What is a sophisticated investor?
Some investments are recommended for, or restricted to, ‘sophisticated investors’, also called ‘accredited investors’. This is because the investment requires a high level of capital or expertise to manage properly. Such products are sometimes called ‘wholesale’, rather than ‘retail’, which means that they are mostly marketed to institutions rather than to individuals and often the minimum investment amount is half a million dollars or more.
But what exactly is a ‘sophisticated investor’? The following outline is simplified – follow the endnotes for full details.
Australia: Someone who has net assets of at least $2.5 million, or an income of at least $250,000 for the past two financial years. (All currencies are for the country stated).
Canada: More complicated, but generally assets over $1 million or an income over $200,000 for the past two years. Conditions apply.
New Zealand: A chartered accountant certifies that the individual has assets of over $2 million or an income of at least $200,000 over the last two years.
United Kingdom: Has experience working professionally in certain types of finance fields OR an annual income in the previous year of at least £100,000 OR net assets of at least £250,000, not including primary residence, OR possibly meets some other criteria – you can read through the gobbledygook for yourself at the link.[i]
United States: A net worth of over $1 million excluding the primary residence or an income over $200,000 for two years.[ii] The link at that endnote is for all countries other than the UK.
If you suddenly come into a windfall of money but are still not expert in matters of finance, I recommend you avoid products that are for sophisticated investors even if you are legally allowed to define yourself as such. If an advisor asks you to sign a legal statement that you are a sophisticated investor, but you think (I would say correctly) that you are not, refrain from signing it and find yourself another advisor.
There have been sad cases of farmers in Australia who were technically defined as ‘sophisticated’ due to the value of their property, only to lose it all through complex investments that they did not understand pushed on them by unscrupulous bankers.[iii]
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