Being an accredited investor just isn’t what it used to be.

A bill designed to loosen the definition of an accredited investor, one who’s eligible to invest in certain private placements, is heading to the Senate after it passed the House of Representatives in resounding fashion last week. Advocates say the proposal would democratize private markets — like private equity, venture capital, hedge funds and real estate — which have long been reserved for the wealthiest investors. The bill would ask the Securities and Exchange Commission to reevaluate the current definition and potentially provide a new one. It’s yet another example of the industry opening up alternative products to Main Street investors.

“While this may be a step in the right direction for the asset managers, it remains to be seen if it is a step in the right direction for the new pool of potential buyers,” said Martin Gross, president of Sandalwood Securities.

Credit Where Accredit Is Due

While the Fair Investment Opportunities for Professional Experts Act passed by a 397-12 vote in the House, it still has its detractors in the wealth management industry at large. Some financial advisors feel private offerings aren’t necessarily the best idea for your average investing Joe. “If there is no alignment of interests, clients should not invest,” Gross said. “This is one area where understanding best practices around due diligence is essential.”

Most notably, the bill would open up the designation to holders of certain licenses, education, or job experience, like brokers and financial advisors. Proponents say a new definition would welcome financially savvy investors who don’t meet the traditional income thresholds. According to investor.org, the current criteria includes:

• Investors must earn at least $200,000 (or $300,000 for married couples) in each of the prior two years.
• Or, they are required to have a net worth over $1 million, alone or together with a spouse.
• Anyone who holds a Series 7, 65 or 82 license.

Advisors will also need to pay attention to the liquidity needs of their clients, the exposures they have in other asset classes, and risk tolerances, Gross said, adding that alternative investments come with levels of complexity and due diligence not required in public markets subject to the Investment Company Act of 1940, a law that protects investors by reducing conflicts of interest and improving transparency. Like it or not, current accredited investor rules exist for a reason, he said.

Keeping it Accredited. Private markets are “inherently complex and opaque,” and any new definition must focus on giving investors and investment managers the education and tools necessary to assess the risks, John Bowman, CEO of the CAIA Association, said in an email. Still, expanding the accredited-investor definition is long overdue. “Sophistication is not solely a function of wealth and is a positive step toward democratizing access to private markets,” he said.

We’re still waiting on Congress to democratize access to vacation homes on the French Riviera.

Alien crop circles, Bigfoot sightings and even Mr. Rogers’ secret life as a Navy SEAL.

We’ve all heard of the popular urban legends, and while we know they’re myths, we still find them oddly compelling. A similar dynamic exists in the wealth management industry, where persistent misconceptions can hinder good advice, according to David Hultstrom, CIO at Financial Architects. What sounds right in the heads and hearts of clients and their advisors, might not make much sense in practice.

“I’ve started keeping an informal little list, and the working title of that list was ‘Stuff brokers are wrong about,’” he said at the National Association of Personal Financial Advisors symposium in New York City last week.

Believe it or Not

Most urban legends stick around because they sound emotionally or intuitively right, even when they’re outdated or just plain wrong, and it’s no different in financial planning. One of the most enduring myths is the bucket strategy, which divides investments into separate boxes of cash, bonds and stocks. The popular version suggests holding five years of spending in cash or near-cash assets so clients can avoid selling stocks in a downturn. But Hultstrom says that’s a form of market timing. “There’s no case where when the market goes down, you’re selling stocks,” he said. “When the market goes down, you’re buying stocks.”

An additional taboo strategy is income investing — generating cash flow through dividends and interest, without touching the principal investment or selling securities. “People love income investing because they have this weird ‘Don’t spend your principal rule’ as a spending control, but it’s not relevant to anything, and it leads to bad portfolio decisions,” he said. Instead, he recommended advisors focus on total return investing, which draws returns from dividends, interest, and capital gains.

A Matter of Life and Death. Another myth centers around longevity assumptions. Clients occasionally cite family history as a reason to avoid long-term planning. “When a client tells me about longevity in their family, I listen very politely and then ignore it completely,” he said. His firm plans for clients to live to at least 100, noting that individual longevity is more about lifestyle and access to healthcare than genetics. Hultstrom also pointed out commonly misused financial terms:

• Mean Reversion is often confused with serial correlation, the idea that asset prices are likely to reverse to their previous values when they reach significant highs or lows.
• International investing technically includes the US, but is often incorrectly used to mean “foreign investing,” which excludes the US.
• Liquidity is occasionally misunderstood as being exclusive to cash or near-cash assets. Stocks are perfectly liquid, Hultstrom emphasized.

“[These urban legends] are perennial, but never seem to get straightened out,” Hultstrom said.

Leaving a customer review has never been easier, though not so much for wealth management clients.

Fewer than 10% of SEC-registered firms reported using testimonials in their marketing materials, even after the Securities and Exchange Commission allowed advisors to use endorsements in advertisements as long as they were accompanied by proper disclosures. It remains a largely untapped strategy, one that advisors are seemingly hesitant to explore.

“In the early days, because the rule hasn’t really been around for that long, we are seeing less adoption,” said Gary Foodim, CMO of Mercer Advisors, which recently partnered with Testimonial iQ to promote client reviews online. “But over the course of the next 24 to 36 months, you’ll see the velocity increasing in terms of adoption.”

How Was Our Service Today?

Testimonials have certainly proven effective in other sectors, such as online retail and healthcare. Some 70% of customers refer to online reviews before finalizing their purchase decisions, per a report from the Journal of Retail and Consumer Services. Under the SEC’s latest marketing rule, which went into effect in 2021, testimonials (given by clients or former clients) and endorsements (given by non-clients) can be included in advertisements so long as they disclose:

• Whether it was given by a current client or a non-client;
• Whether the person was compensated for the testimonial or endorsement (and as long as the compensation was less than $1,000);
• And whether or not there was a conflict of interest on the part of the endorser or testimonial provider.

Let’s Be Reasonable. RIAs also have to have a “reasonable basis” to believe that their testimonials are in compliance with the updated rule. Brian Thorp, the founder of Wealthtender, said his company lets firms screen testimonials that clients submit to make sure they’re SEC-compliant. “At first, there were more compliance concerns: firms saying, ‘Well, we don’t want to be first, let’s see how others do it.’” Others said they were looking for additional guidance on creating testimonials before using them.

“Now it’s a little bit more imposter syndrome,” he said, adding that firms are worried about getting negative reviews. “You don’t get negative reviews. People are with you for a reason.”