Advisers urged to think twice when it comes to ‘sophisticated investors’
Financial advisers need to be careful when deciding to treat clients as "sophisticated investors", senior lawyer at The Fold Legal, Lesley Thorne, warns.
Thorne said there was a misunderstanding within the financial advice sector over what the term sophisticated investor meant, with some advisers incorrectly describing their customers as "sophisticate clients".
Thorne warned that advisors who decide a person is a "sophisticated investor" could risk their status as an Australian Financial Services Licensee (AFSL), if they have overestimated their client's investment experience.
"A sophisticated investor is a person with sufficient experience in using financial products and services," she said.
"Their experience means they don't need the information usually contained in a product disclosure statement or the standard protection available to retail clients.
"To call someone a sophisticated investor is a big call, as the client might later claim that they weren't that experienced," she said, which could put the licensee at risk if they failed to comply with all the retail client obligations.
Thorne said people where often confused the sophisticated investor test with other wholesale client tests such as the asset and income test or the product value test.
"It's confusing because for corporate fundraising, the sophisticated investor tests mirror the wholesale client tests that apply to financial services," she said.
Thorne said the sophisticated investor test only applied to financially experienced client and can only be used by an AFSL, and not an authorised representative
AUTHOR
Nicholas O'Donoghue
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