Becoming a Wholesale Investor: Always the Right Move?

It’s an all-too common scenario these days. A stockbroker sends an email with a Wholesale Investor Certificate to a client, requesting their accountant sign and return it asap so all future share trades can be executed without delay and for the client to have access to wholesale/exclusive products. The client forwards the email to their accountant for their signature. As an accountant myself, I ask them if they understand what the difference in classification means. After we talk, the client invariably goes back to the stockbroker for clarifications.

Over the last five years, I have seen a shift by advisers and brokers from working alongside retail investors to exclusively working with wholesale investors, with increased requests for Wholesale Investor Certificates. It’s important to know the differences and be fully informed as to what you are signing up for. It’s not always necessarily the right move to sign up as wholesale investor.

Retail, the Default Position

Being a retail client is the default position, i.e., unless you meet the requirements to be classified as a wholesale investor per s761G(5), (6), (7) or s761GA of the Corporations Act 2001, you will be considered a retail client under section 761G(1) of the Act.

Retail clients will receive retail advice. There are several obligations that must be discharged to a retail client when receiving retail advice from professionals, the main ones being:

1. The client being issued with a financial services guide (s941A of the Corporations Act),
2. The client being issued with a Statement of Advice specifically tailored to the clients needs (s946A and s947B(3)),
3. The client is provided with Product Disclosure Statements,
4. Target Market Determinations appropriate to the client are provided by product issuers, 
5. Ongoing Fee Arrangements that must be disclosed and agreed upon by both parties,
6. Clients will have access to complains and dispute resolution services (such as AFCA)

The above disclosure obligations provide both parties, the client and the professional, with legal protections and rights.

However, none of the above listed obligations applies once a client is classified as a wholesale investor.

There is one exception to this, and that is in regard to Self-Managed Super Funds (SMSFs). Certain types of advice will always be retail advice, irrespective whether the client is classified as wholesale.

Those types of advice include:

• Establishment
• Windup
• Rollovers
• Contributions
• Payments
• Pensions
• Transfer Balance Cap
• Insurance Assessments

As you can see, professionals can reduce their regulatory obligations by having a client classified as a wholesale investor. Furthermore, they can steer clear of strategic advice areas such as SMSFs to instead focus on investing exclusively for wholesale clients.

Wholesale Client & Wholesale Advice

Under the Corporations Act, a client must meet one of the tests in order to be classified as wholesale in the provision of financial product or services. Those tests are:

1. Product value test – when the value of the financial product in which the financial service relates to is greater than $500,000 per transaction.
2. Business test – when a business employs more than 100 people in the manufacturing of goods, or 20 people in all other cases.
3. Individual wealth test – this is the most common and widely used. Its application is via the Wholesale Investor Certificate that only qualified accountants can sign off on. S708(8)(c) and Reg. 6D.2.03 states a certificate must be completed by a qualified accountant to attest that the client has:
   1. Net assets of at least $2.5 million or
   2. Gross income for each of the last two financials years of at least $250,000.

While the signing of the certificate shifts risk away from the adviser/broker and onto the qualified accountant, fiduciary duties and duty of care still apply to the client by the adviser/broker, with some of the below being relevant questions to be asked:

• Is it in the client’s best interest to be classified as wholesale?
• Does the client have then knowledge and experience with financial products, investing and risk?
• Does the client you have a high level of financial literacy?

The wholesale tests are aimed at identifying experienced, informed and financially savvy clients.

Such clients do not need to have in writing the pros and cons of investing in a particular product that’s specific to their personal risk profile or be disclosed with the costs involved.

But even when one of the tests are met, it is important to understand that being classified and treated as wholesale means losing access to those important disclosures and other protections set out in the Corporations Act, protections that are only inherent in being classified as a retail investor.

That protection needs to be weighed up against the opportunity to invest in wider products including wholesale products. Just because you tick a box doesn’t mean that it’s fit for your unique needs and requirements when it comes to investing.