Stock Market Secrets: Unsophisticated Investors

“Sophisticated investors are people who have a level of wealth and or expertise in the market that excuses the seller of a financial product from the regulatory duty of care. Sophisticated investors are deemed to be smart enough or big enough to look after themselves. Someone with savoir-faire”. Well, in many cases, that’s a laughing matter. It is also a trap. Just because you have convinced a broker that you are a sophisticated investor doesn’t mean you are sophisticated. It simply means you are part of a class of investor that can be sold stuff without liability and without the usual disclosures that would be required in a prospectus. Qualifying as a sophisticated investor says you do not need regulatory protection. It puts you on a list of people that sellers (brokers like me) can “distribute” placements to, private placements, pre-IPO placements. Placements that don’t get offered generally. Placements that don’t even have to be offered to shareholders. Sometimes this is a privilege. And sometimes a liability. If your relationship with the offeror is not top notch, that is to say you are not “trusting friends” then I’m afraid you are “fodder”. And you know what that means – you are on your own. It’s the Golden Rule of the stockmarket. “If it’s any good you won’t get offered it. If you get offered it, you don’t want it”. As usual in sales and making money, it’s all down to the relationship. Being a sophisticated investor is not a relationship, it’s a right to roger, with impunity. So be sophisticated about it. Bottom line. If you ask questions, demand details, hold people to account, turn most things down and trust no-one you’re a sophisticated investor. If you take every carrot you are offered. You’re a bunny. WHY BE BE A SOPHISTICATED INVESTOR If you meet any of the requirements set out by ASIC you can consider yourself a Sophisticated Investor (or section 708 investor under the Corps Act) although to participate in offers to sophisticated investors you will need to prove that to the offeror (usually a stockbroker). Stockbrokers and some financial planners retain lists of registered sophisticated investors to whom they make “s.708” placements. If you wish to be offered these private placements you need to get on the broker’s list of s.708 sophisticated investors. Ask your broker if they have a sophisticated investor program. You can be on the list for a number of brokers or planners, not just one. The more the better. To get on it they will send you a form to fill out most of which will require your accountant’s signature to say you meet the requirements. It simply means they can offer you placements with impunity (and often without paperwork – just on a phone call). They earn commissions on the placements, often large commissions – zero to 12% - the higher the commission the harder it is to sell and the more cautious you need to be – they have to disclose their commission to you. So having a list of people to sell to is something they encourage. Sophisticated Investor placements often come quickly with little information or time for decision – in other words it often requires a lot of trust that the adviser thinks its going to make you money. You have to be aware of that. Your adviser is balancing commission versus your welfare. With private placements by brokers there is often a conflict between the broker doing his best for the corporate client (who pays a big fee to the broker for raising them capital) and doing what’s best for their retail (and institutional) investor base. If the placement is not popular then they have to choose between burning the corporate client (failing to raise the money) and burning their customers (placing stock that goes down). The only safety valve you have is the adviser you are dealing with. Hopefully he is more interested in his customers than the corporate commissions. But ultimately, if you put yourself on the “target” list by being a sophisticated investor, it is up to you to judge for yourself and its up to the adviser simply to offer you the stocks. Sometimes there is a not lot of disclosure (sometimes there is). As I say above.....having a good relationship with the broker is paramount - you have to have someone filtering out the crap because you often don't have the information to make an informed decision. A good gauge is to ask what commission the broker is earning on the placement. The higher it is the more risky it is. Any commissions around 2% are probably run of the mill. Above that and the company obviously thought it was going to be a hard sell and the alarm bells start to ding. Some placement fees have been above 12%. The catch all is that you might as well be on the list. Then you get offered things other people don't get. You don't have to take them. Click on this link to see if you qualify as a Sophisticated Investor. If you do you can ask to go on your broker's list and be offered placements. OTHER ARTICLES Unsophisticated Investors - If you have ever been flattered by someone offering you $500,000 of a product so you can 'play with the big boys' - read this.