The wholesale loophole: same game, different name

There’s a phrase doing the rounds in financial services right now. You hear it in business deveklopment conversations, in new firm structures, and in the pitch decks of businesses that have decided the post-Hayne compliance burden is someone else’s problem. That phrase is “wholesale client.”

And in too many cases, what it really means is: we’ve found a way to take commissions again.

Let’s be honest about what’s happening

The wholesale client framework exists for legitimate reasons. Sophisticated institutional investors, family offices, self-managed super funds of genuine scale and experienced commercial operators do not need the same protective scaffolding as a 68-year-old rolling-over their super for the first time.

That logic is sound.

But the framework has a threshold, not a test. If a client has net assets of $2.5 million or gross income of $250,000, they qualify, full stop. There is no assessment of financial literacy. There is no interrogation of whether they actually understand derivatives, illiquid credit structures or the conflicts embedded in the product they are about to be sold.

The legislation draws a line based on wealth; and because the net asset test includes the value of the family home, rising residential property values effectively mean that millions of Australians qualify as wholesale investors. And increasingly, the industry is using that line as a permission slip.

What’s actually changed, and what hasn’t

The FoFA reforms of 2013 were built on a clear principle: conflicted remuneration corrupts advice. Commissions create incentives that run against the client’s interest. That principle drove the ban on trailing commissions, the best-interests duty and more than a decade of hard cultural work to separate advice from product sales.

That work was not perfect. Implementation was messy. The compliance burden became genuinely burdensome in ways that hurt access to advice. There are legitimate arguments about how the regime could be better calibrated.

However, the underlying principle was not wrong.

Now, a growing number of firms are structuring their businesses so their clients are ‘wholesale.’ Not because those clients are genuinely sophisticated institutional operators, but because wholesale classification removes the best-interests obligation, unlocks commissions and conflicted remuneration, and dramatically reduces disclosure requirements.

In other words, same product, same client type, same adviser relationship, different legal category.

That is not ‘sophistication,’ it is regulatory arbitrage.

The wholesale label is the new trail commission. Same economics, just different paperwork.

The regulator drew the line. The industry is walking around it.

ASIC and Treasury set the wholesale threshold. They own that decision. The threshold also has not been meaningfully adjusted for inflation in years, compounding the fact that more Australians are technically qualifying as wholesale clients simply because asset values have risen.

That is a legislative failure worth fixing.

But the behaviour of firms actively restructuring to push clients into wholesale classification is a different problem. It is not a grey area; it is a deliberate choice to remove consumer protections from people who, in any honest assessment, need them.

The 72-year-old who sold the family home and has $3 million sitting in cash is technically a wholesale investor. Does anyone seriously believe she does not need a best-interests duty applied to whoever is advising her on where to put that money?

The couple with $2.8 million in super, two investment properties and no financial qualifications are technically wholesale investors. Are they sophisticated investors? Or are they just people who worked hard and got lucky with property prices?

Wealth is not the same as sophistication, but the legislation conflates them. The industry is exploiting that conflation.

The 1980s had a name for this

Before FoFA, before the Future of Financial Advice reforms, and before the Royal Commission hauled the industry into the light, this was just how the business worked.

Advisers recommended products, and products paid commissions. Clients often did not know what they were paying, who was being paid or whether the recommendation served their interests or their adviser’s.

It was not hidden, exactly. But it was not transparent either.

The industry spent 15 years reforming that model through regulation, cultural change, education standards and the slow, painful work of professionalisation. The adviser community that did that work, that embraced fee transparency, that restructured their businesses, that sat through the compliance audits and passed the exams, should be furious that a cohort is now bypassing the same obligations under a different label – because that is what is happening.

What should change now

Two things need to happen at the same time.

First, Treasury needs to fix the threshold. A $2.5 million asset test that has not been adjusted in years is increasingly capturing ordinary Australians whose houses have made them wealthy by savings standards, not by sophistication standards. The definition needs either a meaningful uplift or, better still, a genuine sophistication assessment rather than a purely wealth-based test.

Second, ASIC needs to scrutinise more aggressively the structures being built around the wholesale classification. When a firm’s business model appears to depend on classifying clients as wholesale in order to earn commissions it could not earn under a retail regime, that should attract regulatory attention. Not because the law is clearly being broken, but because the spirit of it plainly is.

The advice profession has fought hard to be taken seriously as a profession, and has largely won that argument. The education standards are higher; the ethics are clearer; and the public understanding of what good advice looks like has genuinely improved.

Allowing a loophole to quietly erode all of that, because some firms found a line in the legislation they can stand on, is not a reform agenda; it is a retreat.

The punchline

The firms using “wholesale” to rebuild commission-based models are not innovating. They are not finding a better way to serve clients. Likewise, they are not reducing the cost of advice or improving access.

They are finding a way to get paid like it is 1985, while letting someone else carry the regulatory burden of being professional.

The legislation allows it. That does not make it right.

And the industry, the part of it that did the hard work of reform, should say so clearly.

Jamie Nemtsas is the founder of Wattle Partners and Executive Chair of The Inside Network.

Jamie Nemtsas

Jamie Nemtsas is founder of advice firm Wattle Partners and the executive chair of The Inside Network.