The FSC’s alternative ways of demonstrating financial sophistication
When it comes to the wholesale investor test, the Financial Services Council (FSC) believes there is a need for greater awareness that high wealth may not correlate with high financial sophistication.
Appearing before the Parliamentary Joint Committee on Corporations and Financial Services on 4 October, the FSC discussed the wholesale investor and wholesale client test.
This covered possible changes to the wholesale test in light of a growing number of consumers reaching the sophisticated investor threshold as a result of increased residential property values.
In its earlier submission to the inquiry, the FSC had proposed the net asset test be increased from at least $2.5 million to $5 million including the family home, the current income test is maintained at $250,000, and the product value test is maintained at, at least, $500,000.
But it suggested “consideration should be made” to the sophisticated investor limb of the wholesale investor test to allow sophisticated investors, who understand the risks and have sufficient experience, continue to access them.
Chaneg Torres, executive director of policy at the FSC, told the committee: “There is a correlation between wealth and financial sophistication, but not always, and they are not always able to bear risk.
“This newer threshold proposed is a blunt instrument, but it serves a purpose and is easier for financial services firms to apply than the current test.”
Currently, he said, licensees and fund managers are “very hesistant” to apply the sophisticated investor limb in its current form because it is so objective, and they need to be satisfied on reasonable grounds that the client has the relevant understanding to assess the merit and risk of the product.
He suggested the use of an objective test to measure people’s financial understanding to prevent people, for example, receiving a large inheritance and having it invested in a risky scheme which incur frequent losses.
“If that was made clearer, then our members wouldn’t need to rely on the hard, numerical threshold, and you could have instances of people who might not meet that threshold but who can demonstrate objectively that they have financial sophistication, whether through their education or through their business experience.
“It’s not just via a finance degree that can demonstrate sophistication, it’s certainly worthy of consideration to look at whether there are other objective ways of demonstrating that whether by experience or micro-credentials.”
Using the example of how the requirement is administered in the UK, Torres suggested this could include a degree in finance, previous business experience, being a director of a company, or a member of an angel investor network.
As to how this would be moderated, Torres said he would want to avoid more requirements being placed on licensees and fund managers, and evidence could be provided via a certificate or other qualification.
AUTHOR
Laura Dew
Recommended for you
Bennelong Funds Management chief executive John Burke has told Money Management that the firm is seeking to invest in boutiques in two specific asset classes as it identifies gaps in its product range.
Responsible investment performance concerns have lessened as the market hits $1.6 trillion in AUM, according to RIAA’s annual report, but greenwashing fears among asset managers are on the rise.
Research by Morningstar has found fixed income funds are bucking a general trend around managed fund fee dispersion with a smaller fee dispersion compared to equity ones.
As investors seek to diversify their portfolios, the naming of bond labels has broadened out to include green, social and impact bonds, according to the annual RIAA report.
