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. 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.
Most investors are far from sophisticated.
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. 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. Few investors do. 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.