What Is an Approved List?
An approved list is a roster of pre-vetted investments that a broker may recommend to clients, or that a mutual fund manager may buy for a fund.
Approved lists are sometimes called legal lists. They are intended to restrict purchases to companies that are stable and unlikely to default and in general to be a list of investments that are most suitable to an investor based on the investor's risk tolerance.
- Brokerage companies and mutual fund companies provide approved lists of investments that may be recommended or purchased for their clients.
- The point is to pre-vet potential investments to ensure the safety of their clients' money and investments that match the investor's risk profile.
- The approved lists of public agencies tend to stick to conservative, risk-averse choices.
Understanding an Approved List
Investors often turn to financial advisors or brokers to seek help with investments. Individuals that are not experienced in the financial markets typically seek out professionals who are able to help them invest their funds. The goal of an advisor or broker is to understand the investor's goals, time horizons, and risk profile before making any investment suggestions or decisions.
As a part of this process, once a broker has gotten to know a potential investor, they can recommend an approved list of potential investments.
Approved lists emerged in the 1940s as a way to protect trustors from any mishandling of investments by trustees. They are, in effect, a promise that the investment strategies of the trustors will not bankrupt the trustees.
Today, approved lists protect investors by ensuring a degree of safety from extreme risk. That being said, if an investor is comfortable with taking on more risk, an advisor would be able to provide them a list that has riskier investments.
For brokerages and mutual funds, the approved list limits the choices for account managers and brokers. In most cases, an investment company's list will cover a large number of options and leave plenty of room for choice and flexibility in the building and evolution of a client’s portfolio.
Robo-Advisors Have Lists, Too
The increasing use of robo-advisors makes the lists even more relevant. They serve as effective guidelines for the algorithms that are devised to serve as digital financial advisors.
Investment companies periodically publish their approved lists with buy and sell target prices, based on data collected by the company's research team. The current lists are usually made available to clients through their brokers or fund managers.
While approved lists can provide a certain security buffer for investors concerned about risk management, they are not always effective for every investor. Investors who want a more flexible approach tailored to their own investment and risk management strategies, and want to go well outside the box, may wish to investigate brokerages and funds which provide a wider range of options.
Approved Lists in the Public Sector
Approved lists are used by local and state government agencies to identify investments that are eligible for pension plans, insurance policies, and other funds under their control.
The requirements for inclusion vary from state to state, but in most cases, they include investments designed to protect the interests of the agency and the beneficiaries of the funds. Approved investments for government entities are generally low risk and low return, focusing on stability and steady growth.
Individual stocks that qualify for a state-approved list are usually of high quality. In many cases, the approved list will be required to adhere to the prudent person rule, which restricts a money manager to investments that a prudent person might purchase when seeking reasonable income and preservation of capital.
Other Approved Lists
Other approved lists are issued in related and unrelated contexts. For example:
- An annual approved broker/dealer list may be issued by a government entity to restrict who may be hired to handle investments for public funds.
- An approved materials list or approved product list may be issued by a government agency to define standards for government contractors.
- An approved credit counseling agency list is issued by the U.S. Justice Department to direct borrowers in financial distress to reputable nonprofit counselors to advise them if they are considering declaring bankruptcy.