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How Will the Newly Expanded Accredited Investor Definition Affect Wealth Managers?

Post on: September 8, 2020 | Mat Dellorso | 0

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On August 26th, 2020, the SEC amended the definition of accredited investor, an identifier of individuals and entities that are eligible to invest in certain restricted alternative investments such as private real estate funds and other investments under Regulation D. The previous rules, which defined accredited investors based on net worth and/or income, had not been updated since they were instated in 1983. Since then, numerous technological and regulatory changes have taken place, altering the investment landscape in the process and necessitating a fresh look at the rule.

The updated definition contains numerous expansions, such as the inclusion of entities like Native American tribes, limited liability companies, and family offices with at least $5 million in assets under management. But for the purposes of financial advisors and registered representatives wondering how the new rule will affect them and their current and potential investor clients, here are some key takeaways:

  • Individuals who hold a Series 7, Series 65, or Series 82 license are now considered accredited, regardless of net worth.
  • Individuals who are “knowledgeable employees” of a fund can be considered accredited investors for the purposes of investing in that fund.
  • The requirements for married or “joint” investors has been expanded to include “spousal equivalents,” which applies to those who are in a co-habitating relationship outside of marriage.

The most impactful change will be the inclusion of registered individuals. According to Michael Kitces, there are over 300,000 financial advisors and registered representatives in the US. These individuals and others that fall under the new rule will be added to an estimated 13.5 million people who were already accredited under the previous definition. This expansion is substantial, but not overwhelming, especially when you consider that these newly accredited individuals have a lower net worth, and therefore can contribute less capital than investors accredited under the previous rules. The total amount of capital in the market is not expected to significantly increase.

However, just because they do not have as much capital to contribute does not mean that they do not require just as much guidance as wealthier individuals when it comes to the complex world of alternative investments. New investors are likely to be overwhelmed by the breadth of investment opportunities they now have access to. Wealth managers who deal in alternative investments will have a larger potential client base and can differentiate themselves to these investors by flexing their alternative investment knowledge and capabilities.

One thing the updated accredited investor definition does not change much is the process of executing alternative investments. Advisors and reps should see no change beyond having additional boxes to check in the accreditation section of subscription documents. While it is good that the changes will not make the process more complex, they also won’t do anything to improve the process. With more investors submitting smaller investments—resulting in smaller fees and commissions—for the same amount of administrative work, wealth managers looking to scale may want to consider adopting more efficient digital processing solutions.


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Disclaimer: WealthForge provides this information for educational purposes only. It should not be construed or relied upon as legal or tax advice.

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Mat Dellorso

Mat helps drive WealthForge's vision forward with his passion for innovation and background in entrepreneurship. Mat helps lead company strategy and growth and is a frequent industry speaker on how WealthForge is powering the future of private capital markets.
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