Investors come in all shapes and sizes, from individuals who purchase fractional shares of stocks to fully accredited investors. While all investors have the same goal in mind, accredited investors have a different level of access. So what does it take to become an accredited investor? Do you need to be accredited to create a strong investment portfolio? Here’s a closer look to help you determine where you fit in along the investor spectrum.
An accredited investor can be an individual or a business, and both entities have privileged access to securities not registered with the SEC (Securities Exchange Commission). This means they may be permitted to make investments that carry more risk than those required to register with the SEC. For the purposes of this blog post, we’ll be looking at the requirements for individuals only.
Requirements for Becoming Accredited
To become accredited, you must meet certain net worth and income requirements. This is to help ensure a level of sophistication when it comes to choosing riskier investments and to provide some financial protection against those risks. According to the SEC, a person must meet one of the following sets of criteria:
- An individual who has earned income that exceeded $200,000 (or $300,000 together with a spouse in each of the prior two years) and reasonably expects the same for the current year
- An individual who has a net worth over $1 million, either alone or together with a spouse (excluding the value of the person’s primary residence)
While there is no certification provided to prove accreditation, the investment fund you choose to put your money into will need to vet your finances to confirm you do meet all the SEC requirements. You may need to provide tax forms, bank statements, pay stubs, and other types of financial documentation before you’re able to invest in any securities not registered with the SEC.
Pros and Cons of Being an Accredited Investor
The biggest benefit of being accredited is having access to a host of investment vehicles not available to the rest of the population. Some investments may carry more risk, but they may also offer more profitability and higher rates of return over other options. However, there are some drawbacks to consider as well. Issues accredited investors face include:
- High investment minimums: requiring larger amounts of money to invest can tie up capital and provide a greater risk of significant loss should an investment not perform well.
- Expensive performance fees: Fees for managers of hedge funds and other investments open to accredited investors can be extremely high, with some reaching 20% or more.
Investments that perform well can make the higher investment minimums and high performance fees worthwhile, but remember that there’s always a risk when it comes to investing. Accredited investors may take on more significant risk and more significant losses as a result.
What it Means for the Average Investor
Not everyone will meet the requirements for becoming accredited, and even those who do might not want to take on so much risk. Fortunately, there are lots of options available for anyone who wants to create a strong, diverse portfolio without relying only on the stock exchange. Certain alternative assets, such as some REITs, are open to non-accredited investors, offering options to create long-term wealth without high minimum investments. As always, it’s best to consult with your financial advisor before choosing a strategy for your portfolio. To learn more about DiversyFund and REITs as an addition to your investment strategy, click here.