There’s a lot of confusion among investors about ‘wholesale’ investments and what they are, says PMG Funds’ GM of Investor Relationships, Matt McHardy.

He believes many Kiwis don’t understand the risks they’re taking when they invest their savings with unlicensed managers or in wholesale schemes.

Many don’t understand the differences between ‘retail’ and ‘wholesale’ schemes.

Retail schemes are open to the public, regardless of experience or wealth. They’re typically issued by licensed managers and are regulated and monitored by the Financial Markets Authority. These schemes must comply with prescribed disclosure requirements, so investors receive comprehensive information about how the schemes work and the risks associated with investing into a particular scheme. This also allows investors to make comparisons between similar schemes.

Wholesale schemes are only intended for skilled professionals and investors like fund managers, institutional investors, and high-net-worth individuals who fully understand the risks.

McHardy says PMG Funds offers both retail and wholesale schemes, but the wholesale schemes are offered only to a small and targeted proportion of their clients that qualify.

“Many investors I speak to confuse our funds, which are licensed retail investment schemes, as owning only retail property, which is incorrect. In fact, most of the property held across PMG’s funds is industrial or prime office space.

“These terms are confusing for many investors, who go into these wholesale schemes without understanding the risks.”

He is certain low returns on fixed interest products such as term deposits are driving investors to seek higher returns.

They’re looking at retail investment offers issued by licensed managers with returns of 5.5 per cent and comparing them to wholesale schemes, where returns may be higher, but so are the risks.

Some are moving their life savings into wholesale schemes to get a better return, he says.

Lately, the FMA, the country’s financial products and services regulatory body, has been closely watching wholesale schemes after the high-profile failure of one wholesale scheme, which resulted in significant loss of investor capital.

It has also issued warnings to unlicensed mortgage fund issuers for their advertising of wholesale schemes through social media.

McHardy states: “You have to ask, is Facebook really the place you’ll find investors with several million dollars to invest in your scheme. Or are they really just targeting everyday Kiwis who should be investing in retail schemes with greater protection?”

He believes these cases were the catalyst for the FMA’s recent review of wholesale schemes and how they’re being advertised.

PMG Funds made a submission to the review, along with many others in the industry. “We’ve been saying for a long time that we don’t think the differences between the two types of schemes are being made transparent and that many investors don’t truly appreciate the risks they might be agreeing to.”

Regulated versus unregulated

A good first step would be changing the terminology used in the market, he suggests.

“Like others in the industry, we’re pushing for calling them ‘regulated’ versus ‘unregulated’ schemes.”

He says scheme managers for regulated schemes are subject to additional compliance obligations and will have invested heavily into their risk management and compliance processes to ensure investor capital is better protected.

While unregulated wholesale schemes may have fewer compliance costs, the risk may be higher, with fewer legal protections for investors. Eligible investors need to decide if the return is sufficient for the risk.

Many investors could qualify as a wholesale investor if a lawyer or accountant certifies them as ‘eligible’, says McHardy.

They have to certify that their client can demonstrate the skills and experience to understand the merits of the transaction, their client’s own information needs in relation to the investment, and the adequacy of the information provided about the investment.

But by signing an eligible investor certificate, you risk not receiving all material information needed in order to make an informed investment decision.

Even more of a concern is that it’s also possible for certain high net worth clients to self-certify that they are a wholesale investor.

“We see all too often examples where investors might be a wholesale client by wealth but lack the experience and knowledge to understand the risks and should be a retail client.”

The process to become a licensed manager may be expensive, long, and complicated, but it aims to protect the investor, says McHardy.

“It provides comfort that the documents made available to investors should contain all the relevant information you’ll need to make a fully informed investment decision, as determined by the FMA. With a wholesale offer, there’s none of that.”

McHardy says it’s encouraging to see the FMA finally looking at wholesale schemes.

He says there’s still a place for wholesale schemes and unregulated operators.

In conclusion, investors should understand the risks and if they have legal protection.

“Investment managers doing the right thing by investors will generally always result in long-term success.”

Information is correct as of 5/2/2022 and contains the opinions of Matt McHardy, and general commentary and views from PMG. Any information provided in this article is for information purposes only, is not intended to be relied upon, and should not be construed as financial advice.

www.pmgfunds.co.nz