Last month Swiber, an oil fields services firm, defaulted on a coupon payment for the second time. The bonds were marketed to affluent individuals, known as accredited investors, by DBS.
One accredited investor who bought a Swiber bond claimed that the bond was above her risk appetite. Another accredited investor did not understand the product he bought into and simply signed whatever papers his relationship manager gave him.
An accredited investor status allows access to more complex and risky financial products. However, this access to a broader universe of financial products comes with a loss of regulatory protection. We'll explain more below.
What is an Accredited Investor
The Monetary Authority of Singapore (MAS) defines an accredited investor as a person who has net personal assets in excess of S$2 million. If an investor's primary residence is included in calculating net personal assets, any outstanding mortgage loan must be deducted from this amount. Also, the value of the primary residence may only account for up to S$1 million of this S$2 million requirement.
Otherwise, a person can also be defined as an accredited investor if his or her income was in excess of $300 000 in the last 12 months.
Because of an accredited investor's wealth, they are assumed to have a good understanding of financial matters and financial instruments. Accredited investors have access to a wider range of financial products, at the cost of regulatory protection.
This tradeoff can be quite costly - accredited investors should know that they lose some important protection that retail investors take for granted.
Below, we outline 3 things accredited investors need to watch out for.
1. A reasonable basis for product recommendation
For retail investors (non-accredited investors), a reasonable basis is required when a financial product is recommended. This means that a client's investment objectives, financial situation, and particular needs are taken into consideration when a financial product is recommended.
For accredited investors, a product recommendation is not required to have a reasonable basis. This means that a financial product may be recommended on grounds other than its suitability with an accredited investor's investment objectives, financial situation and particular needs.
For example, an accredited investor may be recommended a product that is riskier than he or she is able to tolerate. Or, an accredited investor may be recommended a products that locks up funds for an excessively lengthy duration.
Financial institutions are not required to provide accredited investors with the same set of product information that retail investors receive. For example, accredited investors may not receive a prospectus when investing in a unit trust (also sometimes known as mutual funds).
A prospectus that accompanies a unit trust investment is a legal document that details the risks, fees and expenses, investment strategies, and performance of the fund.
For other types of financial products, accredited investors are similarly not entitled to the same level of product information disclosure as retail investors.
The lack of complete information places accredited investors at a disadvantage. Accredited investors may not be aware of how risky their financial product is, or how much of their investment is being paid as fees.
3. Opting out
Currently, it is not possible for an accredited investor to to opt out. This means that even if an investor is aware of his or her status as an accredited investor and its implications, he or she is not able to downgrade to a retail investor status to enjoy the full range of regulatory protection.
This means that more diligence is required on an accredited investor's end. An accredited investor needs to expend more energy to ensure that a recommended financial product fits well within his or her investment objectives, financial situation and particular needs.
The MAS is aware of the drawbacks of the accredited investor scheme. Later this year, the MAS will introduce some legislative changes at a parliamentary reading. If the changes are accepted, accredited investors will be accorded the same degree of regulatory protection as retail investors.
In the meantime, accredited investors need to be aware of the drawbacks of their status, and exercise diligence to make sure that they have a good understanding of the financial product they are committing to.