As alternative investment specialists, we often get asked lots of questions about how to invest in non-traditional or alternative investments. To properly answer this question we need to start with who can access these alternative strategies. Alternative investments are not suitable for every investor. In certain cases these investments are available only to what the Securities and Exchange Commission (SEC) refers to as an “accredited investor.” So what is an accredited investor?
In a nutshell, an accredited investor must meet specific requirements for net worth and income. Firms like Three Pillars Wealth Management also have to meet specific requirements, including providing these investing opportunities only to accredited investors. When these requirements are met by both the firm and the investor, these investors can be presented with opportunities to invest in alternatives like private equity, private placements, hedge funds, venture capital, and equity crowdfunding.
While some believe that there is a process an investor must go through to become approved, that isn’t the case. It is our responsibility, as alternative investment specialists, to determine the suitability of each investor. As the fiduciary for each of our clients, we must ensure that we do what is in your best interest. This includes determining the suitability of alternative investments for you.
Research On Accredited Investors1
Research done in 2020 shows that:
- There are 13,665,475 accredited investors in the US
- This is approximately 10.6% of all US households
- The estimated wealth of accredited investors is $73.3 trillion
Are You an Accredited Investor? 2
The SEC defines an accredited investor as someone who meets the following requirements.
- Income over $200,000 in two consecutive years, or joint income with their spouse of $300,000 for two current years. That income is expected to remain the same in the current year.
- Net worth or joint net worth over $1 million, not including their primary residence.
- Individuals who have specific professional certifications, designations, or credentials
- Individuals who are “knowledgeable employees” of a private fund
- SEC- and state-registered investment advisers
Alternative Investing: Pros and Cons 3
Like everything, there are pros and cons to alternative investing.
- Alternative investments may have higher rates of return
- Alternatives may provide increased portfolio diversification
- Alternative Investments usually don’t follow the performance of the stock market and can mitigate volatility
- Alternatives may have beneficial tax treatment
- Alternatives can have higher fees
- Alternative investments can be riskier than traditional investments
- Alternatives are more complex and more challenging to understand than conventional investments
Alternative investments, available to accredited investors, offer potential benefits to high net worth individuals who are looking for higher returns and portfolio diversification but can better absorb the risks inherent to these strategies. When seeking to invest in alternative investments, it is beneficial to work with an advisory firm experienced at investing in and managing these types of strategies. This is partly because alternative specialists will help you determine if you are an accredited investor and if alternative strategies are right for you based on your current investments, financial strategy, and goals.
1 DQYDJ. "How Many Accredited Investors Are There in America?" Accessed May 10, 2021.
2 U.S. Securities and Exchange Commission. "SEC Modernizes the Accredited Investor Definition." Accessed May 10, 2021.
3 Investopedia. “Alternative Investments The Pros and Cons of Alternative Investments” Accessed May 10, 2021.