Friday Finance: are you a sophisticated investor?

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This is an extract from The Poor Man’s Guide to Financial Freedom: A Realistic, 10-Step Manual for Building Liberating Wealth on a Low to Medium Income.

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]


[i] https://www.handbook.fca.org.uk/handbook/COBS/4/12.html#DES582

[ii] https://en.wikipedia.org/wiki/Accredited_investor

[iii] https://www.abc.net.au/radionational/programs/backgroundbriefing/macquarie-bank/9811240

Also available on many other platforms.

9 comments

  1. luisman · May 8

    Reblogged this on Nicht-Linke Blogs.

    Like

  2. luisman · May 8

    I don’t have much experience with anglo-saxon banking. What are you not allowed to invest in, if you’re not a “sophisticated investor”? Hedge funds? warrants/options? Certain funds that are categorized ‘high risk’? Some funds have a certain ‘minimum investment’, set by the bank or fund manager, which excludes most regular investors/savers, because it’s 100k or 500k to get in.

    It’s always a bad decision to get into investments you don’t understand (and for some this starts already with their self owned house/apartment). What everyone has, is a certain level of pattern recognition for markets, and that is the most important. If you’re not particularly gifted in that area, it’s better to stay out of active investments and just buy funds or an index.

    Liked by 1 person

    • Yes, hedge funds and that sort of thing.
      As for your second point, also yes. I know you play the market a bit but you know what you’re doing.
      I have an article on the 17th addressing this issue and criticizing two prominent finance writers in Australia for getting it wrong, one because she’s dull and the other because he’s a grifter.

      Liked by 1 person

  3. Hesse Kassel · May 8

    The rules in Australia are ridiculous.

    They killed peer to peer lending markets by restricting lenders in them to only sophisticated investors.

    It used to be possible to ring your broker and get shares in an institutional placement that might be going, often those things are a virtual give away. No such luck any more, sophisticated investors only.

    Very handy for insiders. Less competition for lenders. I notice that the premium companies have to offer to raise money in an institutional placement has increased dramatically too.

    Liked by 1 person

    • Is that just for business lending? Last time I looked, anyone could still invest in lower-return consumer P2P.

      Like

      • Hesse Kassel · May 8

        It looks like they require a wholesale investor certificate on SocietyOne, at least

        https://www.societyone.com.au/invest#register

        I can’t claim to have actually put money into peer to peer lending or know much about it though, so it is possible I just don’t understand what is going on.

        Australian shares seem like a better bet to me anyway (I mean that in a general sense, not in a market timing at this moment sense)

        Liked by 1 person

        • Plenti (formerly RateSetter) allow Oz retail investors. Max return is currently 6.5%, 5 years, for borrowers with lower credit rating.
          Haven’t tried it either.
          Seems okay but I’m worried that in a serious recession, people would be out of work and defaulting at the same time as shares plunge, thus negating the point of diversification. Been waiting and watching but no big recession yet to serve as an example.
          https://www.plenti.com.au/invest/

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          • Hesse Kassel · May 10

            Looks like you are right.

            Maybe I shouldn’t assume the worst of government all the time!

            Like

            • I can see both sides. Some hapless consumers are protected from themselves by these laws but in other cases banks like to use their political clout to give themselves a monopoly wherever they can.

              Like

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