t put all your eggs in one basket sort of situation. You proportionately go well, it’s a higher risk. How much am I going to put away because it usually comes with terms of liquidity. You can’t get the money out quickly generally because it might be in an unlisted company that’s waiting for listing which could take two to three years. Your money’s there. You can’t access it straight away. It’s not like a listed share and things like that. All of those things…
Gareth: Might be 30 days to get out or something like that.
Ashwin: It could be the next day if they are shares. That whole thing is a protection point for retail investors so just be aware of all those things. When you’re going in so you might qualify as a sophisticated investor. Doesn’t mean oh yes, these opportunities aren’t available on retail investors so I should put more into it. That’s not the thought process in my headspace anyway.
Sonny: Investors got to be aware of that when they’re brought opportunities that are wholesale only opportunities. You’ll have certain groups and advisors that will simply ask for an accountant’s letter. Do they meet these quantitative metrics and therefore I’m going to expose you to this investment and these risks but it might not be suitable for the individual, their investment strategy, their portfolio. They hang their hat on the fact that they’ve got a certain amount of assets or a certain amount of income.
Gareth: Would it be right the accountant, no offense to Ashwin, it’s technically not their job to check whether or not that investment is suitable or not. They’re just filling in.
Ashwin: We won’t be checking the investment.
Gareth: You’re just saying yes, you meet the test. Here’s my letter of proof to say you’re validated against this.
Ashwin: Because the letter would generally be one of the conditions to invest in that product. All it is is ticking one of the boxes that this person is a sophisticated investor. We’re not reviewing the investment or looking anything like that. We would need a financial license to do that. Some people will go through with the financial planner who’s presenting the opportunity to do that but again as a wholesale investor as Sonny mentioned earlier, the responsibility of the advisor isn’t at the same threshold as a retail investor. Again, if you’re not sure what you’re signing don’t sign it because you shouldn’t be part of that investment. That’s first step. If you’re not sure get clarification. You can get a lawyer. You can get a financial advisor to explain the risk. You can even ask for a statement of advice so they can outline it for you if you’re not sure. If you’re someone that has got two and a half million dollars or you earn 250,000, paying for that advice before you put your money in it it’s probably worth it. That’s the whole purpose.
Tim: Very good and I mean have you had any experience in that space recently and like what are some examples of a product which would fall into that wholesale classification.
Gareth: I can probably provide a personal experience on that end. I’m pretty sure this is my little story on the website somewhere is I went to a financial advisor and was not even, the question wasn’t even asked. I don’t think you generally know as an individual unless someone told you or you heard it at a bar or read it on a website whether or not you do or don’t meet the test or I’ve got a really terrible accountant. Who knows but I think most people will find themselves probably pigeonholed into what a retail run-of-the-mill bank or financial planner. When I say retail there’s a terminology called a retail investor which is if you’re not a sophisticated wholesale investor then you are a retail investor. That’s right?
Gareth: These guys are nodding. For those people that are not watching the video that was a nod from three people. I think that’s the first thing is I just didn’t even know that that thing existed. Then once you do know that that exists there’s a whole suite of new products and opportunities that are available to you if you tick that box. It wasn’t like you go to the financial planner or the bank and the bank says well, if you’re a retail investor you can have these ones. If you’re a sophisticated investor you can have these ones or you can have access to those things. It’s just assumed that you’re not a sophisticated investor and so you get pushed down a path.
Ashwin: I would probably say generally most people are retail investors. That’s probably why the assumption’s there but when you see an advisor usually supposed to fill out a fact find. On that fact find you should write down what your income is. You write down what your assets are so from that most advisers at that point will identify whether the potential is there to be a sophisticated investor because I would have had all the information.
Gareth: A good, legitimate financial advisor would ask.
Sonny: It’s best practice regardless of quantitative but someone could have 10 million dollars. I’ve had inherited it and have not have a single amount of investment or financial experience before. From a quantitative perspective they’ll meet the metrics but are they sophisticated. Are they going to be able to make the right decision? An advisor that’s not undertaking best practice even beyond those financial numbers to then make sure that the investor has a qualitative experience or understanding.
Gareth: What you’re really saying is there’s actually two parts to the test. There’s one yes, you tick the box that you’ve got sufficient capital and investment funds to do this. Number two you’ve got sufficient brain power to know what you’re doing. Correct?
Ashwin: Also the probably the third one is also is there a need for it. There’s some people who’s, let’s say your living costs as a retirement is only 80,000 a year. If you’ve already got the surplus assets that’s going to provide that without taking these risks well maybe you don’t need to go down the path of taking unnecessary risk. That’s where you need the holistic advice piece before you undertake this and then you sort of know where your investment strategy and planning should be around that.
Gareth: But I think people are allowed to go to the casino and they’re allowed to risk a lot and there’s no one at the door saying are you retail or you’re a, it’s kind of if you compare it to the casino it’s almost like going to the high roller room in a basic sense.
