Although many investors met the yardsticks of either having $2.5 million in assets (excluding the family home) or two years of gross income of $250,000, they were happy to keep their retail status. In the main, so were their advisers.
But in recent times, there has been a trend among advisers to get high-net-worth individuals designated sophisticated investors, in the process changing the way that many advisers run their practices. It is not a one-way street; these well-heeled individuals are wanting to have sophisticated investor status. For them, the benefits can far outweigh the disadvantages.
For the adviser, the advantages are obvious. In an era where the paperwork required to meet the compliance obligations for a retail investor is the equivalent of several pine plantations, the far less onerous reporting requirements for the sophisticated investor are a bonus, both in terms of cost and time. It means the potential for a more efficient practice where more time can be devoted to advising the client in a timely manner – the heart of the business relationship.
The fact that advisers are required to do far less paperwork for the sophisticated investor means they are better protected. The phrase caveat emptor perhaps best defines the relationship between the adviser and this class of investor.
In effect, what is happening is that these advisers are offering sophisticated investors a service more akin to a private bank service, cognisant of the fact that private banks have become more competitive in this space.
Remember, though, their ability to go down this path depends on their dealer group’s compliance procedures and process, making it difficult for some advisers. But those who have done it have achieved business efficiencies and can compete with private banks.
For SMSF trustees, the opportunity to be classified a sophisticated investor is becoming particularly relevant. ASIC has clarified that an SMSF can be designated sophisticated if all the trustees are sophisticated. So an SMSF does not need funds under management of $10 million, and the lower thresholds of $2.5 million or $250,000 gross income for the trustee/s are critical to give them investment options not available at the retail end of the market.
This is particularly pertinent at a time when SMSF trustees are looking to greater diversification away from their traditional asset classes of blue chip Australian equities, property and cash. Increasingly, more interesting assets are coming on to their investment radars. The problem can be that many venture capital, private equity and property syndicates are only offered to wholesale/sophisticated investors.
Sophisticated investment status also gives the adviser and their clients the flexibility and ability to trade quickly, particularly relevant given current market volatility, without the usual paperwork that can limit their capacity to respond to market opportunities.
There is an argument that the growing number of sophisticated investors, and the less compliance involved, opens the system to abuse. In the wake of the financial planning scandals of recent years, the need for compliance is greater, not less, and the wholesale benchmarks stipulated by ASIC don’t necessarily mean these investors have the necessary investment acumen to make the right decisions.
But surely it’s the individual who decides to sign up to be a sophisticated investor. It is he or she who wants the flexibility and choice this status confirms. People have the right to make choices – provided they are prepared to accept the consequences.
George Lucas is managing director of Instreet Investment Limited. He has over 24 years’ experience in the investment banking and funds management industries specialising in developing, managing and structuring financial products. He was previously a director of two listed investment trusts, chief investment officer at Mariner Financial, and a senior equities derivatives trader with Citibank and First Chicago in London.
