Preparing an unnecessary SOA

SOAs are not required for every client in every instance. One common scenario where we see non-obligatory SOAs being prepared, is where the client has been certified by an accountant as a wholesale client. Wholesale clients do not require an SOA, subject to some exceptions as discussed below.

This situation is explained by RG 175.146(a), which states that an SOA is not required where the client is not a retail client. Clients who are not retail clients are typically referred to as wholesale clients, although most prefer the old terminology, ‘sophisticated investor’.

A client is presumed to be a retail client unless it can be shown that they are a wholesale client. There are several tests to determine a client’s eligibility to be a wholesale client, as outlined in the Corporations Act. These include:

  • The product value test. If a client invests more than $500,000, they are a wholesale client;
  • The individual wealth test. If the client is an individual with who has either net assets exceeding $2,500,000 or gross income of at least $250,000 (as certified by an accountant) then they can be treated as a wholesale client;
  • The large businesses test. If the client is a business with more than 20 staff (100 staff for a manufacturer), they can be treated as a wholesale client; and
  • Professional investors test. Professional investors with specific attributes can be treated as wholesale clients.

Where a client is a wholesale client, various rules relating to compliance do not apply. This includes the rule regarding the need to prepare SOAs. Put simply, wholesale clients do not require written SOAs unless the advice involves personal insurance and/or superannuation products. In other words, an SOA is required for wholesale clients if the advice provided is related to insurance and/or super products and strategies.

That said, many advisers still choose to prepare a formal SOA even for wholesale clients. They see the SOA as a useful record of their advice and service, and see little benefit in running two client management systems.

There is nothing to stop an adviser preparing an SOA for a wholesale client where the advice does not relate to personal insurance and/or superannuation. For those advisers that choose to do so, we strongly encourage them to ensure that the SOA meets all the rules and regulations that generally apply to SOAs. After all, the SOA is a record of your work. Best to ensure that it is a record of work well done.

The Dover Group