Ashwin: I would say in some way but I suppose if you’re using super money to do that that’s when you should probably get advice because that’s going to set up for your retirement versus using one week’s paycheck.
Sonny: My outcomes and risks are probably a little less binary. There’s more complexity to them. Someone might know the difference between red and black being able to put something down but then understanding either the term of investment or the risks that are associated with it or whether they’re representative of the potential return. That’s something else.
Gareth: I think that’s what I’m really understanding from this conversation is there’s actually two parts to it rather than a simple yay, nay, you’re that box or that box. If you are a sophisticated or wholesale investor it doesn’t mean you don’t, you can still have retail products. I think it’s kind of like you can then you’ve got more choice. Then your way of investing that your money in those products is a separate part too.
Sonny: It’s not a case that wholesale products are better than retail products. There’s just a different suite of products.
Gareth: I think that’s really important point. I think the perception is it’s kind of like the high roller room. You’ve got better odds or better, you get nicer cocktails or something in that department but it’s more they’re different products rather than better products.
Sonny: I’d agree with that.
Tim: Are they products, that wholesale products that just haven’t been gone through that classification process like are they, do they have to be approved as retail so they could just be like a younger fund or something along those lines?
Ashwin: It could be something like that. Sometimes it’s also the product themselves don’t have the funds available to get it to a retail product stage or they don’t need that and that level of funding to get what they’re going. If it’s a start-up company that’s planning at least in two or three years to go through a full, to list on the ASX, do the prospectus, everything else. There’s a lot of costs involved in that. They’ll do what they call pre-seed or seed money to get it going. The risks are higher but the potential upside is there but it also has just as much risk of going down while doing the prospectus and listing on the ASX is a totally different risk profile for someone coming in. You can look at any recent IPO there would have been pre-seed money that came through. Those people took a higher risk and most likely was in the wholesale space to get into those investments.
Gareth: If I wanted to start a fund and then it is more expensive and more time-consuming to make it a retail compliant fund than it is to make it a wholesale sophisticated fund.
Sonny: Absolutely. I think that goes to Tim’s point there’s a lot of funds out there currently or start-up in a wholesale fashion because of cost restrictions and structural restrictions as well and additional requirements that are needed for retail funds. They might need to get the fund going. In the first part prove the investment thematic and then gain additional traction and support in terms of investment inflows before they can afford or it makes a good business case to turn into retail.
Gareth: Then that obviously means they’ve got to perform better, make higher returns, take more risk because they’re paying more costs.
Sonny: There’s more oversight. There’s more regulation. There’s more disclosure.
Ashwin: There’s also the potential that those funds now get more money. They’ve got to look for more opportunities and maybe they don’t have the staffing level to do that all. It’s not in the inclination to change the profile of the fund to look for more opportunities. You, all of a sudden become a public or retail fund and all of a sudden there’s an inflow of a lot of money and your metric is still for opportunities. Now you’ve got all the extra cash to find opportunities. Maybe that doesn’t line up with what they wanted to do in the first place. It might be a strategic thing as well within the fund.
Tim: What I’m hearing is you might be wholesale but you may not be sophisticated. Maybe the words are a bit confusing.
Gareth: It is very confusing.
Sonny: Most people would like to think themselves as either sophisticated or a professional investor but I think that’s a good summary Tim.
Gareth: It’s definitely two parts right?
Ashwin: It would be great because I tried to look for, it would be great if there was a course that people could sit to test sophisticated concepts. There was obviously another exemption that you can pass on education based but a lot of people haven’t gone through a full degree to qualify under that basis. You would need a different way of doing things. Maybe people could sit a course on top of passing the assets and income tests and that would give everyone the peace of mind that you are sophisticated but that line is still blurred effectively.
Sonny: Also doesn’t stop people from making a silly decision.
Tim: Well we are all guilty of that.
Sonny: Objectivity around that and that’s where a broader advice that even from a wholesale perspective counts. There’s certain specialities in different areas of investment but then that whole objectivity piece around looking at it through a different lens or a fresh set of eyes regardless of someone’s expertise. That’s why even investment committees for investment funds still exist.
Ashwin: Look, I still personally view whenever I have any investment in those sort of frameworks. You’ve got to be willing to part with that money. That’s the way. It’s effective.
Gareth: You mean lose it.
Ashwin: Oh yes.
Gareth: If you say part. You mean lose it.
Ashwin: It’s parted and it may not come back.
Sonny: Is it like temporary?
Gareth: That implies that you’re going to get it back.
Ashwin: It’s gone.
Gareth: Do you need to admit something Ashwin?
Ashwin: No. If my wife is listening I’d be in trouble. That’s effectively how I view it. Once it’s out it’s gone. Hopefully it does come back and I’ve still reviewed and updated within my overview of my portfolio but it’s effectively gone.
Gareth: But it’s as good as spending it at the pub.
