Transcription: Segment 2
Paul Winkler: And we’re back here on the Investor Coaching Show. Paul Winkler, along with Mr. Jim Wood. There is this thing about accredited investors. I like to bring up the idea that a lot of people think that wealthy people are great investors. “They’re just really, really great.They’re very, you see, sophisticated investors.” they think.
How do most people build wealth?
And then you’ll hear things like, “This investment is only for sophisticated investors,” and I just go, there ain’t no such thing as a sophisticatedinvestor. It’s just that people believe that wealthy people are great investors. And I always like to point out that wealthy people become wealthy the old fashioned way. They go out and they start companies. They build the companies and then they monetize that and they turn it into a valuable company.
And then little by little (or lot by lot), they may sell the company. They’ll sell and invest the proceeds and go off into the sunset and retire. You know? So the idea that they’re great investors is somewhat suspect. Now, a lot of times they can be lousy investors and do okay, because they’ve got so much money. I mean, you can take a person that is worth, you know, many, many, many millions of dollars and they can screw up all day long and they’ll probably won’t starve. They won’t be living under a bridge in a box or something like that.
What are accredited investors?
So, you know, the idea is that we often will look to these people and say, well, what is so and so doing with their money? You know, because they’re wealthy and they believe that because that person is wealthy, they must be really good investors. And I just want to tell you, that is not necessarily the way it works by any stretch of the imagination. Now there is this concept of an accredited investor. And Jonathan has sent me this article about this, saying that some rules have been changing out that this was interesting because the idea behind an accredited investor has always been that you have to have a net worth of at least a million dollars.
And, you know, you’re excluding your primary residence. When you do that, you have to have a net worth of a million dollars and have income of at least $200,000 each year for the past couple of years, or if you’re married, $300,000 combined income. And that has created the accredited investor rule. And they’ve decided to make a change in that. And the change, a couple of the changes that I thought were interesting, you say, well, that doesn’t apply to me. I’m just going to make a humorous point about this because I think it’s kind of funny, but they had seen the amendments were to add a new category to the definition that permits natural persons to qualify as accredited investors based on certain professional certifications, designations, or credentials or other credentials by an accredited institution, which the commission may designate from time to time by order now.
So they’re saying that these people are going to be added. They’re going to be, if they don’t meet the other criteria, they’re there. They might be able to meet the criteria as accredited investors, as long as they have these designations and what are they series seven. So this is something that I got early on in my career. And you got series seven, too, didn’t you and Jim are, as you can see the six series. So series six is where you can sell mutual funds or variable accounts in like variable annuities and those types of things. A series seven.
I got that first, and then I decided, well, you know what? I might want to do individual bonds and individual stocks. Cause I didn’t know any better. And I went and did that. I went and upgraded to the next designation, which is series seven, which allowed me to do that. And you get into options. You can study those types of contracts, a series 65 is the next one, which is a registered investment advisor. And that’s one thing I have as a requirement. When people come here and work here, they’ve got to get that. I don’t require a series seven, you know, when for any of our advisors, but most of our advisors came from that side of the business.
So we’ve all been there and it’s helpful. It’s good stuff to have. You have to know what some of the things are that you’ve got to avoid to be a good investor and understand how options work. Because a lot of contracts like annuity contracts are built on that chassis. You know, I did a whole thing where I talked about indexed, annuities and options. It’s good to understand how that stuff works and series 82 licenses as qualifying natural persons.
Now, what I think is amusing about this is this. They’re looking at these people and saying, well, these people have these designations. So we’re going to let them slide as accredited event masters. And I’ve always jokingly said that an accredited investor by definition is somebody that the government says has enough money that they’ve deemed them worthy of causing them to lose money. And it’s not a big deal. But now what we’re doing is we’re saying, well, if you’ve got these designations, now you’re an accredited investor.
And you think about it, they’re sliding under that definition of education because they don’t have enough money now. So you’ll have enough people, a number of people that don’t have enough money that they can afford to lose it. There’s the government’s deeming that they can lose money. And we’re okay with that because they have designations. They’re sophisticated investors. And here’s the thing, here’s what’s problematic about it. And I’ve talked about this before.
Sales tools
They’ve heard me say this before, but there was a study that was done. Two universities did a study and what they actually did is looked at investment accounts of investment advisors. And what they found was that the investment advisors were making the same mistakes with their own accounts as they were their client’s accounts. And they were even doing this after they retired. So it wasn’t an issue of, well, you know what, Ms. Jones, I’m doing the same thing with my money that I’m doing with your money. And it wasn’t a sales pitch, you know? So they weren’t saying, “Hey, I’m putting you in the same thing I’m in.”
And it wasn’t just a helpful sales tool. It was, they didn’t know enough not to be messing up their own accounts even after they retired. So I look at this and go, you know, out there, there’s this idea that these people are sophisticated investors. And even when they’re brokers and people have these licenses, that doesn’t necessarily mean anything, you know, and it really gets down to it. There’s a lot of academic research that just goes completely unheated when it comes to investing.
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Show me the evidence
And the moral of the heartless stories is don’t watch these people. Don’t watch accredited investors, wealthy investors, you know, financial people that have the designations that I just didn’t. I didn’t, you know, I look at that and going, you know what, that’s great. You’ve got that. But you better be looking at academic research and showing me what the empirical evidence is. The evidence based type of research that is going on to determine whether what you’re doing is prudent.
Jim Wood: Mostly the idea that that money equals sophistication just falls flat on its face, right off the bat. You think of how many athletes and how many celebrities have made millions of dollars and end up broke because you know, they get a manager that abuses them or they just, they go with the wrong investments. I mean, you look at the clients are Bernie Madoffs. How many of those were celebrities? And some of them were, you know, investment people with all these designations and years of experience.
Paul: Yeah. I was talking to a professional football player one time. And we were talking about investing in finance and what he said, just floored me. He said, “I got two investment advisors.” And I was like, Oh, that’s interesting. And he said, “Yeah, one, what I do is I have one check the other person’s work. And that is the way they keep an eye on each other.” And all I could think of was what my father used to say. When I was a kid, we had a neighbor that would do something and he would say something that wasn’t true. And then his friend would come around and he would corroborate it. And my father would say, “Yeah, so and so lies. And the other one swears it’s so true, and neither one of them really knew what they were doing.”
You’re listening to the Investor Coaching Show. Paul Winkler, with Jim Wood.
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