Managing a wholesale and HNW client base

By Jayson Forrest - Managing Editor  - IMAP Perspectives

David Andrew (Capital Partners Private Wealth), Paul Ashworth (Cameron Harrison), Simon Carrodus (The Fold Legal) and moderator, Greg Miller (Wealth Market), share their insights on building a wholesale and high-net-worth client base.

Of the 450 high-net-worth (HNW) families that Perth-based Capital Partners Private Wealth manages, the average investable balance these clients have is approximately $2.5 million. The cumulative total of these HNW clients prompted Capital Partners to look closely at the wholesale rules, but after weighing up the pros and cons, the decision was made to retain its wealthy family clients in the retail advisory space.

“It came down to a risk management decision,” says the Founder and CEO of Capital Partners, David Andrew. “As a business, we’ve always been in the FPA Professional Practice program, so when the FASEA Code of Ethics came in, it wasn’t much different to the Code of Ethics we were already committed to through the FPA Professional Practice program.

“As advisers, we have a duty of care to our clients. I know some advisers look at the wholesale rules as a way of avoiding regulatory requirements, but we’ve not seen it that way. And while the advice we give to a wealthier client is different to a less wealthy client, the advice is still going to be in writing, it’s still going to be comprehensive, it’s still going to be in the best interests of the client, and it’s still going to be appropriate for the knowledge of the client,” says David.

Speaking at an IMAP webinar on ‘Building a wholesale, HNW and not-for-profit client base’, David confides that the biggest issue his business has had to come to terms with when dealing with HNW clients, is their level of sophistication and understanding around investing.

“A lot of our HNW clients are business owners. The primary relationship we have with the family may be with a person who is a sophisticated investor, but the secondary relationships within that family are not. So, there are complications when dealing with HNW clients. As a business, we have created our systems around one homogenous process that deals with different service offerings, which effectively streamlines our advice offering.”

However, there is one area where Capital Partners does use the wholesale provisions and that’s in the not-for-profit space. In this scenario, David confides that when you are dealing with a committee, it’s easier to get decisions made and keep things progressing when using the wholesale provisions. 

It’s a similar story at Cameron Harrison, which also adheres to the higher fiduciary standards required in the retail advice space. And like Capital Partners, Cameron Harrison does find challenges working with clients who believe they are sophisticated HNW clients, when perhaps they are not.

“Whether the client has $3 million or $10 million of investable funds, we adhere to a ‘mutual engagement’ principle at Cameron Harrison. That involves us having a deep understanding of the client, and the client having a deep understanding of us,” says Managing Partner, Paul Ashworth.

Before Cameron Harrison takes on a HNW client, it requires that the client undertake two half day planning sessions with the business. And while this is a significant time investment by the client, it helps to ensure that both parties acquire the relevant understanding of each other to proceed.

“A significant number of our HNW clients are business owners or have been business owners,” says Paul. “Our clients typically have two pools of wealth that we need to help them integrate: active wealth, which is the active risk within their business, and passive wealth, which is their lifestyle and investment assets.”

Cameron Harrison uses this planning session as a starting point for driving the financial planning agenda for the client. This covers the structural agenda, including tax structuring, tax strategy, asset protection, intergenerational wealth transfer and estate planning, and the implementation aspect of that agenda, which includes investment management.

“Financial planning is a reiterative process. Typically, we’ll always go back to our clients every two to 2.5 years in terms of their overall plan, while assessing their wealth agenda with them on a rolling six-month basis,” says Paul.

And when it comes to larger HNW individuals and small family office clients, Paul confirms that while Cameron Harrison manages most of their wealth, assets like commercial and real property tend to be handled by the clients themselves.

At Capital Partners, David says the most important meeting that advisers have with clients is the pre-discovery meeting. He says by the time advisers have got through the 30-minute meeting, an enormous amount of background information has been gathered.

“What we are tuned for in that pre-discovery meeting is whether or not we actually want that person to become a client of the business. Regardless of how much money they have got, will this client be an ideal client for our business? If they’re not an ideal client, then this may be problematic going forward, so we use this meeting to sort out potential new clients.”

David adds that for planning businesses operating in the HNW client space, practitioners spend a lot of time being “orchestra conductors” for their clients, which requires juggling their diverse needs.

