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Invariably in most arbitrations, attorneys wish to expose the plaintiff as a sophisticated investor able to judge the merits and risks of an investment. The attempt usually relies on the fact that the claimant is a college graduate and occasionally reads articles about investments, etc. etc. However, no one has ever yet offered a reasonable definition of what a sophisticated investor actually is.

Some might conclude that a sophisticated investor downloads direct stock information into his/her own computer with such services as Value Line, Morningstar, Dow Jones, etc. and trades directly through a discount brokerage firm and/or uses no load mutual funds. He uses his own skills in analyzing the risks and merits of an investment. In very limited circumstances, the investor might use a full service broker if he wished to avail himself of a particular analysts report. *

An investor, regardless of his/her background, who is relying upon the background, education and competency of a broker for analysis, information and trades of stocks, bonds or mutual funds should not be considered sophisticated.

* Most investors are far from sophisticated. From Investment Analysis and Portfolio Management by Cohen, Zinbarg and Zeikel, Irwin, 5th Edition- "A substantial bond of research clearly indicates that most investors, not only individuals but financial institutions, do not manage their portfolios effectively, That is, investors do not construct or manage their portfolios in a manner that reflects their attitude toward risk, nor do they recognize the likely financial consequences of disappointing investment performance." There are "three critical elements that should be central to every rational investor's deliberations: 1. Defining investment objectives clearly and realistically, 2. determining an appropriate asset-mix strategy for achieving these objectives and 3. adopting operating tactics that will effectively implement the broad strategic plan." Further, "capital market conditions are ever-changing and diligent adjustment to important trends is necessary to achieve determined goals consistently over long time periods. Few investors do."

Sophisticated Broker

* I believe the real issue in determining sophistication is to view the inherent knowledge of the broker, supervisor, expert witness AND the attorney or other individual presenting the case. This could be simply done by requesting that the individual provide a specific understanding of GNMA's and GNMA funds. (They will need to address FHA speed, average weighted maturity and duration.) Or to properly define diversification of single issue securities. I submit that few brokers or supervisors could provide accurate definitions on either subject and that such inadequacy on a highly touted conservative investment or essential statistic is indicative of a lack of basic knowledge. So since you do not have a sophisticated broker, you almost undoubtedly do NOT have a sophisticated client.