More On Legal & Compliancefrom The Advisor's Professional Library
- RIAs and Customer Identification Just as RIAs owe a duty to diligently protect their clients privacy and guard against theft, firms also play a vital role in customer identification. Although RIAs are not subject to an anti-money laundering rule, securities regulators expect advisors to address these issues in their policies and procedures.
- Dealings With Qualified Clients and Accredited Investors Depending upon an RIAs business model and investment strategies, it may be important to identify “qualified clients” and “accredited investors.” The Dodd-Frank Act authorized the SEC to change which clients are defined by those terms.
The SEC recently redefined the accredited investor standard that is used to determine whether individuals are permitted to purchase insurance products such as Variable Universal Life policies and Variable Annuities that permit investment in exotic, high-risk products such as hedge funds and private equity. The new definition effectively increases the net worth at which an investor may qualify to purchase these riskier products.
Under the amended rule, as reported by AdvisorOne, an investor’s principal residence is excluded from the net worth calculation. Individuals (or married couples) are qualified as accredited investors under the rule if they have a net worth of at least $1 million, excluding the value of the investors’ principal residence. The rule was motivated in part by inappropriate marketing efforts that may have targeted families that, due to the inflated housing market, were “house rich” but who lacked the investing sophistication to fully understand the exotic products that they were purchasing.
What does the rule mean for your clients and prospects? For starters, the rule will re-establish the cache of private placement insurance products and help move them back into the exclusive realm of the advanced markets producer.
Who Are Accredited Investors?
Accredited investors are permitted by the Securities and Exchange Commission to invest in higher risk investments that are off-limits to the average investor. These investments require fewer public disclosures and generally don’t require registration, thereby increasing investor risk. Individuals are qualified as accredited investors if they satisfy either an annual income standard or a net worth standard.
The Wall Street Reform Act of 2010 amended the net-worth standard, mandating that the SEC amend its rules respecting the net worth component of the standard; yet left the income standard alone.
Under the income standard an individual with an annual income of $200,000 in each of the two most recent years, or a married couple with an annual income of $300,000 in each of the two most recent years, is an accredited investor.
Prior to the recent rule change, individual investors could also be qualified as accredited investors if they had a net worth, or joint net worth with their spouse, of more than $1 million, including the value of the investor’s principal home. As mentioned, the new rule excludes the investor’s principal home from the calculation.
In addition to the immediate change to the net worth calculation, the Wall Street Reform Act also requires the SEC to evaluate the definition of “accredited investor,” as it applies to
Selling to Accredited Investors
Accredited investors have access to private placement life insurance (PPLI)—which is off limits to the typical investor. Private placement life insurance allows high net worth clients to make hedge fund investments the same way that other insurance clients make mutual fund investments–through subaccounts of a variable universal life insurance (VUL) policy.
Like the standard VUL policy, a PPLI policy wraps investments, permitting them to grow tax free during the insured’s lifetime and then pass tax free to beneficiaries. Unlike the standard VUL policy, which restricts investment to specified carrier-offered, mutual fund-like subaccounts, PPLI offers a wide range of investment options, including hedge funds, private equity, REITs and complex derivatives.
Not all investors satisfying the accredited investor standard are interested in advanced insurance products that require qualification, but the accredited investor standard can still be a powerful device to pre-qualify your prospects. Countless services exist that will provide leads who meet the accredited investor requirements. Investors will at least satisfy the income or net asset test and will be prime candidates for advanced markets insurance products and services.
For additional coverage of this issue and similar ones, we invite you to sign up with AdvisorOne’s Summit Business Media partner, AdvisorFX, for a free trial.