Financially Speaking: Understand Your Investment Qualifications
By LouAnn Schulfer, AWMA®, AIF®
Accredited Wealth Management AdvisorSM
Accredited Investment Fiduciary®
For years, we’ve worked with investments that are “alternative” to the traditional offerings that many people are used to or have experience with. When I meet with new clients, it’s still very common for me to hear “I didn’t know I could invest in something like that”, not ever having heard of investor qualifications and the different investments that one may be eligible to invest in per FINRAs and the SEC’s guidelines (they are our regulatory authorities).
Investing considerations are complicated and should be given prudent analysis, far beyond the investor’s qualifications. Time horizons, future income needs, intentions and goals, to name a few. Those are all fundamental and in my experience, investors already have a good idea of that before meeting with me. Thoughtful and detailed analysis is still a critical part of my discussions with them and recommendations to them, but in addition to that, exploring the investments they qualify for based upon FINRA and the SEC’s guidelines is not only prudent, it’s often progressive in moving their financial plans forward.
Understand your net worth and your liquid net worth. Net worth is your assets minus your liabilities. Add up everything you own, minus everything you owe. That is your net worth. For investing purposes, we cannot count your home, so eliminate that from the simple equation. Liquid net worth is anything you could liquidate within a 30 day time horizon. Bank accounts, retirement accounts, etc. Not that you would, but you could put the order in and have your money out within 30 days. That’s the definition of liquid net worth for investing purposes, and the critical difference between regular net worth and liquid net worth.
So, let’s work our way through the categories. The first is what I consider “basic”. Anyone who wants to begin saving or investing and is willing to commit some money and time to stay invested can qualify for basic and the most commonly known and offered types of investments. These are available in banks and ordinary “corner office” firms, so to speak. Any institution with a licensed financial advisor can offer a basic level of investments, which is a great way to start. From there, if your net worth (excluding your home) is at least $250,000 OR your net worth is no less than $70,000 and your income is greater than $70,000, you may be able to participate in other specified investments.
Accredited Investors: An accredited investor is an individual who must have a net worth of at least $1 million excluding their personal residence OR an annual income of at least $200,000 (or joint income with spouse exceeds $300,000) in each of the last two years and who reasonably expects his or her individual income to be in excess of $200,000 in the current year.
Qualified Client: A qualified client is a natural person who must have at least a net worth of more than $2 million, excluding their personal residence.
Qualified Purchaser: A qualified purchaser is an individual who must own at least $5 million in investments, and for institutions, at least $25 million of investments.
While I am not able to get into details about the specific types of investments in this article, I believe it is very important for investors to understand that these qualifications exist, and were put in place by FINRA and the SEC for very good reason.
Since we were married nearly 25 years ago (before I was an advisor), my husband and I knew it was important to understand our financial situation. Initially we set a discipline to annually review our net worth together. Since then, technology has made it easier for us to track both our net worth and liquid net worth on an ongoing basis. Simply knowing this personally over the past 25 years has made us feel uncomfortable at times, and excited at other times. It has helped us gauge our progress and understand whether or not we have discretionary funds at any given time. Since becoming a wealth advisor (to others’ finances) I understand that knowing my clients’ financial situations, including income, net worth and liquid net worth also may qualify them to participate in different types of investments they may have never even heard of. If there was just one piece of financial advice I could give to all people, it would be to understand your net worth, your liquid net worth, and your investment qualifications. If your qualifications meet any of the above definitions, explore your options. You may join the many who’ve said “I didn’t know I could invest in something like that.”
Alternative Investments may not be suitable for all investors and should be considered as an investment for the risk capital portion of the investor’s portfolio. The strategies employed in the management of alternative investments may accelerate the velocity of potential losses.
Securities and advisory services offered through LPL Financial, a Registered Investment Advisor. Member FINRA/SIPC.