“To help us better manage our clients, we have spent a lot of time and effort building our professional network. This means that while there are a lot of areas, like debt financing arrangements, that we don’t provide advice on, we are still able to facilitate an outcome for our clients by outsourcing to our network. So, we’re still dealing with the complex needs of our clients, without actually having to put pen to paper.”

While the wholesale rules may seem like an attractive proposition for advice businesses wanting to avoid onerous regulation and the FASEA Code of Ethics requirements in the retail environment, Simon Carrodus - a solicitor and Director at The Fold Legal - cautions advisers to think carefully about moving HNW clients to the wholesale environment.

“If you are thinking about transitioning your business to wholesale only or implementing separate infrastructure for wholesale clients, you need to remember that the legal and ethical principles are largely the same as they are for the retail landscape. The principles that underpin the myriad of retail advice obligations, which do frustrate advisers, are sound,” says Simon.

“What operating in a wholesale environment allows you to do is to apply those principles with more flexibility, meaning you’re not as hemmed in as you are in the retail environment. In wholesale, you do have a choice and you can adapt the way you deliver those principles in a way that is more efficient and provides a better client experience.”

However, Simon emphasises that moving clients to the wholesale environment is no silver bullet. Advice businesses are still required to have a licence, cannot engage in misleading or deceptive conduct, and are also required to deliver their services “efficiently, honestly and fairly”.

“And while there is no specific Best Interest Duty in the sense of Section 9 6.1b of the Corporations Act, under Common Law, you still have a fiduciary obligation to act in your clients’ best interests and prioritise their interests over yours in the event of a conflict,” he says.

“Ultimately, the way you should be looking to advise your clients is almost identical between retail and wholesale. And remember, even in the wholesale space, clients can still claim against you and are more likely to have the means to take you to court in the event that you fail in your fiduciary obligations.”

According to Simon, it’s important that advice businesses and practitioners remember that if an adviser can advise on both retail and wholesale, then they are bound by the FASEA Code of Ethics regardless. “So, advice in relation to a superannuation fund, which includes an SMSF, is going to fall under retail,” says Simon.

David concedes that crossing from wholesale to retail can be problematic for advice businesses that want to go down the wholesale path.

“From a risk perspective, the advice that Capital Partners Private Wealth has received is if you are treating someone as a wholesale client, and you’re doing a rollout of an updated Financial Services Guide (FSG), but it happens that some of your wholesale clients get an FSG, they are now entitled to consider themselves as retail clients.

“Similarly, if someone within your business says, for example, the advice for Mr and Mrs Jones is ready and sends it out, but they happen to use a document titled Statement of Advice, that client is now a retail client, even though previously they were a wholesale client,” David says. “That’s really not a risk I want to deal with.”

A common question asked by advisers is can an AFSL holder grant an authorisation to an adviser to deal with wholesale clients only, meaning they wouldn’t have to meet the various FASEA obligations?

“The answer is, maybe,” says Simon. “The FASEA Code of Ethics and most of the FASEA obligations apply to relevant providers, and a relevant provider is defined as an adviser who is authorised by their licensee to provide personal advice to retail clients.

“So, even if you only provide advice to wholesale clients, that’s kind of irrelevant because it’s what your authorisation says. If your authorisation says you can provide advice to retail and wholesale clients, then you’re caught by FASEA. But if your licensee deliberately limits your authorisation to wholesale only, then you exist outside the FASEA obligations.”

However, for moderator, Greg Miller - a Director at Wealth Market - if the financial planning industry is trying to become a profession and ensuring that advisers are professional and working to a Code of Ethics, then sidestepping the FASEA obligations and Best Interest Duty by becoming authorised as a wholesale adviser, doesn’t sit well.

It’s a view supported by David, who adds that Capital Partners’ approach to financial planning has always been about doing what is right for the client.

“If doing the right thing by clients is your starting point, then that just flows through into everything you do,” David says. “If you have a transaction error, you don’t cover it up - you fix it. When it comes to your advice process, you need to understand the expectations of clients. You don’t cut corners in the delivery of advice and your services, because that’s what it means to be a professional.”

David Andrew is the founder and CEO of Capital Partners Private Wealth; Paul Ashworth is the Managing Partner at Cameron Harrison; Simon Carrodus is a Solicitor and Director at The Fold Legal; and Greg Miller is a Director at Wealth Market. They spoke as part of an IMAP webinar on ‘Building a wholesale, high-net-worth and not-for-profit client base’.