The Unsophisticated Sophisticated: Old Age and the Accredited Investors Definition

Abstract

Accredited investors are able to buy unregistered securities such as private equity, venture capital and hedge funds with little regulatory oversight. This lack of oversight is justified because investors who meet the accredited investor thresholds ($200,000 annual income/$300,000 for a couple, or a net worth of over $1 million excluding primary residence) are assumed to be sophisticated enough to understand these complex and opaque securities. Some have argued that income and wealth thresholds are not necessarily an accurate proxy of financial sophistication.We use financial literacy instruments from the Consumer Finance Monthly and from the Health and Retirement Study to explore whether accredited older households, who are more likely to experience age-related cognitive decline and who have accumulated significant lifecycle savings, are less financially literate than younger unaccredited respondents. In both data sets, we find that accredited households age 80 and older are more than 80% less likely than unaccredited investors age 60-64 to have high financial literacy scores. Respondents with less than a high school degree were more likely to have a high financial literacy score than older accredited respondents in a multivariate analysis. While accredited investors are more financially literate than unaccredited investors within each age group, older accredited investors had significantly and strongly lower financial literacy scores than younger unaccredited investors and the difference increased consistently with age.