Wilson Asset Management

By Aleks Vickovich

Investment manager Geoff Wilson has called for the sophisticated investor test to be abolished so that all consumers can access sharemarket capital raisings while replacing it with a financial literacy test for would-be unit-holders in managed funds.

The principal of $3.5 billion listed investment company (LIC) pioneer Wilson Asset Management (WAM) has rejected calls by Labor and the Financial Services Council to raise the threshold in the controversial regulation, arguing that instead the test should be ripped up altogether.

Under the 20-year-old Corporations Act test, investors who have $2.5 million in net assets (including the family home) or gross income of $250,000 in two consecutive years can be accredited by accountants as “wholesale” or “sophisticated” investors.

That gives them access to institutional-grade investments such as wholesale-only equity placements by listed companies, shares in early stage and pre-IPO companies, private debt and lucrative unlisted property trusts.

But they also lose important consumer protections, such as the guarantee of non-conflicted financial advice and right to an automatic referral to the Australian Financial Complaints Authority if a dispute arises.

Millions of Australians have inadvertently become eligible for accreditation thanks to rising house prices and the lack of a wage or asset price inflation mechanism in the law, sparking calls from both industry and consumer groups to raise the threshold and/or add indexation.

But Mr Wilson said the risks of investing in complex unlisted funds was determined more by an investor’s knowledge base than their income or portfolio value.

“For unlisted products, what they really need is a financial literacy test, not an assets test,” he told The Australian Financial Review.

That would help avoid the “situation” of troubled investment group Mayfair 101, he said, in which investors who met the definition deposited funds without understanding the risks or, in at least one case, what was meant by the terms “wholesale” and “sophisticated”. As much as $250 million of investor funds are frozen in Mayfair products.

‘Superfluous safeguard’

For listed equities, Mr Wilson said no test was necessary since existing consumer protections were built into the ASX’s structure, such as continuous disclosure obligations.

In a submission to Coalition Senator Andrew Bragg’s parliamentary committee on fintech and regtech late last year, seen by the Financial Review, WAM described the sophisticated investor test as a “superfluous safeguard”.

The rule blocks shareholders from accessing most capital raisings, which tend to be restricted to wholesale investors due to the cost and time constraints of opening them to the entire register, the submission argued. Of the $27 billion in equity raised by ASX-listed companies last year, $24 billion was reserved for institutional and wholesale investors.

“The system has failed to treat retail shareholders equitably and the regulations that were developed to protect them are now precluding retail shareholders from equitable participation in equity raisings,” it argued.

“As a wholesale investor, WAM is a beneficiary of the current ASX regulations. However, it believes all shareholders should be treated equitably.”

As for his own products, Mr Wilson said that was a “tricky one” given LICs are only permitted to pay so-called stamping fees to financial advisers and brokers advising wholesale investors to participate in LIC initial public offerings.

The federal government last year banned the payment of these commission-like payments to advisers after the Financial Review revealed the regulator had warned Treasurer Josh Frydenberg about the conflicts.

In order to maintain the ability for LICs to pay fees to wholesale-only advisers – seen as a critical element of conducting successful capital raisings quickly – Mr Wilson said perhaps submitting investors to the financial literacy test might be the best approach.

WAM, which was influential in the backlash against Labor’s policy to outlaw franking credits before the last federal election, has been pushing for changes to the sophisticated investor test for about 10 years. It warned the Financial System Inquiry, chaired by former AMP chairman David Murray, that retail investors had missed out on $13 billion in equity and counting.

‘Blunt instrument’

Lobbyists for the technology industry have also called for the rule to be loosened so that regular retail investors can more easily invest in start-ups and private equity.

Venture capital investor Ben Armstrong of Archangel Ventures backed calls for a knowledge test to replace the current asset and income threshold.

“People who make $250,000 a year might not understand the market they are investing in,” Mr Armstrong told the Financial Review. “Someone who makes $100,000 a year may well work in that industry and intimately understand the risks and opportunities.

“[The current test] is a blunt instrument, paternalistic and does penalise people from wealth creation opportunities.”

Ben Williamson, founder of investment banking fintech Fresh Equities, added: “Having less money doesn’t make you stupid. More opportunities mean more options, which means more diversification and, strangely, potentially lower risk.”

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