Vast majority of FAAA advisers treat all clients as ‘retail’
The vast majority of members of the Financial Advice Association of Australia (FAAA) treat all clients, including those who qualify as wholesale, as retail clients, the FAAA has told the Australian Law Reform Commission (ALRC).
The FAAA said this was because its members wanted to protect their clients as well as avoiding inefficiency and complexity.
“For those clients who might qualify as wholesale, this avoids the inefficiency, complexity and confusion of complying with different legal obligations for the superannuation component of the advice they provide, as opposed to the remainder,” the FAAA said in a submission dealing with the advice in the context of superannuation.
As well, it said a significant number of larger financial advice licensees also do not permit authorised representatives to operate on a ‘wholesale client only’ basis.
“As professionals, it’s the duty of financial planners/advisers to understand the regulations and ensure clients are protected and can make informed financial decisions based on their circumstances,” it said.
“FAAA members have raised concerns about whether clients understand the difference between wholesale and retail client rights and requirements. Most importantly, there is concern that many wholesale clients may not be aware or do not understand that they lose all the protections of a retail client; that wholesale client status is promoted by some as better for clients as they can access more investments options. It would be very confusing for consumers to understand why and how different rules and obligations apply to the advice they are receiving depending on the product class the advice includes.”
The FAAA also referenced a law firm’s submission to the ALRC that it did not make sense that a client could be treated as a wholesale client for advice on their investments within superannuation but then retail when they wanted to make a superannuation contribution.
It said that while it agreed with the law firm’s summation it did not support the firm’s suggestion that the superannuation product exclusion be removed from the all wholeseale client tests.
The FAAA said it recommended that the superannuation product exclusion remain in place as retain the obligations to treat a client as a retail client for superannuation advice, to protect consumers’ retirement savings.
“While many financial planners/advisers apply the retail client obligations to all their clients and financial advice services, there may be a small number of financial planners/advisers who provide superannuation advice through the required SOA, however address additional advice needs through a wholesale client engagement, where appropriate,” it said.
“However, FAAA’s members are concerned about the potential for poor consumer outcomes from providers who rely on the wholesale client obligations and exemptions by excluding the client’s superannuation needs from the scope of their wholesale client advice, because of the requirement in the Act to meet the retail client obligations when providing superannuation advice. This issue is significantly exacerbated by the out-of-date threshold for wholesale clients, and the potential misuse of this wholesale client pathway.”
As per most Advice regulation and Govt intervention, Whole client operation & definition is moronic in real world.
I am yet to accept that the current regime provides all these widely professed protections for retail clients. The only potential there would be that a wholesale client, by and large, doesn’t have access to AFCA. The reams of compliance required under Chapter 7 is a smoke screen. It is a widely stated belief that clients do not read a SoA. Ultimately they rely on the integrity of the adviser (which you can’t legislate for). A wholesale client can complain to a licensee and, more often and not, that results in a monetary compensation as the business doesn’t want to loose the client or suffer reputational damage. The huffing and puffing about the wholesale client definition probably comes largely from those supporting existing business models. Sounds similar to the pharmaceutical association trying to protect their current business models. Must be the season for it.
Without doubt, the next scandal in financial services will be over “wholesale” clients.
I’m not sure when they stopped being called “sophisticated investors”, probably when the lunacy of claiming people with a household income of more than $250,000, or net assets of $2.5 million, grants them a higher level of investment intellect (they might just be good at their job).
Yet regardless of the name used, this is what ASIC continue to accept as being true.
The writing is on the wall and has been for some time.
@ Fed up,
I can tell you when they ceased to be sophisticated clients when a particular group of advisers from a well known banking institution following the Storm adviser scandal was audited by external auditors. The reason being that many of those advisers provided the kind of limited documentation advice to so called sophisticated investor clients but included their unsophisticated wives in the investments being promoted.
It other words, they took short cuts to get the job done without considering the ramifications if and when things turned sour.
As an asset allocator, why would I be limiting my portfolio options to retail products? Unless this is what instos want to reinforce to continue to get their product margins – the ironic thing is that even for the large super funds, they also invest in wholesale investments themselves – i.e private equity, private credit, etc within their balanced funds. This retail versus wholesale clients debate is a distraction. I don’t see how property advice falls into this retail versus wholesale debate, despite mum and dad investors racking up lots of debt in the process – arguably taking on more risk.
We made a few observations on this space in the following video (2m). It is interesting to understand the index issue and where we sit relative to the rest of the world.
https://www.linkedin.com/feed/update/urn:li:activity:7094637662103375873?utm_source=share&utm_medium=member_desktop