Opening Accounts: Financial Profile, Accredited Status, and Suitability
The profile and the suitability determination
The new-account record is the evidence that a recommendation was suitable. Capture name, address, date of birth, SSN, employment and income, net worth, liquid net worth, tax bracket, investment objective, risk tolerance, time horizon, prior experience with illiquid or tax-advantaged products, and other holdings that create concentration. For entity accounts, obtain the authorizing resolution or partnership agreement and identify who may give instructions; for trusts, confirm the trustee's powers; for custodial accounts, remember the minor owns the assets.
Accredited-investor status is defined, not estimated. An individual qualifies with income above $200,000 ($300,000 joint) in each of the last two years with a reasonable expectation of the same this year, or net worth above $1,000,000 excluding the value of the primary residence. Most institutional entities, and entities with more than $5,000,000 in investments, also qualify. Under Rule 506(c) the firm must take reasonable steps to verify - reviewing tax returns, brokerage statements, or a written certification from a CPA or attorney.
Suitability for DPPs turns on liquidity and concentration. These are long-term, illiquid, often tax-driven investments; NASAA guidelines and many firm policies cap a retail purchase at roughly 10% of liquid net worth. Document the discussion.
Trap: Including home equity in net worth. A $2,000,000 house owned free and clear does not make a client with $50,000 in savings accredited.
Worked example: A client holds $600,000 in a 401(k), $150,000 in a brokerage account, and a $400,000 mortgage on a $900,000 home. Net worth for accredited purposes is $750,000, not $1,150,000. Exclude the residence; include retirement assets even though they are not liquid.