The following is an article published in the Australian Financial Review by Jessica Sier.
Investors whose wealth has increased through soaring property prices and rising assets are at risk of being pushed into riskier financial products as they gain sophisticated investor status.
While it may seem like an attractive option for investors to attain a "sophisticated investor" certificate allowing them to participate in complex share placements, exotic bonds and exclusive private equity deals, experts are calling for an urgent rethink of the criteria.
"There are alarming levels of financial illiteracy across all Australian demographics," says Mark Brimble, chair of the Financial Planning Education Council and lecturer at Griffith University.
"We can't just assume that because someone has a certain value of assets and income that they understand these products."
As it stands, investors with net assets – including their residential property – of $2.5 million and/or a gross income of least $250,000 a year for the last two years qualify for an SI certificate signed by an accountant. This enables them to participate in pre-IPOs, IPOs and receive tax benefits for investing in Early Stage Innovation Companies (ESICs), among other things.
But as house prices have soared – the median in Sydney is up 65.9 per cent since 2012 and Melbourne is up 48 per cent – it is much easier for people to qualify for this status.
"These criterion were meant to be a significant hurdle for people," says Peta Tilse, managing director of Sophisticated Access and founder of Cygura, a centralised online platform for sophisticated investor certification and validation.
"But it's become very outdated and thanks to the booming property market, including the family home, opens that sophisticated investor door right up," says Ms Tilse.
The Australian Securities and Investments Commission (ASIC) offers client consumer protection to retail investors where financial advisors deliberately miscategorise their clients or when companies fail to properly disclose their businesses. However these protections are not available to sophisticated investors.
Another law, established in 1991, automatically upgrades an investor from retail to wholesale or sophisticated if they invest $500,000 or more in one particular product.
"It's a law not many people know about and it was made when the average full time earnings were $19,000 per year, rather than the $80,000 now," says Ms Tilse.
The last few years have seen a spate of financial planning controversies ripple throughout Australia, adding to the concern that over-eager financial advisors might be pushing otherwise unaware "sophisticated" investors into riskier investments with little or no protection should returns fail to materialise.
Investors in music streaming service Guvera, many of whom were sophisticated investors and SMSFs, were left out of pocket last June when the ASX blocked the listing of the company on its exchange. The Gold Coast-based company managed to raise $180 million from 3,000 individual SMSFs and sophisticated investors, courtesy of enthusiastic accountants spruiking the booming internet streaming industry.
However, the ASX blocked Guvera from listing, leaving these sophisticated investors out of pocket and the company struggling to raise emergency capital to keep the doors open.
"What people sometimes don't understand is those legislative protections are stripped out and rather than ASIC acting on their behalf if something were to go pearshaped, then they would have to act for themselves," says Ms Tilse, who is calling on the government to urgently review the current assessment and validation periods for SI accreditation.
Self-managed super funds, a large proportion of the Guvera raising, are also at risk of being sucked into the world of "sophisticated" accreditation, putting at risk the life savings of some Australians.
According to the Australian Tax Office's most recent data, 19 per cent of SMSFs had a balance of between $1 million and $2 million in 2014-15, while 11.4 per cent had a balance between $2 million and $5 million while 2.3 per cent had a nest egg of between $5 million and $10 million.
"I get people coming in all the time wanting to upgrade to sophisticated investor status," says Fiona Willard, partner at Foundation Partners, a financial advisory firm.
"They come in with an existing bias and I ask them, why do you need to take on the risk with your SMSF? "As part of the Future of Financial Advice consultancy process, Treasury issued an Options Paper in January 2011, inviting submissions for wholesale client and sophisticated investor tests in the Corporations Act. However so far, the federal Government has not acted to make any changes to the rules. "The hurdle we have at the moment is wealth, not knowledge," says Mr Brimble. "This architecture seems to suggest that just because someone is wealthier, they want to be more complex in their financial affairs."
