SMSFs as wholesale clients: a continuing sea of grey

by | Apr 11, 2024 | AFSL | 0 comments

The confusion and debate about wholesale clients and in particular, when a SMSF trustee can be a wholesale client, continues as a recent SMSF Adviser Article points out.

Whenever advising a SMSF trustee, the adviser must always carefully consider the nature of the advice they are giving. If it is related to the superannuation product itself, then (as long as the trustee is the one receiving the advice), the $10M test applies (when advising the member on their superannuation product, the client must always be retail). Where the advice is purely investment advice, the normal wholesale client tests apply.

As pointed out in the SMSF Adviser article, there will always be grey areas here where advisers need to exercise caution and be on alert. Structuring advice on the fund and trustee obligations (including the need for the investment strategy etc) are two examples of ‘superannuation’ related advice that require the higher test to apply or alternatively, treated as retail and provided with an advice document. Implementation of the investment strategy by giving ongoing investment advice is not advice on a superannuation product and can be treated as wholesale under the normal tests.

Above all of this is the adviser’s motivation for classifying the client as wholesale. Classification of a client as a wholesale client by an adviser should always be client driven and client centric and never to avoid disclosure or cut corners. Most firms we deal with classify clients as wholesale clients because the client specifically wants access to wholesale investments and/or wants a much more flexible advice relationship and process, in other words, client driven and client centric.

Classifying a client as a wholesale client does not guarantee that a client complaint won’t end up with AFCA. Just as much care needs to be taken for wholesale clients around being very clear on objectives and risk tolerance, linking your recommendations back to objectives and risk and clear and prominent disclosure of assumptions, risks and costs. Record keeping is just as critical with wholesale clients and can sometimes be more fraught with danger without the retail ‘guard rails’ in place.

Future clarity

The need for clarity and simplification in this space is clear. It absolutely feels like we are splitting hairs here to have a workable situation that gives effect to what appears to be the legislative intent. Advisers who are trying to do the right thing can easily end up in strife.

On 20 March 2024, the Parliamentary Joint Committee on Corporations and Financial Services established an inquiry into the wholesale investor test for offers of securities and the wholesale client test for financial products and services with submissions due mid-May. We are currently working on our submission. Hopefully as a result of this we will have some further clarification albeit we can’t see it moving quickly.

The promised but yet to be delivered QAR simplification of advice documents and process is also a critical piece to this puzzle. If advisers had more flexibility in how they deliver advice and the documentation they use to communicate advice to different types of clients, there would be less drive to move clients into the wholesale camp.