It’s interesting – to use a mild word – to experience the way these two terms are used almost interchangeably by many in our profession. Frustratingly, I include regulators in this group as well.

    It’s a bit weird, as in my head, whilst the two are related, but very different to each other.

    Let me explain:

    The normal language goes something like this – ‘The client is High Net Worth / Experienced / Sophisticated and is Eligible to invest in this High Risk offshore Timber fund, and therefore the fund is Suitable for this client.

    Let’s just look at that again. What if we apply that logic to our personal lives?

    What we would then say is that, being over the age of 18, anyone else who is single in the UK (World?) is Eligible for marriage purposes. So say perhaps 7 million or more in the UK alone?

    But how many of these are really Suitable? How many share the right values and objectives? How many are the right gender or orientation? How many are our ‘Type’?

    And the answer is not just 1, but it is likely to be a small fraction of the starting population of many millions.

    And the paragraph above gives us a clue. Eligible is the starting point, but to be Suitable requires us to take the starting point and process it through a series of criteria of filters to eventually get to a Suitability assessment.

    Returning to some of the Eligibility measures then, let’s look at these again:

    High Net Worth:

    What, exactly does this mean? The FCA Handbook uses the figure of £250,000 investible assets. That number has been adopted by many funds and jurisdictions.

    Is £250,000 really ‘High Net Worth’? Is that really ‘Wealthy?

    In today’s climate, that simply means a pension of £5,000 or £6,000 per annum. Is that rich?

    Does it imply that someone who worked for a company for 12 years, on a salary of £30,000, is now regarded as wealthy? (12/60 x £30,000 = £6,000pa, to simplify slightly!)

    So I’m not sure what ‘Rich’ is – and have never met a client who regarded themselves as ‘Rich’. Perhaps if we are trying to remove protections from people, we can we at least add a zero to that figure?

    Experienced

    This is the worst one. It has been taken to mean that if you bought one high risk product, you now qualify for another. I’ve also seen it made to mean that if you have been running a widget company, that constitutes ‘Experience’ in business, which means investment, so you are an ‘Experienced Investor’!

    Can you tell by my tone that I think that’s just completely nuts?

    In fact, I’d go further. The ‘Experienced Investor / Professional Investor’ rules do nothing more than save an Adviser money, time, paperwork and some risk, and it does this by removing rights from clients. I would even claim that the rules are often misused. After all, of the client was that ‘Experienced’, why would they want our advice, and why should they pay for it?

    To us, it’s simple. If the client wants our advice, then they are entitled to as much consumer protection as anyone else is.

    Sophisticated

    This would make sense if it was in regard to great taste in wine, being widely travelled and well read. Most of our clients could identify with at least a few of those.

    Somehow, it doesn’t mean that. Somehow, ‘Sophisticated’ has become to mean ‘Complicated’.

    So if you have investments in a few countries – because you married a Kiwi – have slightly complex affairs – you have a ‘creative’ accountant – and have invested a bit over the years – you are great at making Widgets – that makes you sophisticated. And no account is taken of your unusual liking of Blue Nun!

    And, in turn, this means that you somehow now qualify for a ‘punt’ (Horrible word, but Investment seems to be the wrong word in this context, to be honest). Tree Plantations in Costa Rica, Hotel bedrooms in Cape Verde. Nothing is too weird, no location to exotic to send the clients’ money to. Getting it back from there may be an issue though….. Perhaps it’s just a one way ticket?

    Can we file this in the same round file as the risk categorisations of ‘Balanced, Realistic and Adventurous’? Because they are all total Tosh (my editor said I had to say ‘Tosh’. I had a stronger word in mind…..)

    And that brings us to risk. Not that we ever really left it. Because – at least historically, and for some fund managers - all of this is about how much risk we can foist on the poor unsuspecting client.

    In the same way as UK law makes me Eligible to marry a 6 foot 4 inch, teetotal, vegan trainspotter who loves the Opera, that does not make me a Suitable match for them, nor they for me.

    It’s about suitability and appropriateness and goals and objectives and values and all those things. The ones you find out by talking to each other. And yes, I’m talking about clients here.

    Advice should be personal. So it follows that suitability is personal. Risk required and risk tolerance is very different. We should not treat the risk process as holding the clients hands closer and closer to the fire, and then when they say ‘it hurts’, saying, that’s it, you’re a 6, so you need to have this fund. So they then spend 10 or 20 years saying ‘it hurts’!

    We avoid that trap by understanding the client's position, aspirations and goals. We then give suitable advice. Suitability trumps mere Eligibility every time.

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