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Wealth doesn’t equal wisdom for 'sophisticated' investors

The increase in stock prices and house prices in Australia in recent years has cast the spotlight on the definition of ‘sophisticated investors’, also known in the investment industry as ‘wholesale investors’.

The definition was last reviewed in 2011 in the Corporations Act. Since then, more and more Australians have been able to satisfy the requirements for this definition without lifting a finger. It is estimated that as many as three million Australians now qualify, but they have become wealthier but no more sophisticated while the number is increasing rapidly.

So what's the catch?

Sophisticated investors can be offered securities without the usual product disclosure requirements that apply to everyday mum and dad investors. Stockbrokers and financial advisers are able to offer sophisticated investors access to investments that cannot go to retail clients, such as some unlisted property investments, bonds and other unlisted investments.

Many companies also prefer dealing only with sophisticated investors. It means smaller and tighter share registers, access to bigger amounts of cash and less compliance issues.

In order to be classified as sophisticated investor, an investor needs gross personal income over the last two years of at least $250,000 or to have assets of more than $2.5 million. They also need sign-off from a qualified accountant. Importantly, the stockbroker or financial adviser also needs to be confident that the investor truly is ‘sophisticated’ – aware of the financial implications of both the advisor’s advice and their investment decisions.

The definition makes it easier to do business

Many advisers prefer dealing with sophisticated or wholesale investors, as it shifts much of the burden of risk of investing to the client, who are trusted to make their own decisions. In addition, it reduces compliance obligations for the advisor. Sophisticated investors require no statements of advice or annual reviews and they can be offered products which are more complex to understand.

Crucially, the significant rises in both property and stock prices over the past 10 years suggests the time has come for the qualifying numbers for sophisticated investor status to be dramatically scaled up.

Property prices in many parts of the country have doubled in the past 10 years. The median house price in Sydney is now more than $1.3 million, and the average of all residential dwellings in Australia is $835,000.

During the same period the stock market has had a big run, leading to huge increases in paper wealth. The All Ordinaries Index has risen from around 4,300 on 1 October 2011 to 7,700 now, an increase of almost 80%. During this time investors have been receiving dividends, increasing their wealth still further.

More Australian investors have satisfied the numbers side (assets and/or income) of the sophisticated investor definition, but it is clear that many are not really ‘sophisticated’ in any sense of the word. They have not accumulated any greater knowledge of investing or capital markets. Inflation and a rising stock market simply does not make an investor ‘sophisticated’.

Many others have inherited money or invested in a stock many years ago that has made spectacular gains, such as CSL or the Commonwealth Bank. Some have sold houses that they owned for many years or divested an investment property.

Adviser responsibilities

Importantly, an adviser’s duty of care is towards the client. If a savvy daughter brings in her mother who has significant assets, then the mother is the client. It is the mother who must understand the advice that she is given. A simple discussion with the mother will enable an adviser to determine if she is ‘sophisticated’ far more than a certificate from the family accountant.

We often ask a client to repeat back to us what we have suggested or to explain the significance of certain advice.

But many advisers don’t take seriously enough their responsibility to properly assess if an investor truly is ‘sophisticated’ and the Australian Securities and Investments Commission (ASIC) doesn’t have the resources to check. Accountants tend to pass the buck as rarely will an accountant refuse a client a certificate confirming their sophisticated investor status.

It’s time to review the area. The criteria is strictly financial and it has not been changed for more than a decade. It has left the system open for abuse and the people who pay the price are everyday investors who may suffer dearly if the classification leaves them with less protection. The government can make a big start by raising the qualifying threshold for sophisticated investors in the Corporations Act and index them for the future.


Rodney Horin is CEO of wealth manager and aged-care advisor Joseph Palmer & Sons. This article is general information and does not consider the circumstances of any investor.


October 27, 2021

Bernie Madoff's clients were apparently "sophisticated investors". If you need someone to stroke your ego to tell you how special you are because of what you earn or have (or don't), then maybe it's you that has issues ?

October 21, 2021

It's really frustrating for those who lose their wholesale status by virtue of retiring. We are no less sophisticated than we were (in fact our skill has grown with our experience), but we are now deprived of access to a whole range of investments that we once selected from. It makes much harder to generate a decent return.

Richard Rouse
October 21, 2021

I agree with Peter. The value of your home is irrelevant in the case of investing, it can hardly be classed as a liquid asset. I understood that the idea of having to be classed as a sophisticated meant that you were unlikely to get yourself into a position where you were likely to lose your home because you had sufficient assets outside of that, as well as enough experience as a successful investor. I agree that the threshold should be raised to protect those unsophisticated investors from themselves; and that there should be more controls over unqualified investment advisers.

October 21, 2021

The threshold hasn't been changed since its introduction. Index it by 10% per annum and the population may reduce particularly if backdated. A sophisticated investor should be able to achieve such a return over 5 years.

Jerome Lander
October 21, 2021

Unfortunately many retail investments are far inferior to wholesale alternatives. The average "retail" investor is precluded from accessing these better performing investments and hence precluded from moving ahead compared with a "wholesale" investor or client. In many cases, far from protecting these investors from losses, the red tape actually prevents them from achieving substantial gains and better risk adjusted returns. One of the greatest revelations I had - and I work and have worked in both worlds - was that those who could be wholesale investors were much better off; they were able to move away from the asset gathering relatively lower performing world of retail investing and retail advice to much higher performing alternatives.... For this reason, it is really sad to see so many advisers classifying their wholesale clients as retail for the sake of streamlining their business practice, hence precluding these clients from doing so much better with their money.

October 21, 2021

Back when I qualified as a sophisticated investor the definition of “investable assets” did not include the principle place of residence. Seemed logical, avoided issues of mortgage offset and the fact that your house is hardly an “investable” asset.
Why not return to this definition?

October 24, 2021

Peter's suggestion is spot on.The only decision ASIC then needs to make is the minimal size of the "investable" funds required and possibly index it.


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