Sonny: But don’t be. I think the point is don’t be afraid also to ask whether you should be investing or ask somebody whether you should be investing in wholesale products and making sure that you do have an understanding of them.
Gareth: Is that is that an answer a financial advisor is allowed to give?
Sonny: Yes, in short.
Gareth: I could ask a financial advisor should I be a wholesale investor and should I buy this wholesale product? They can provide the yes or no advice.
Sonny: Correct. Whereas to Ashwin’s point for accountants can just say yes, you meet these metrics. financial advisors even if they get that letter best practice still suggests that you need to have a conversation with a client to gauge their understanding before you recommend a product.
Gareth: The investment fund manager doesn’t care either way.
Sonny: Not so much. There’s new requirements called target market determinations now or TMD’s where the fund managers have to provide some guidance and stipulate the type of investor who’s suitable for their fund now which is relatively new in terms of back end of last year. With that there is more oversight from not only the fund managers but then the broader distributors of those funds like wrap products and platforms that need to keep an eye on what investments are being made in certain funds.
Gareth: But otherwise if I fill in the form, I’ve got my letter it’s up to me to have made that decision.
Tim: Fair enough.
Gareth: So really a financial advisor plays an important part in deciding whether you should or shouldn’t make that decision.
Sonny: If a wholesale investor chooses to get the advice.
Gareth: You as the wholesale investor chooses to go down that path.
Ashwin: Which is part of if you’re reading through whatever application you’re filling out, if you’re not comfortable with it that’s when you should.
Gareth: Or don’t know what the words say.
Ashwin: You should be engaged with a financial advisor for some clarity and then still make a decision after that advice piece.
Tim: Very good. Beautiful. All right. First one done.
Gareth: That seemed like good content.
Sonny: I don’t think we missed anything particularly.
Gareth: I think it was good clarification on lots of points because it is really misleading. If you Google what is wholesale investor you get like a one paragraph.
Ashwin: And mates that now qualify they shouldn’t be doing this shit.
Gareth: This is the thing. A lot of people I think probably do qualify without knowing.
Thank you for joining us once again. If you’re interested in our waffle about self-managed super funds feel free to join us on smsfmate.com.au or search SMSF Mate in Spotify.General Advice Warning
Ashwin is an accountant and educator based in Perth, Western Australia. He is passionate about helping family owned businesses and startups. He is one of the founders of SMSF Mate and you’ll regularly see him on our podcast!
Ashwin is a managing owner and director of Eventum Consulting, a multidisciplinary firm helping clients with finance, succession planning and their tax needs. He also served as a lecturer in taxation and small business at the Central Institute of Technology, and has worked as an accountant at a number of well-known tax specialists.
Ashwin studied a Diploma of Business Education and a Bachelor of Commerce in Financial Accounting, Managerial Accounting and Corporate Finance, both at Curtin University, WA.
Ashwin is passionate about technology, and sees it as an enabler for his clients to grow truly sustainable and profitable businesses.
You can find out more about Ashwin or connect with him on Linkedin here: https://www.linkedin.com/in/ashwin-ramdas-72442919/
Or visit his website here: https://eventum.com.au
Sonny Rahim is a finance professional based out of the Greater Perth Area. He is the director and founder of Premia Private, a multi-faceted finance business with advisory divisions and expertise in the areas of Strategic Planning, Wealth Management, Investment Management, Debt and Personal Insurances. Sonny is one of the founders of SMSF Mate.
Sonny studied in the Private Markets Investment Programme at Saïd Business School, University of Oxford and also participated in the Oxford Entrepreneurship Venture Finance. He also completed a Bachelor’s Degree, Commerce (Accounting and Finance) at Curtin University in Western Australia.
As well as being a founder and managing director of the Premia Financial Group, Sonny has worked as an investment fund manager and a chartered accountant. He sits on the board of Ronald McDonald House Charities Western Australia.
You can find out more about Sonny or connect with him on Linkedin here: https://www.linkedin.com/in/sonny-r-rahim-28959333/
Or visit his website here: http://www.premiaprivate.com.au/
Gareth Lane is a successful entrepreneur, businessman, and owner of the digital marketing and web agency Concise Digital, based out of Perth, Western Australia. Concise Digital have solved over 60,000 digital / web problems for clients since 2005. Gareth is one of the founders of SMSF Mate.
Gareth is passionate about helping small businesses be more successful online by avoiding the pitfalls of digital marketing. He regularly runs live talks, workshops and meetups discussing Google, social media and all things digital marketing.
Gareth studied Business and Commerce at Curtin University, and has held board positions for a number of organisations, including serving as the President of the Western Suburbs Business Association and as a non-executive member of WA Business Assist. A true entrepreneur at heart, he started his first business at 13 and has created and run multiple successful businesses since.
Gareth enjoys good food, great wine and time in the sun when he’s not at his computer helping other businesses get ahead!
You can find out more about Gareth or connect with him on Linkedin here: https://www.linkedin.com/in/garethconcise/
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