Higher-income investors and those who have become millionaires—with seven-figure investment accounts, excluding their primary home’s value—become known as so-called “accredited investors.” These investors can tap a variety of higher-risk, higher-reward investment opportunities unavailable to the general public. But financial advisors often caution with this warning: Just because you can invest in a certain product or deal, does that mean you should?
“The investments available to these investors are often more opaque, and that means sometimes that there’s less protection to the investor,” says Diane Bourdo, a certified financial advisor and president of Humphreys Group in San Francisco.
While many of Bourdo’s clients do fall into accredited status and do hear about opportunities available only to accredited investors—crowdfunding deals, angel investing, real estate investments—she counters that investors interested in owning a particular asset class or industry sector can choose to invest in vehicles that carry less risk.
For instance, choosing to invest in small-cap stocks, funds or ETFs (to tap growing companies) can make just as much sense as pursuing a hot crowdfunding proposition, and those who want to invest in real estate can choose from many funds, ETFs, or REIT stocks that provide that access.
“If an investor has $5 million, versus $1 million or so, the point may be moot,” Bourdo says. “However, regardless of net worth there are a variety of ‘traditional’ investment options that may serve their goals.”
Becoming accredited is an investment milestone. Less than 10% of Americans fall into the accredited category. Who counts as an accredited investor? The main criteria relate to current income or investments amassed:
You are an accredited investor if you have income of $200,000 or more during the two most recent years or your income with a spouse exceeds $300,000 for the past two years and you expect that income to continue.
You are accredited it your individual net worth, or joint net worth with a spouse, exceeds $1 million, excluding the worth of your primary home.
Erik Olson, a certified financial planner at Arete Wealth Management in Crystal Lake, Illinois, says that his firm works with many accredited investors and offers about 40 types of investments open only to those investors. About 5% of the company’s clientele cross into “accredited” status annually.
“Investors don’t necessarily know they’ve become accredited,” he says. “Many who have net worth of $1.5 million to $2 million remain focused on growing their investments.”
Accredited investors can get into investments that provide higher returns than what’s typically available in the stock market, however, Olson notes, they’ll need to understand the risks of the investment and will often be unable to cash out of their investment until the term of the investment is up—meaning the investments are less liquid than conventional securities (funds, ETFs, stocks).
There are several types of investments available to accredited investors. Many fall under what investment advisors call “Reg D” investments—shorthand for the securities rulings governing private placements and other investments these investors can make.
Among the investments Arete has helped investors tap are these:
Asset-backed investments: For instance, a $200 million business sought a $2 million capital raise from individual investors, in which a pool of investors would provide funds which would generate a 15% internal rate of return to each investor. Olson’s firm placed reporting and auditing requirements on the investment, and required that it was secured by the firm’s assets.
Interval funds: These funds, structured similarly to mutual funds, may be available to non-accredited as well as accredited investors. These funds do not report a daily “NAV” and allow investors to buy in and sell during particular windows each year. This provides more latitude for the fund managers to make investment decisions and distributions, but these funds are less liquid than other mutual fund investments.
Hedge funds: In these investments, investors participate in a pool of funding used to acquire businesses in which the hedge fund operator may take an active role in making demands or request of management. Separately, quantitative hedge funds—which use algorithms to forecast business behavior—may offer a passive investing opportunity.
Private equity funds: Accredited investors can make a direct investment into businesses through private equity funds, but typically play a passive role in the business once they become partial owners.
Real estate deals: Investors can extend private debt to real estate developers at high interest rates, often over a period of a few (two or three) years. Often the real estate is already in use and providing cash flow, but a developer plans to make improvements and share the increased cash flow with investors, with returns in the double digits.
Crowdfunding: Crowdfunding platforms, because of their online nature, often offer investments specifically to accredited investors. While the investment increments may not be outsized ($10,000, for instance), the investor must acknowledge or demonstrate net worth to partake.
Many of the investment opportunities that become available to accredited investors fall under the umbrella of “alternative” investments. Alternative categories are designed to move in different patterns from other common asset categories, thus providing bonus or counterweight benefits to a portfolio.
“I have a lot of accredited investors with 0% of their assets invested in alternatives,” Olson notes. “But it always depends on each individual investor as to whether a product available for accredited investors makes sense.”
For investors who are fortunate enough to have amassed a sizeable nest egg, it’s often prudent to experiment with 10% (maximum) of a portfolio in an alternative investment, Olson says. Most investors don’t place more than 20% of their assets in alternatives.
Olson says the more illiquid (meaning, not easily sellable) an investment, the more contractual obligations—financial statements, proof of sound financials at a business, etc.—his firm will require on behalf of investors, in order to protect them.
Often, investors who cross over into accredited status are preoccupied with the same concerns of their lower-net-worth peers: Preserving or growing their funds. The higher-reward potential of investments open to those with high net worth must be weighed against the risks and opacity of these options and, as with all investments, investors must know they may not achieve the returns they want–if at all.
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