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Advisers misusing wholesale definition

Many investment advisers do not properly understand the definition of a wholesale investor or what it would mean for their advice practices, one compliance expert says.

Monday, April 11th 2016, 6:00AM 1 Comment

by Susan Edmunds

Barry Read, of IDS, addressed the Meet the Managers roadshows last week.

He said the way advisers dealt with clients who met the definition of a “wholesale investor” was an area where his team saw gaps when they reviewed advice practices. “It’s one of the things that sometimes gets missed.”

A client qualifies to be treated as wholesale if they own financial products of $1 million, if they are an entity with $1 million in net assets over the last two accounting periods or operate as an investment business.

Read said that could mean many family trusts in Auckland automatically became wholesale investors.

When dealing with wholesale clients, advisers do not have to give a disclosure statement and six standards of the Code of Conduct for AFAs do not apply, including those covering borrowing from clients, the requirement to agree the nature and scope of service, prove advice suitability and having a complaint process.

“You don’t have to give disclosure statements to a wholesale client. You can still do that, but you don’t have to,” Read said.

Clients must opt out of the wholesale definition in writing if they want to be treated as retail investors.

Read said if wholesale clients had clear objectives for the investment, advisers should proceed with the process as wholesale clients and include the identification of that designation in the terms of engagement paperwork.

But if they wanted an investment plan, he recommended advisers ask the clients to opt in as retail clients.

Read said it was an area the Financial Markets Authority was looking at.

The recent options paper put out by the Ministry of Business, Innovation and Employment, asked whether clients should be required to opt in to being wholesale investors, rather than out.

Read said he supported that idea. “That’s a much better way of doing it. That takes away the assumption. If they haven’t got the literacy, the fact they have won Lotto doesn’t mean they shouldn’t be protected by the code obligations.”

Tags: Financial Advisers Act

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Comments from our readers

On 11 April 2016 at 2:06 pm henry Filth said:
You might think that there was more to the retail/wholesale split than a simple, single, monetary value.

Perhaps "retail" should be the default, and clients would have to opt in to wholesale.

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