SMSF sophisticated investor

Should my SMSF become a sophisticated investor?

Australia has relatively strong investor protection laws, and although they don’t always meet the public’s expectations, they typically ensure investors have access to appropriate disclosures and protection mechanisms when they invest or take financial advice. However there are certain exemptions (namely the sophisticated investor exemption) available to companies that issue investments or provide advice and SMSF trustees can unknowing be placed into a situation where they can’t access these protections.

What is a sophisticated investor?

In general an SMSF will be considered a “retail” client, however last year ASIC clarified that when an SMSF has net assets of $2.5 million or if the value of the investment is at least $500,000 then the SMSF can be considered a “wholesale” client.

SMSFs with more than $2.5 million in assets are not automatically regarded as wholesale or sophisticated clients.  A qualified accountant must issue a certificate confirming the level of assets (or income of at least $250,000 per annum in each of the previous two years) for the SMSF to be considered a sophisticated investor.

The certificates are valid for two years from the date of issue however must have been obtained within six months of accepting any wholesale offer to purchase securities (without prospectus).

More information can be found on the Australian Securities and Investments Commission (ASIC) website here.

Wholesale clients / investors may have access to a wider range of investments, but they do not enjoy all of the important consumer protections applicable to retail clients.

Protections not available to wholesale / sophisticated investors:

If an SMSF is categorised as a sophisticated investor they no longer have access to the following protections which are available to retail clients:

  • Retail clients must be provided with a Financial Services Guide (FSG) from the advice provider setting out terms and basis of their services;
  • Where advice specific to a client’s needs a written Statement of Advice (SoA) must be provided which sets out the basis and reasoning of that advice, as well as the remuneration the adviser will receive (including all commissions);
  • Where the retail investor is acquiring a financial product, they must be provided with a Product Disclosure Statement (PDS) or prospectus document which contains all relevant information required for a potential investor to make a decision on the investment;
  • A dispute resolution system must be made available at no cost for all retail clients;
  • Advice providers must have compensation arrangements in place whereby a retail client suffers loss or damage because of breaches by the advice provider of their obligations (i.e. providing advice in a way not consistent with the laws / regulations – not bad or poor advice);
  • Providers of advice to retail clients / investors are required to have higher and more strict levels of training

 Why do the sophisticated investor exemptions exist?

The general thought is that if an individual (or entity like an SMSF) has assets and income over the prescribed thresholds, they can afford to lose what they invest, so the burden of providing all the above retail client protections is removed from the investment issuer or advice provider.  A sophisticated investor is considered to be more akin to a professional investor who has the experience and knowledge to bear the risk of the investment.

To put it another way, the sophisticated investor rules provide a short cut for companies that provide advice or issue investments.  For example by restricting the availability of an investment to only those with wholesale or sophisticated status, there is no need to issue a prospectus or PDS or have dispute resolution or compensation arrangements in place.  Companies can raise additional quickly through a smaller number of wholesale investors at a lower cost that raising funds from public retail investors.

What are the advantages?

Potential benefits of being considered a sophisticated investor include:

  • You get access to investment opportunities that are generally reserved for the ‘big end of town’ such as share placements or underwriting agreements.
  • Offers are sometimes made at a discount to the current market share price.
  • Access to unlisted or pre-IPO offerings.
  • Opportunities to invest into private syndicates, including those used for property development.

But these advantages come at a cost.  These types of investments are often more risky in their nature and sophisticated investors don’t receive the same levels of disclosures or protections and therefore have to rely on their own investment knowledge and expertise to make a decision – often in a very short period of time.

Another potential advantage available to sophisticated investors comes from the provision of non-investment strategic advice – an area where SMSF trustees are hungry for value.  By obtaining a sophisticated investor certificate, albeit temporarily, trustees may have access to high value advice in a more efficient and cost effective manner.

Should your SMSF become a sophisticated investor?

The answer to this question will come down to the specific circumstances of each individual SMSF trustee.  There are many trustees who may meet the requirements of being a sophisticated investor on paper, however these same individuals will freely admit that they do not consider themselves sophisticated in all things financial.

My opinion is that SMSF clients should be treated as retail clients and have access to all the protections available to retail investors regardless of whether they meet the sophisticated investor criteria or not.  Issuance of a sophisticated investor certificate for SMSFs with more than $2.5 million in assets should be an exception, rather than a rule.


Director at Superfund Partners. I love working in the SMSF space. Self-managed super funds are more than just a savings vehicle - they enable people to truly take control of their financial situation which is key to achieving happiness. Leading the Superfund Partners team is a privilege - they are a great crew and they always put others first.