Being rich makes you smart, at least according to NZ regulators

Does high wealth make you clever? Scarily, under New Zealand law, it apparently does.

Even more frightening, you’re a sitting duck for unscrupulous financial advisers who can sell any manner of financial products using what’s known as the “wholesale investor exclusion”.

Kiwi laws are so loose your average small business owner or Merivale-granny can be targeted.

In recent weeks we’ve been hearing about investment schemes sold to private schools and individuals where there seems to be very little protection when it all goes wrong. The Cayman Island based Penrich fund is one such scheme that’s had plenty of press.

My guess is, the wholesale investor regime has allowed these funds to be sold to ordinary people and community groups. I’d also guess it’s the tip of the iceberg. If one private school has bought it, many others will have too.

If one charity is involved, many others will be. If one lawyer, engineer or doctor signed a “wholesale investor certificate” many will have. It’s how New Zealand works – names are whispered and everyone assumes they’re in good company. The due diligence must have been repeated many times by others.

The wholesale investor exemption can be easily slipped into the paperwork, like it’s something everyone signs.

It’s a gateway to investment opportunities that others can’t access, because the rules about what information must be disclosed to investors, don’t apply.

What it really means is “you’re on your own, buddy”. The disclaimer you are asked to sign isn’t called a ‘Safe Harbour Certificate’ for nothing. And it’s not your pretty little harbour they’re keeping safe either. A financial adviser’s own rump is almost untouchable once you’ve provided your autograph.

When we hear the word “wholesale” in the financial world, it makes us think of big corporate investors with a financial controller and a team of analysts.

But under New Zealand law and the Financial Conduct Act, it takes surprisingly little money to pass the wholesale test.

Fancy a go? Take the wealth test yourself and see how you get on. Even if you’re not quite in this league, you might be one day.

Test one: This is the “large” test. For the last two years your assets less any debts are worth $5 million. Too tough? Try the next one.

Test two: This is the “activity” test. At some point in the last two years you had a portfolio of investments worth $1 million. Still a stretch? Try the one below.

Test three: The “minimum investment” test. You have at least $750,000 to buy investments with. Still can’t do it? Ok, despite the lack of wealth, do you think you understand investments and can weigh up the pros and cons? Could you tell if the information someone was giving you was adequate?

If you’re happy to sign a waiver and get your accountant or lawyer to agree you’re savvy, then you’ve passed the “eligible investor” test.

Congratulations, you’re now a wholesale investor based on either having a bit of money or a bit of nous.

Your average Ashburton cocky could pass the first three tests blindfolded and so could a group of parents on a wealthy school board.

It does stand to reason that if you’ve made a bit of money in life, you must have a few beans between the ears. But let’s be honest, $750,000 doesn’t come with a financial controller or mini treasury unit backing it up.

Does money make you an investment expert?

You might know a farm balance sheet inside out or be a talented neurosurgeon, judge or celebrity rock star. Whatever your gift for dragging in the cash, you need to seriously consider the reality of being a wholesale investor and the legal document being signed.

My career history alone means I could sign the wholesale investor forms.

Would I? Never. Despite having run a funds management firm, worked for a financial advice firm and stood on the trading floor of an investment bank, I don’t have a team of analysts and enough resources around me any more. I want basic disclosure protection when I invest and I want my adviser and fund managers on the hook with responsibility.

It’s incredibly disturbing that people are paying advisers 0.5 per cent to 1 per cent a year to run a portfolio when they’ve signed a wholesale investor certificate, taking full responsibility themselves.

If we ever see any meaningful change to the Financial Conduct Act 2013, there are a few things on my wish list:

1. The wealth barrier for a wholesale investor should be set at a portfolio size $10 million.

2. All wholesale investors should prove they have in-house expertise separate from the adviser or fund manager selling the product.

3. Advisers who deal with wholesale clients should not be allowed to charge on-going advice or monitoring fees.

Until that time, be aware that having money makes you a target for those who don’t want to take responsibility.

Janine Starks is a financial commentator with expertise in banking, personal finance and funds management. Opinions in this column represent her personal views. They are general in nature and are not a recommendation, opinion or guidance to any individuals in relation to acquiring or disposing of a financial product. Readers should not rely on these opinions and should always seek specific independent financial advice appropriate to their own individual circumstances.