Switch ‘wholesale’ versus ‘retail’ to ‘simple’ versus ‘complex’

The regime around retail versus wholesale investors is wrong and places too much reliance on the ‘product issuer’ versus the investor and the investors’ financial planner, according to industry veteran and former Equity Trustees boss, Harvey Kalman.

Instead, he is arguing for change and adoption of a model which would see financial products split into “simple” and “complex” with simple products being “a managed investments scheme with no more than 5% of individual asset class and 25% in total in the asset classes of: shorting, derivatives (excluding FX hedging only), agricultural, property, illiquid, private equity, fund of funds and gearing”.

As well, Kalman says that if investors nominate themselves as “sophisticated investors” then the Australian Securities and Investments Commission (ASIC) ad the law should allow them the benefits and consequences of such an election.

“They should have to confirm they understand that they cannot complain to “retail” complaints authorities and the like,” Kalman said.

He said that using the “simple” and “complex” model no change would be needed to the threshold defining ‘wholesale’ investors but suggested “another option is to increase the amount to $1 million which is being used in the industry as a factor when financial planners are deciding what clients to take on if they want to offer complex / sophisticated products”.

He has told a Parliamentary Committee that the current model “tries to protect investors based on the definition of the skill of the investor and who the product is being distributed to.

“This approach has created significant red tape and puts the onus on the Responsible Entity and allows the investor to not take responsible for their decisions and does not assist most investors who need advice,” Kalman said in a submission.

“We believe the system is wrong and places too much reliance on the “Product Issuer” versus the investor and the Investors’ financial planner. Investors should be taking responsibility for their financial decisions and if they don’t understand then they should not invest and hence wear the consequence,” Kalman said.

“If the product is defined as Simple then there should be no issues with anyone investing in this product, if Complex, then they need to pass the test or use advice and take the consequences if the investment fails,” he said.