Wholesale investor rules don’t need changing

By James Mawhinney

March 22 2020
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An overlooked implication of raising the wholesale investor threshold is the impact it would have on retirees, SMSFs and other investors reliant on an income for their livelihood, writes James Mawhinney.

Investment products offered to wholesale investors in Australia could become out of reach for many should regulations result in an increased threshold to become eligible to invest in such products. This could spell disaster for many existing wholesale investors who need to access income-producing investment products to sustain their income stream.

The impact of low interest rates on bank deposits has forced many wholesale investors to look beyond traditional financial institutions to those non-bank finance companies that are filling the growing credit gap left by restrictive bank lending policies. A handful of commentators have suggested increasing the threshold, arguing a large portion of investors that may currently be classified as wholesale, may not have the financial literacy to understand the products they invest in, and therefore may be taking more risk than they should.

However, when you consider the steps required to establish a self-managed superannuation fund, of which there are thousands in Australia, it suggests most fund managers would be qualified to make an investment. An increase in the wholesale investor threshold would potentially render many self-managed superannuation funds defunct or a considerably smaller range of investment options to choose from.

Any changes to regulation would stifle the ability of investors to access regulated financial products and result in less competition for traditional investment companies and banks.

Increasing the wholesale investor threshold would mean the average self-funded retiree would be unable to invest funds in finance companies that are filling the enormous credit gap left by the banks. It simply doesn’t make sense, particularly at a time where investors are struggling to earn 2 per cent per annum on their idle funds.

We often have to turn away investors with $400,000-$450,000 to invest who have done their homework and want to invest with us, simply because they don’t meet the $2.5 million net assets or $250,000 per year income test. The threshold is already high, and if this was increased to levels that only institutional investors can participate in, you will wipe out an entire market that is providing a more equitable distribution of capital between investors and businesses needing access to funding.

If an increase in the wholesale investor threshold was to be put to Parliament, it would no doubt be met with considerable resistance from existing wholesale investors and the rapidly growing non-bank finance company industry. Given the challenges banks are currently facing, it begs the question of whether the traditional institutions should be protected, or retaining the existing wholesale investor threshold encourages fair competition, a re-allocation of capital and provides investors with the choice of seeking higher returns.

James Mawhinney is the founder and managing director of Mayfair 101.

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