As both federal and state lawmakers seek to allow more investors to put their money into private markets, advisors are of two minds about whether that's a good thing.
The Securities and Exchange Commission, which regulates both the advisory industry and securities markets, defines an accredited investor as someone with a net worth over $1 million and an annual income of more than $200,000 ($300,000 for a married person). Under current law, investors must be accredited to put their money into private equity, private hedge funds, unregistered securities and certain types of crowdfunding — whether they work with a financial advisor or not.
The House Financial Services Committee voted in a party-line 28-21 vote on April 26 to advance legislation that would allow an advisor who holds certain securities licenses to put clients' money into unregistered securities regardless of the client's net worth or income.
Meanwhile, state lawmakers in Nevada are
Proposals like these routinely garner opposition from groups like the
That obscurity often drives people who are interested in private investments to rely on the expertise of advisors.
"And there's a common theme among the wealthy," Berkson said. "Often the more well-educated you are, the more you understand the boundaries of your own knowledge and the more likely you are to delegate decisions to others to fill in the gaps of your own knowledge."
Berkson said he's concerned the federal bill —
Whether advisors would welcome the opportunity to direct more clients into private placements varies from person to person. Jarrod Sandra, the owner of Chisholm Wealth Management in Crowley, Texas, said the mere possession of a securities license isn't as indicative of expertise as some lawmakers seem to think.
The federal bill would let advisors with Series 7, Series 65 and Series 82 licenses place their clients' money in private markets. Of those three, only the Series 82 deals primarily with private investments.
"The people who are taking these, they are being taught how to pass an exam," Sandra said. "And then they get out on the other side and start talking to people in the real world and realize what they've learned hardly represents what's actually happening."
Private deals have been on the rise in the U.S.
The deals have also been attracting regulators' scrutiny. The Financial Industry Regulatory Authority, broker-dealers' self-regulator,
Nicholas Daniel, a founder of Columbus Wealth Management in Columbus, Ohio, said he's taken on many clients who come with private investments already in their portfolios.
"Rarely did these investments outperform the public markets, especially after-fee and after-tax," Daniel said in an email. "Almost every client I have worked with that has these investments has expressed a lot of frustration on performance and their cash being locked up a lot longer than originally communicated."
As for concerns that investors could be taken advantage of, some advisors were quick to note that their fiduciary duties apply to private investments just as much as public ones. Thilan Kiridena, the founder and CEO of the New York-based firm Capital Elements, said wealth managers have a duty to look out for clients' best interests regardless of what type of securities they're recommending.
"Investment representatives are already governed by so many laws and regulations," Kiridena said. "We're always required to do proper due diligence no matter the asset class."
Tom Balcom, the founder of 1650 Wealth Management in Lauderdale by the Sea, Florida, said the big question is who should be making the decision on what's safe for investors? Is it the government or is it investors themselves with the help of qualified advisors?
"Right now, it's a little bit like going to a restaurant and being told you can't order anything on the left side of the menu," Balcom said.
Jeff Saling, the founder and executive director of the business incubator StartupNV, struck a similar note when talking about Nevada's bill on accredited investors. He said Nevada is not a state with a large wealthy population that meets the SEC's accreditation standards. That makes it difficult for private startup companies to raise capital in the state.
Saling called on federal regulators to take better account of the fact that income and net worth levels vary greatly from place to place in the U.S. and to move away from uniform rules.
"If you are in San Francisco or Los Angeles or New York, your freeways are jammed with accredited investors," Saling said. "But they're less than 3% of our population."
Sandra said he has some sympathy for arguments that the government shouldn't tell investors what to do with their money. But he questioned if clients are losing out on much by being steered away from private placements.
"Show me a 30-year period when the public markets didn't do well," Sandra said. "If you were investing for the long term, you probably did well, unless you were trying to time the market, and then you probably did terrible."
