Following the Swiber debacle, many wealthy (sorry, formerly wealthy) Singaporeans are regretting their decision to become accredited investors. From all appearances, it seems accredited investors are just people that banks (or private funds) can push into buying high-risk products. So what is the accredited investor status, and should you use it just because you can have it?
What is an accredited investor?
An accredited investor is someone with at least $2 million in net worth (including property assets, which can account for a total of up to $1 million in determining net worth), or an income of at least $300,000 in the last 12 months. This is, broadly speaking, also the definition of a high net worth individual (HNWI) in the local context.
Accredited investors are assumed to be better able to handle investment risks and are thus exempt from certain protections. When it comes to retail investors (i.e. the average Singaporean), the Monetary Authority of Singapore (MAS) restricts the kind of financial products that can be sold to us. For example, retail investors can only buy vanilla bonds when considering corporate bonds. There are also regulatory requirements such as having a prospectus for any investment product.
Accredited investors bypass these requirements and can be sold more exotic products. Examples include unrated and high-yield bonds or early stage venture capital funds.
Most of the time, these financial products will be sold to them via private bankers or independent asset managers. However, funds can also approach them with none of the usual MAS restrictions.
As of 2015, the Singapore government has moved to introduce an opt-in scheme which requires you to consent to be an accredited investor before you’re treated as one.
The problems we’ve seen with accredited investor status
The Swiber debacle was what triggered tighter regulation for accredited investors. Swiber was an oil and gas related company and their corporate bonds were sold mainly via private banks. (In fact, in 2014, MAS determined that 43.5% of Singapore dollar bonds were sold via private banks).
Retail investors, by the way, don’t generally get sold products from private banks (or are even invited to bank with them). So we can safely assume it was accredited investors who were pushed into products like Swiber bonds — which also had minimum investment sums of $250,000. A prospectus was not even required.
When Swiber defaulted, a large number of accredited investors were burned. Even worse, they didn’t quite have the capacity to understand or absorb the risk, as was assumed. At the time, property assets could account for the bulk of their net worth (not just up to $1 million). Many were older Singaporeans who were not especially skilled in financial management but had simply managed to buy properties that appreciated significantly in the run-up to 2013.
It was apparent that many had liquidity issues and did not comprehend the risks any better than the average retail investor. This was compounded by the fact that an opt-in was not necessary at the time; banks could just treat anyone who qualified as an accredited investor, whether they chose to be or not.
With the new measures in place, you’re no longer going to stumble into this by accident. But now it’s worth asking if you should be an accredited investor if you can.
Why you might want to be an accredited investor
You should consider accredited investor status if:
- You are sufficiently qualified to manage the risk. Once you declare yourself accredited, you’ve stepped into the Wild West of the financial world. You will be sold products that either make you a lot of money or lose a lot of it. Above all, remember there will be no one to complain to if your investment fails. You cannot plead ignorance once you’ve declared yourself fit to handle the risk. You must have a thorough understanding of the risks you’re taking because you’ll hear many good sales pitches.
- You follow the 5% rule. The 5% rule holds that you should put no more than 5% of your portfolio in high-risk investments. This limits your downside but gives you a large potential upside. If you take a risk and it fails, you lose just 5%. If you take a chance and it pays off, you receive an outsized reward for the size of the risk you took.
- Your intentions in investing go beyond financial gain. Being an accredited investor raises a lot of different options. For example, you could involve yourself in impact investing — you could put money in social enterprises or in companies with revolutionary eco-friendly designs. Many wealthy individuals put money into early stage venture capital for companies with lofty goals; it’s as much about making a positive contribution as it is about potential gain. You could even invest in ways to support various passions; if you’re a lover of the arts, for example, you might be able to invest in an art fund or artists’ commune, which is not something available to most retail investors.
Why you might not want to be an accredited investor
You should avoid being an accredited investor if:
- You are unfamiliar with wider aspects of financial management. If you have inherited your wealth, or obtained it through a windfall such as property or the lottery, or any other way which precludes knowledge of financial management, be extra cautious. Less scrupulous wealth managers and private bankers do exist, and they may take advantage of your unfamiliarity with financial matters. It’s best to stay unaccredited so you cannot be sold on toxic products.
- You are risk averse. If you are uncomfortable with risks then there’s basically no point to being an accredited investor. Accredited investors will be offered products that require huge amounts of capital and in many cases products that are not even well regulated. These could bring more than a few sleepless nights — and the point of being rich is to have a less stressful life.
We can show you safe, simpler ways to invest your money. While the gains may be modest, you will be able to rest easy. Check out our simple passive investment systems at Alpha Lab.