“Gerald, do you know anything about accredited investors? If not, why don’t you research and craft an article about it? But please do not ever reveal my name”.
It was 2013 when a former wealth manager-turned-entrepreneur made this request to me during a meet-up. He had come across my blog and knew that my mission is helping investors to make better investment decisions. Through the years, my research on accredited investors make me realize how warped the game is being played against investors.
Be very sure, don’t ever be blur
2019 will be a defining year for accredited investors as Monetary Authority of Singapore (MAS) effect major changes to the regulatory framework concerning accredited investors. These changes probably came on the back of many investment casualties.
And it’s happening all over again and again. From Hyflux perpetual bonds of 2018, to the Swiber bonds of 2016, to the Lehman Brother’s Minibond, numerous Singapore accredited investors had suffered significant losses after being exposed to risky investments. No thanks to the work of wealth managers and private bankers.
The latest case involving Hyflux perpetual bond is not the first nor will it be the last. But why should you care or bother about it?
Well, you should. This is because many people are not even aware that they are being classified as accredited investors. The worst thing is that you may have elderly parents or unwitty relatives who are being deemed as accredited investors, making them extremely vulnerable of being misled into buying risky investment products. Many accredited investors may not be sophisticated investors at all. For example, they might have thought that perpetual bonds are low risk fixed income assets when it may not necessary be the case.
Many of you would presume that you would not suffer the same fate but you are wrong. This is because these investment products are not scams, but legitimate products sold by reputable banks and financial institutions. This means that it could happen to any one of us.
Many accredited investors are affluent individuals but were unaware of the risks behind these financial products. Given their lack of understanding of these investments, how on earth did they manage to get access to these financial instruments in the first place? This is where the accredited investor rule comes into place.
Accredited Investor Rule
Under the law (Securities and Futures Act), accredited investors are considered non-retail investors and they are accorded a lower level of regulatory protection as they are considered to be better able to protect their own interests. However, this presumption may not be true for all investors who meet the prescribed wealth or income thresholds.
You are considered an accredited investor if you:
- Have more than $2 million of net personal assets, out of which the net equity of your primary residence can contribute up to only $1 million of the $2 million threshold; or
- Earn more than $300,000 in the preceding 12 months
There are many old folks out there who are asset-rich because their properties have risen in value over the past decades. Unknown to them, many Singaporeans have become accredited investors because of asset inflation. Under this accredited investor regime, they are considered “sophisticated investors” even though they are clueless about the various financial products out there. To address this issue, one of the key changes is setting the $1 million threshold from the property contribution to your net worth. In doing so, many not-so-rich investors would be excluded from being classified as accredited investors.
And then there are busy professional folks out there like you and me. Many professionals are busy building their careers and some may have impressive annual income of more than $300,000. However, professionals in this income bracket may not be competent in investing. Just think of doctors, lawyers, businessmen and the likes. Many professionals may be experts in their respective fields but it does not mean they are expert in investing complex financial instruments like gold buy-back schemes or junk bonds. Many of them presume that precious metals and bonds are safe investments when in fact they may be risky financial products in disguise.
To address the second issue, MAS is changing the accredited investor regime to that of an opt-in scheme. This marked a drastic change to the scheme because previously those not-so-rich investors are treated as accredited investors by default and they may not even know that they are being treated as target board for risky investment products.
However, please note that financial institutions can still treat existing clients as accredited investors until 8 July 2020. This is because MAS is giving financial institutions transition time to upgrade their system and update their clients.
Return of your wealth
Under the previous accredited investor rule, investors did not have the luxury of “opting out” and they are not protected by regulatory safeguards granted to ordinary retail investors. To top it off, the complete product information may not be provided to accredited investor. Thus, the latest regulatory changes by the government would go a long way in leveling the playing field for investors.
In today’s low interest rate environment, private bankers and wealth managers often capitalize on wealth builders’ greed for high yield. Thus, with the backing of the accredited investor rule, they sell high risk products to accredited investors with the view of making explosive profits from the commissions. Very often, the risk profiles of the AIs are not even compatible with the products sold. But for the sake of making money, ethics may sometimes have to be compromised.
However, regulatory protection can only go so far. Ultimately, investors must do their part and educate themselves on the risks when investing in financial products. So many middle-class investors have lost their retirement fund or funds meant for their children’s education as a result of investing in risky financial products. Clearly the financial industry exploits the accredited investor rule to the maximum.
Always remember if something is too good to be true, it is. Don’t be afraid to walk away when your wealth manager tries to hard sell his best investment products to you. Always remember the return of your wealth is always more important than the return on your wealth.
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