In the aftermath of the global financial crisis in 2008, and perhaps taking into consideration the slew of bond defaults in Singapore in 2016, the Monetary Authority of Singapore (MAS) took measures to strengthen Securities and Futures Act (SFA).
One feature of this process includes “enhancing the regulatory safeguards for retail investors”. This means clearly distinguishing man-on-the-street investors from “non-retail investors” (i.e. Accredited Investors and Institutional Investors).
What Does It Mean To Be An Accredited Investor?
First, let’s just make clear that there are two types of so-called non-retail investors: 1) Accredited Investors and 2) Institutional Investors.
To understand who the MAS classifies an institutional investor, scroll to the bottom of the article, where we’ve listed the relevant entities. Here, we’ll focus on who the MAS define are Accredited Investors –
i) Individuals with a personal net asset in excess of $2 million;
ii) Individuals with an income of not less than $300,000 in the past 12 months;
iii) Corporations with net assets exceeding $10 million in value, in their most recent balance sheet;
iv) Trustees of trusts that the MAS approves; or
v) Persons that the MAS approves
For the sake of this article, we’ll focus on the first two groups. As you can see, individuals who are generally considered rich (or high net worth individuals) fall into this category.
Regardless of how these individuals may have accumulated their wealth, could be property price appreciation, running a marketing company, selling Hello Kitty products online, or even winning the lottery, they can be considered “Accredited Investors”.
This is worrisome as they are also considered to be more financially savvy, which, obviously, may not be the case. And because they are considered to be more financially savvy, they do not have the same regulatory protection as the man-on-the-street investors.
An example is that investments sold to the public, such as shares, bonds or investment funds, require a prospectus to be registered with the MAS. Intermediaries dealing with customers must also be licensed by MAS. These can be bypassed when investment products are sold to Accredited Investors.
The problem with being an Accredited Investors is that you are assumed to be able to manage your risks better than the man on the street. This simply may not be the case in many scenarios.
How The MAS Has Tweaked This Classification Over Time
To tighten the process of being classified as an Accredited Investor, the MAS has introduced two main measures. 1) an individual’s primary residence can only contribute up to $1 million of the required $2 million in personal net assets; and 2) individuals must opt-in for consideration as an Accredited Investor.
In the past, the full sum of $2 million could have come solely from an individual’s home value. Needless to say, this was a dangerous way to classify someone as an Accredited Investor who is savvier than the man on the street or even someone who can take on more risks.
In addition, such a person would have simply been treated as an Accredited Investor even without his or her knowledge. Such people could have been introduced to complex and risky financial products that could not have been sold to the man on the street, and they may not have even known that they were being treated differently.
Also, certain statutory board, such as town councils, educational bodies or religious bodies, will no longer be automatically classified as Accredited Investors. They now have to opt-in as well. This makes sense too as these entities aren’t supposed to have professional investment acumen in the first place.
Why You May Not Want To Opt-In As An Accredited Investor Even If You Can
#1 If You’re Not Financially Savvy
If you or your parents are not experts on investments, but are able to fall within the classification, you may want to think twice before doing so. This is because you’re not afforded the same regulatory protection as those considered as man-on-the-street investors, you may be sold investments that are complex in nature and do not meet your investment objectives.
Just because you’ll have more investment options does not mean you’ll be better off. If you don’t truly understand what you’re investing in, you may be putting yourself at great risk of suffering financial losses.
Even if you think you understand what you’re investing in, you may not fully comprehend how the investment is structured until it’s in the papers (which means you’ve been burnt) or appreciate the amount of risk you’re taking on just to earn the returns being promised.
#2 If you’re risk-averse
If you generally don’t want to take risks with your money, you should definitely not opt-in to receive an Accredited Investor tag.
The only real benefit of becoming an Accredited Investor is being exposed to riskier investment tools not available to the public. An investment that offers low risk will almost always go through the tedious process of making itself available to the masses, who aren’t Accredited Investors.
#3 You’ll Be A Main Target For Certain Investments
Since you’re an Accredited Investor, you’ll be the first “target” for risky investments that can’t be sold to the public. This means every time you walk into a bank, speak to your relationship manager or financial advisor, you’ll be recommended an exclusive product that isn’t being marketed to the general public.
Even if you’re savvy enough to sieve through the investments and make a good decision to not invest 99% of the time, the 1% of the time that you wrongly believe in the investment being offered to you, may cost you dearly.
This may not be your fault, it’s simply a function of only being served such investments.
Taking On Higher Risk Does Not Always Mean Receiving Higher Returns
Before we end, we’d like to leave you with the notion that low-risk investments will always offer low returns. But there is no guarantee that a high-risk investment will offer high returns.
If you’re simply not sure about an investment, they smartest thing to do is avoid it whenever you’re in doubt.
According to MAS, an Institutional Investor is a
i) Licensed banks, under Singapore’s Banking Act
ii) Merchant banks, under Singapore’s Monetary Authority of Singapore Act
iii) Finance companies, licensed under the Finance Companies Act
iv) Companies or Co-operatives licensed under the Insurance Act
v) Companies licensed under the Trust Companies Act
vi) Singapore government
vii) Statutory bodies in Singapore under any Act
viii) Pension funds or Collective invest schemes
ix) Holders of capital markets services licenses dealing in securities, fund management, custodial services for securities, real estate investment trust (REITs) management, securities financing or trading in futures contracts
x) Persons who carries on the business of dealing in bonds with accredited investors or expert investors
xi) certain Trustees approved by the MAS
xii) certain Persons approved by the MAS
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Bonds and Fixed Income
Bonds and Fixed Income