Wholesale Client Only MDAs – It’s a thing!

At MDA Guru we have received many queries of late with regards to wholesale clients and MDAs. Two main underlying themes seem to be driving this interest;

1.      Insurmountable PI increases for some in the financial services industry, and particularly where MDAs are involved, have created cause for some financial advisers and AFSLs to question offering advice to retail clients at all, let alone MDAs.

2.      FASEA requirements for some advisers, and particularly older advisers, to upgrade their education, etc., has landed in the “too hard” basket, especially where the adviser mainly has a wholesale client base and only a handful of retail clients.

In January 2020 we released an article titled “Wholesale Clients and MDAs…Like Oil and Water” where we dove into the regulations to better understand the relationship between wholesale clients and the ASIC regulatory guidelines with regards to MDAs which is primarily designed for retail clients. You may want to follow this link to have a quick read before going further Wholesale Clients and MDAs…Like Oil and Water — MDA Guru.  The article ended by suggesting that If you want to provide MDAs to wholesale clients only then you should seek legal advice. Although this suggestion still holds true, we have seen some recent examples of wholesale only MDAs come onto the market which provides us with some further insight.

The reason why an adviser would want MDA authorisations for their wholesale clients is so that they can provide discretionary portfolio management while enjoying the regulatory relief that an MDA offers.  Mainly, they are able to operate a similar structure to a Managed Investment Scheme (MIS) without a Responsible Entity (RE) or having to provide a Product Disclosure Statement (PDS), subject to meeting the prescribed conditions. If an adviser operates a scheme without MIS or MDA authorities then they could be deemed by ASIC as operating an Unregistered Managed Investment Scheme.

Under the current ASIC licensing system all financial product and advice authorisations (e.g., securities, cash products, derivatives, managed funds, etc) fall under all advice type authorisations (e.g., retail, wholesale, general). AFSL product authorisations cannot be allocated separately between the different product authorisations. Therefore, for a Licensee to be able to provide an MDA to wholesale clients only, the Licensee will not be able to provide any advice to retail clients.

With consideration of the above let us move forward with three different scenarios we mainly see;

1.      A Licensee applying for a new AFSL with MDA capabilities for wholesale clients only. In this case the AFSL would be restricted to wholesale clients only for all product authorisations. PI Insurance and FASEA requirements do not apply, though PI Insurance cover at some level may still be beneficial. The Licensee has no wishes to provide retail advice.

2.      A Licensee varying a current AFSL with retail and wholesale client advice type authorisations to support a wholesale client only MDA. In this case the variation will require the Licensee to remove the authorisation to provide advice to retail clients for all types of advice. This variation would remove the need to hold PI Insurance though ASIC may require some runoff cover for retail client advice for a period of time.  In this situation, advisers would need to be removed from the Financial Adviser Register as they will no longer be authorised to provide personal financial product advice to retail clients.

3.      A Licensee with retail authorisations creates a new advisory business and applies for a new AFSL for wholesale clients only with authorisations to support an MDA. In this case the new AFSL would be restricted to wholesale clients only for all product authorisations. PI Insurance and FASEA requirements do not apply. The existing Licensee/AFSL remains the same. In this situation the following should be considered:      

a)      Can clients be advised by both advisory businesses? – Yes, clients can receive advice from multiple AFSLs/Advisories as long as it is clear who is providing the advice.

b)      Can advisers provide advice under both Licensees? – Yes, however this is a bit more complicated. A cross endorsement arrangement between the two AFSLs will be required and such arrangements can be complex and pose some regulatory risk. That said, it would be clearer and cleaner to separate the advisers. The advisers responsible for the wholesale advice would not be required to maintain FASEA requirements.

Depending on your situation and business model it is important to know what authorisations to apply for in your AFSL application or AFSL variation. A wholesale only MDA does not involve the same authorisations that an MDA with retail clients requires. At MDA Guru we can help you to determine your best pathway and guide you through this process. Please call or email us for a chat.