The AFR View


Australians have become very rich. But are they also more sophisticated? According to rules written 20 years ago, 3 million of us are now eligible to be classed as financially sophisticated. That’s the number of Australians with annual gross incomes over $250,000 a year for two years, or with assets of $2.5 million including the family home.

That defines them under the Corporations Act as sophisticated or wholesale investors, who can be certified as such by a qualified accountant and allowed to buy into riskier financial instruments and investments meant for professional institutional players with deep pockets. They can skip some of the red tape and rules on commissions and disclosure that are meant to protect more modest investors.

But should well-off Australians who have simply been the passive beneficiaries of rising house prices be pitched into a world arguably not designed for them?

Many might be surprised at their new status. When those rules were set in 2002, just 1.9 per cent of people – a little more than 100,000 households – qualified. Now, in a form of financial bracket creep, research reported in The Australian Financial Review shows how housing wealth and super savings have lifted the number to 16 per cent.

That number will keep growing to include a substantial proportion of the population: 43 per cent of Australians by 2041, based on Treasury assumptions on asset growth.

Unlike houses, super savings are excluded from the sophisticated investor threshold. But the rising numbers of supposedly high-powered investors will still amp up the already fierce debate on financial advice as more Baby Boomers retire with substantial sums of money available.

Moreover, mislabelled sophisticated investors are exactly where the sharks come to feed. The Mayfair 101 debacle involved at least one “sophisticated” investor who was signed on after being told not to worry that he did not understand what a wholesale investor was.

Mayfair 101 is now trying to avoid a fine for misleading and deceptive conduct after allegedly using the “sophisticated investor” tag to sell financial products to ordinary Australians at a lower level of disclosure. And they were pitched as safe alternatives to bank deposits.

Freedom of choice for all

What is the best course of action now? There are philosophical as well as financial issues here. An open, democratic society such as Australia should maximise freedom of choice for its people. It would not want to give some the opportunity to create wealth for themselves – say, to buy into pre-public IPOs – and deny it to others who have to buy the same shares on the market months later.

And you cannot protect people from the consequences of every bad decision. On the other hand, it’s hard to leave people to unwittingly blow up their family finances because they were left unprotected by some arbitrary cut-off that could be exploited by a dodgy adviser or fund manager to evade consumer rules.

Veteran investment manager Geoff Wilson suggests a real test, not an asset test. A financial services worker on $100,000 might do better than an unrelated business owner earning $250,000. Capital and knowledge are not the same thing.

Indexation of benchmarks

Industry consensus is that the benchmarks should be indexed, and it seems just a bureaucratic oversight that they are not.

The Financial Services Council also wants to lift the threshold to between $2.5 million and $5 million, with an active “opt in” to sophisticated status.

A review could also consider whether the family home should be counted. As in other areas of the financial rules, only investable assets should really be considered, not the roof over a family’s head.

The financial services sector has changed greatly in the past 20 years. There are far more rules that apply now, and the whole marketplace is more productive, educated and competitive.

The Australian Securities and Investments Commission has product design and distribution rules that oblige financial firms to specify what consumer segments their products are suitable for. Financial advisers are better placed to assess a client than they were before, and the regulator is eager to remove red tape to boost access to their services.

A much improved and more accessible market is now much more important than keeping an arbitrary gate set up two decades ago to decide who can or cannot play.

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