Sophisticated Investors Beware
14 August 2017
As CPA's we are often asked to sign off on a client's certification to become a Sophisticated Investor.
While this may seem a purely administrative task, it's not.
We take this service very seriously as it carries for the investor and for us a high risk.
A sophisticated investor is a type of investor who is deemed to have sufficient investing experience and knowledge to weigh the risks and merits of an investment opportunity.
The criteria for becoming a sophisticated investor however only determines if the applicant meets the asset or income requirements. This does not confirm that the applicant to has any knowledge or understanding of investments. Therein lies a real problem.
"Everything we do carries a risk," says Porters director Joe Porter, "some things are a great risk than others. For accountants some things carry a societal burden. Sometimes we are society's gatekeeper to protect the public from crooks, to protect people from schemes and to protect them from themselves.
"Ask yourself why only certain people can sign off on the Sophisticated Investor certification."
"When we approve a sophisticated investor certification our clients need to be aware of the risk they are taking on."
Sophisticated-only investments do not have to provide the standard product disclosure statements, financial services guides and other information required for retail investment products. These investments require individuals to accept the risk without the same levels information they are used to receiving in the retail sphere. By becoming a sophisticated investor and investing in sophisticated investments, you accept this risk. Director Simon Terry explained that the benefits do not necessarily outweigh the risks.
"We believe our value of service to our clients is derived from delivering a straightforward financial planning service through reputable financial planners rather than clients taking the stockbroker lottery as a sophisticated investor."
Investors need to be very clear on what they intend to achieve when becoming a sophisticated investor and that with this certification they are taking on real risk which may not balance with any perceived financial gain.
Before applying to become a sophisticated investor ask yourself the following.
● Can you afford to lose all of the capital you are putting up?
● Be wary of anyone trying to pressure you into getting a certificate. Is a broker or property developer strongly encouraging you to get involved in an investment with “sophisticated” status?
● Do you have experience with the asset class on offer? Is it something that you would choose if available to retail-only clients?
● Are you aware and do you accept that there may not be a dispute resolution process in place for "sophisticated" status investments?
● Do you have a financial adviser to run a second set of eyes over the opportunity?
Please take the time to read these reader-friendly links if you are considering becoming a sophisticated investor.