Opening Accounts: Financial Profile and Investment Objectives
Profiling the Investor Before the First Ticket
Before a subscription is accepted, the representative must build and document a financial profile: income, net worth, liquid net worth, tax status, other holdings, time horizon, liquidity needs, risk tolerance, and investment objectives. FINRA Rule 2090 (Know Your Customer) and Regulation Best Interest require reasonable inquiry and a reasonable basis for any recommendation. In private placements the profile does a second job: it establishes accredited investor status.
Under Rule 501(a) an individual is accredited if income exceeded $200,000 in each of the last two years ($300,000 jointly with a spouse or spousal equivalent) with a reasonable expectation of the same this year; or net worth exceeds $1,000,000, excluding the value of the primary residence (and excluding debt secured by it up to its fair market value); or the person holds in good standing a Series 7, 65, or 82 license; or the person is a director, executive officer, or general partner of the issuer. Entities generally need $5,000,000 in investments.
Traps: adding home equity into net worth; counting only one year of income; treating a CPA, CFA, or attorney as automatically accredited (only the enumerated licenses qualify); confusing 506(b)'s reasonable-belief standard with 506(c)'s verification standard.
Regulation S-P privacy notices, CIP/AML identity verification, and trusted-contact designations for senior investors complete the file.
Worked example: A prospect shows $1.7M of assets including a $600,000 home, and $400,000 of liabilities including a $250,000 mortgage. Net worth excluding the residence is $1.1M − $150K = $950,000 - under the threshold. But two years of $250,000 joint income qualifies the prospect on the income prong.