Did you know that in the US you have to be an accredited investor to invest in a number of higher risk investments? These investments include:
real estate syndication and limited partnerships;
pre-initial public offerings (IPOs);
mergers and acquisitions;
loans for start-ups;
Under the Securities Act of 1933, an accredited investor is accepted as someone who has a net worth of $1m or more or has had an annual income of $200,000 or more in each of the most recent years (or $300,000 jointly with a spouse) and who has a reasonable expectation of reaching the same income level in the current year.
The Securities and Exchange Commission created the law in the 1930s to protect the public from wild unscrupulous dealmakers, businessmen, brokers and investors. In particular, it protects the less well-off from potentially losing money on higher-risk investments.
But the downside is that only the rich can invest in the best investments.
The law does not necessarily prevent these better-off investors from losing money because the mere fact that you have money does not make you a sophisticated investor. You still have to be financially well educated and experienced to select the best investments.
A similar law in the UK would be a good thing in that it could tackle the problem of so-called misselling. In my opinion the regulators have got it all wrong. The biggest risk is not the investment itself but the ill-educated and inexperienced investor. In other words, the problem is one of misbuying rather than misselling.
I would like to see several levels of investor in the UK such as inexperienced, experienced and professional.
Perhaps these investors could be colour coded as red (inexperienced), amber (experienced) or green (professional). The degree of compliance required of the adviser for each investor should correspondingly decrease according to the experience of the investor.
The more experienced or professional the investor the greater range of investments he or she should be eligible to invest in.
An income and/or net worth limit could also be applied to each investor level. If, for example, an inexperienced investor had a lot of capital they may be entitled to invest a proportion of their money into a higher investor category level.
The result of such a law would be to free advisers and investors alike from over-burdensome regulations and to reduce misselling claims.
In the UK we have a nanny state of over-regulation in financial services with the investor treated as though he or she is somehow the innocent victim in any number of misselling scandals. This is an insult to both the public and advisers.
The government has been hoodwinked by the media into believing all the misselling hype and has subsequently influenced regulators into taking a hard-line against advisers. I have heard about, and actually seen, many cases of clients ignoring sensible advice and getting into trouble later. It is the old story of “you can lead a horse to water but you can't make him drink”.
What sanctions does the adviser have against the client in these circumstances? None of course. If, on the other hand, the client makes a complaint against the adviser…
Tony Byrne is financial planning director at Wealth And Tax Management