Does phenomenal skill on an athletic field translate to being a sophisticated, accredited investor? That is a problem that leads many athletes to invest in risky and sometimes fraudulent investments that can lead them to bankruptcy.
Professional athletes as accredited investors
If you are familiar with the term accredited investor you’re unique. If you’re not familiar, an accredited investor, includes anyone who:
- 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, OR
- has a net worth over $1 million, either alone or together with a spouse (excluding the value of the person’s primary residence).
Many professional athletes fit under that definition. While they have the income or assets to qualify, it does not mean that they fall under the sophisticated person definition given later.
What does accredited investor mean?
The Securities and Exchange Commission (SEC) Office of Investor Education and Advocacy issued an educational investor bulletin2 for accredited investors, September 23, 2013. It says that the principal purpose of the accredited investor status is to identify investors who can bear the risk of investing in unregistered securities. Unlike offerings registered with the SEC in which certain information is required to be disclosed, companies and private funds, such as a hedge fund or venture capital fund, engaging in these exempt offerings do not have to make prescribed disclosures to accredited investors. Unregistered offerings, sometimes called private placements, involve unique risks and investors should be aware that they could lose their entire investment. Unfortunately losing their entire investment is an all too often heard headline. In 60 Minutes’, ’Thrown for a Loss”, Armen Keteyian reports that NFL players lost an estimated $43 million in a bad real estate deal.
Accredited investor and sophisticated investor
The SEC bulletin also offers an accredited investor status for purchases directed by a sophisticated person. “Any trust, with total assets in excess of $5 million, not formed to specifically purchase the subject securities, whose purchase is directed by a sophisticated person”.
In this context, a sophisticated person means the person must have, or the company or private fund offering the securities reasonably believes that this person has, sufficient knowledge and experience in financial and business matters to evaluate the merits and risks of the prospective investment.
Many so-called financial advisors appear to be qualified, successful and no know what they’re doing. In “6 questions to know your “financial advisor” Part 1 and Part 2, I offer questions to clarify that confusion.
What can an accredited investor do to protect themselves?
What can a professional athlete or anyone who is an accredited investor do to address the risks of their accredited investor status? I believe they should turn to financial professionals who are by law required to work in their best interest. Legally that is known as being a fiduciary.
Investment advisers are regulated by the Securities and Exchange Commission (SEC) or appropriate state authorities and are required to provide services to their customers under the fiduciary standard. CERTIFIED FINANCIAL PLANNER™ professionals providing financial planning services also must abide by the fiduciary standard, as defined by CFP Board.
The CFP Board defines fiduciary as “one who acts in utmost good faith, in a manner he or she reasonably believes to be in the best interest of the client.”
Some investment advisers and CERTIFIED FINANCIAL PLANNER™ professionals providing are also accredited investment fiduciaries (AIF®). Under the Fi360 AIF® Code of Ethics, an AIF®
- Act with honesty and integrity and avoid conflicts of interest, real or perceived.
- Ensure the timely and understandable disclosure of relevant information that is accurate, complete, and objective.
Not exploit any relationship or responsibility that has been entrusted to me.
What more? Contact us to help you evaluate the financial professional you’re working with, evaluate an unregistered investment or simply to increase your overall financial sophistication.