Lesley Thorne

Advisers sometimes refer to their clients as sophisticated clients, but this term is often misunderstood according to The Fold Legal.

Senior Lawyer at The Fold Legal, Lesley Thorne says there is no such thing as a sophisticated client, only a sophisticated investor. “A sophisticated investor is a person with sufficient experience in using financial products and services,” she said. “Their experience means they don’t need the information usually contained in a product disclosure statement or the standard protection available to retail clients.”

Ms Thorne says for financial advisers to treat someone as a sophisticated investor, an Australian Financial Services (AFS) licensee must be satisfied that their knowledge and experience makes them sophisticated. “To call someone a sophisticated investor is a big call, as the client might later claim that they weren’t that experienced,” she said. This can put the licensee at risk if they didn’t comply with all the retail client obligations.

People often confuse the sophisticated investor test with other wholesale client tests such as the asset and income test or the product value test, Ms Thorne says. “It’s confusing because for corporate fundraising, the sophisticated investor tests mirror the wholesale client tests that apply to financial services.”

As a general rule, Ms Thorne says advisers should remember that for financial services (i.e not fundraising), the sophisticated investor test only applies to financially experienced clients and can only be used by an AFS licensee (i.e. not an authorised representative). Clients who meet the asset and income tests aren’t necessarily sophisticated investors, but they will be wholesale clients.

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