Watch out: You’re now a sophisticated SMSF

SUMMARY: ASIC lowers the bar. Now more than half of all SMSF trustees will be considered sophisticated.

Self-managed super fund trustees are used to fending for themselves and, reasonably successfully, fighting off the sharks.

But following a stunning week in news that affects you, it’s clear that you’re going to have become even better at it. Be more alert and more alarmed.

Why? Because exactly a week after the corporate cop lowered protections for SMSF trustees, they delivered a gobsmacking reminder of why they probably shouldn’t have.

On 8 August, the Australian Securities & Investments Commission decided to lower the bar on the definition of what constitutes a “sophisticated”, or “wholesale”, SMSF.

Previously, the most widely held interpretation was that the SMSF itself needed to have $10 million of assets in order to qualify (I’ll come back to what this means shortly). That’s $10 million in the fund. Another interpretation had it that the trustees of the SMSF needed $2.5 million in net assets, inside or outside the fund.

ASIC has opted for the latter. There’s a massive difference between the two. And it potentially opens up some deep problems for many SMSFs, who shouldn’t really be considered sophisticated.

While I’m casting no aspersions, more than half of Eureka Report readers would now be considered sophisticated investors, where under the $10 million fund rule, it might have been 5% or so. Given the average SMSF has $1 million in it, you’ve only got to add a home worth, say, $800,000 and non-super assets worth $700,000, or combinations thereof, and you qualify.

Then, on 15 August, ASIC announced that Macquarie Private Wealth, a stockbroking/financial advice division of Macquarie Bank, has been ordered to write to every single client on its books in the last decade to invite them to complain about the advice offered by MEL.

This is part of the ongoing enforceable undertaking (EU) slapped on Macquarie in January 2013. The reason this is such a concern is that part of that EU was specifically because Macquarie’s advisers were already running a bit loose with the rules on defining sophisticated investors. Or, in the words contained in the EU, MPW advisers were “failing to provide sufficient evidence that clients were sophisticated investors”.

So … ASIC identifies that a very large licensee like Macquarie doesn’t monitor adequately whether its advisers properly document clients’ qualification as wholesale clients, and it has grave concerns for the quality of the advice given by those advisers across the board.

But it then moves to lower the bar for sophisticated investors, to the point where, at a guess, about 50% of all SMSFs and their trustees will qualify.

But it’s not all bad

What does being a sophisticated, or wholesale, investor mean?

Firstly, the definition that I’ve given above – assets of $2.5 million – is one way to qualify. The other qualifications are that they have earned in excess of $250,000 in income for each of the last two years, or that they are making a single investment of more than $500,000.

And they must get a signed letter from their accountant to confirm their qualification.

Sophisticated investors do get access to investments that “retail” investors can’t be offered.

These can include some property developments, capital raisings, discounted share offers and even discounts into managed funds.

On the downside, they do not have to be provided with the usual legal protection material that retail investors are required by law to be given, such as financial services guides, product disclosure statements and statements of advice.

They might not have coverage under the adviser’s professional indemnity policy and external dispute resolution processes, such as COSL and Financial Ombudsman Service.

Sophisticated clients could even miss out on some actions taken by ASIC itself, where they are trying to retrieve funds for retail clients.

What should SMSF trustees do?

If you’re sitting down with an adviser (or stockbroker) and they suggest that you might be a sophisticated investor, don’t be flattered.

This is a decision that should not be accepted without some thought being put into it. Sure, being classified as such can make things happen faster, can remove some annoying paperwork and can get you into seemingly great deals, but do you really want to trade off your retail/consumer protection for what might be, on average, a couple of per cent?

Some people will now qualify as sophisticated who should be. But when you lower the bar as dramatically as has happened on this occasion, there are going to be far more trustees who could qualify who really shouldn’t.

I know I bang on about property a lot. But my biggest fear in this area is the invitation this will give to property spruikers. If they have a financial planning licence, this is going to open the doors even further for them. I expect SMSF trustees will be hearing a lot more from them soon.


The information contained in this column should be treated as general advice only. It has not taken anyone’s specific circumstances into account. If you are considering a strategy such as those mentioned here, you are strongly advised to consult your adviser/s, as some of the strategies used in these columns are extremely complex and require high-level technical compliance.

Bruce Brammall is director of Castellan Financial Consulting and the author of Debt Man Walking. E: