SMSF
Sonny Rahim Updated Dec 19, 2022
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This information has been reviewed by our SMSF Mates before it was published as part of our review process.
In Australia, there are laws and legislation which differentiate retail and wholesale (sophisticated) investors. The main intention of this legislation is to protect retail investors from investments that are considered riskier and more complex than others.
On the other hand, when a person or entity is classified as a wholesale investor, it allows those with the knowledge, experience and understanding of financial markets to invest in wholesale investment products which are not available to retail investors.
When receiving financial advice, the compliance process and advice process varies significantly between a retail and a wholesale investor, because of the variance in investment products, so it’s essential to determine where you sit early on.
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A wholesale or sophisticated investor is someone who is classified as having sufficient financial knowledge, understanding and capital to participate in wholesale markets and investment opportunities.
A retail investor is virtually everyone else unless they can satisfy one of the tests to wholesale investor certification under the Corporations Act 2001.
Click here to take our quick Retail or Wholesale Investor test
Here are some of the most common examples:
| Corporations Act 2001 | Features | Terms | Exemptions |
|---|---|---|---|
| 708 (8) (c) | The investor has $250,000 gross income per annum for each of the last two financial years or $2.5M in net assets, either of which must be certified by a qualifying accountant. | Sophisticated investor | Nil |
| 708 (8) (d) | The investor is either a company or trust that is controlled by an individual meeting the requirements in 708 (8) (c). | Sophisticated investor | Nil |
| 708 (10) | The investor has a certification or statement from an AFSL holder that the investor has adequate financial knowledge and experience to assess the investment offer, and satisfies other admin requirements. | Possibly described as a sophisticated investor
| Nil |
| 708 (11) | The investor is an AFSL holder, manages assets of at least $10 million, or is listed on the ASX. | Professional investor | Nil |
| 761 G (7) (c) | The investor has $250,000 gross income per annum for each of the last two financial years or $2.5M in net assets, either of which must be certified by a qualifying accountant. | Wholesale client | This does not apply to general insurance, RSA or superannuation products. The product is not offered for use in connection with a business. |
| 761 G (7) (d) | The investor is an AFSL holder, manages assets of at least $10 million, or is listed on the ASX. | Professional investor | This does not apply to general insurance, RSA or superannuation products.
|
| 761 G A | The investor has a certification or statement from an AFSL holder that the investor has adequate financial knowledge and experience to assess the investment offer, and satisfies other admin requirements. | Sophisticated investor | This does not apply to general insurance, RSA or superannuation products. |
Click here to take our quick Retail or Wholesale Investor test
The aim of the game with financial services laws is to protect consumers, so the level of regulation is far higher when dealing with retail investors, compared to dealing with wholesale investors. While there are numerous ways to be certified as a wholesale investor, the most common is by looking at an investor’s gross income and net assets.
The law is a lot less stringent about the investment process for wholesale clients compared to retail clients, which means compliance obligations are significantly reduced. For example, retail investors must receive a Product Disclosure Statement (PDS), Financial Services Guide (FSG) and Statement of Advice (SOA) where applicable. In contrast, it is not a requirement for wholesale clients to receive any of these documents. Not to mention that retail investors are protected by the new Future of Financial Advice (FOFA) reforms and wholesale investors are not.
The main reason for the distinction between retail and wholesale investors is that for the most part, well-informed investors have experience in financial markets and with the associated risks while retail investors usually do not.
Wealth isn’t always the best measure for financial markets literacy. Coupled with that, a wholesale investor loses access to important consumer protections set out in the Corporations Act once they are classified as a wholesale investor.
Sometimes it is hard to be objective about your own ability or skillset, mainly when you have made some money throughout your career. But owning your home or running a successful business in another field does not necessarily translate to skills in financial markets.
If ever in doubt, speak to your financial advisor or accountant to determine if it would be better to stay with a retail investor classification or not.
Up until 2014, an SMSF was classified as a retail investor unless the super fund held at least $10 million in net assets. Meaning that even if the individual qualified as a wholesale investor under the tests shown above if the SMSF held less than $10 million the entity would be classified as a retail investor when it comes to their super fund.
The regulator has since clarified its position stating that it will allow trustees of the SMSF who have gained wholesale investor certification to participate in wholesale investment products with the SMSFs assets.
Click here to take our quick Retail or Wholesale Investor test
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