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Scary truth about accredited investor rule

Bullionstar

Bullionstar

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As an investment blogger, my commitment is to deliver quality content so that readers can benefit from reading my blog. Beyond this, I also hope to build a community by engaging my readers. Thus, if you find this article useful, please email subscribe to my blog for free or share your thoughts in the comment block. Today, I will share the scary truth about accredited investor rule in Singapore.

I learned about the accredited investor rule a few years ago from a local entrepreneur who worked in the financial sector for many years. He candidly shared with me his experience as a wealth manager and touched on how the industry made money from investors based on this rule.

I have previously written about this rule in this blog but apparently many readers still have many doubts about it. You may check it out here.

Make your money work hard

Like many people, I share the same aspiration to enjoy the good life through building wealth. In this regard, my conviction is that investing offers the possibility of a ticket to financial freedom.

But have you ever wondered why so many Singaporean investors lost big sum of money in financial products like Minibond Notes, High Notes 5 and Pinnacle Series 9 and 10 Notes back in 2008?  Instead of making money work hard for them, ironically they lost substantial wealth. Last year, many investors also got burned after investing their hard-earned money in Swiber corporate bonds.

Singapore banks

Many of you would presume that you would not suffer the same fate but you may be wrong. This is because these investment products are not scams, but legitimate products sold by reputable banks and financial institutes to retail investors. This means that it could happen to any one of us.

Many of these individuals are affluent 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.

Understanding the law

Under the Securities and Futures Act of Singapore, accredited investor refers to someone whose net personal assets exceed in value $2 million (or its equivalent in a foreign currency) or whose income in the preceding 12 months is not less than $300,000 (or its equivalent in a foreign currency) or such other amount as the Authority may prescribe in place of the first amount.

What this means: When you walk into a bank and provide your wealth data, the bank will profile you. Maybe your wealth manager already have your profile ready before you even walk into the bank. In any case, if you qualified to be an accredited investor, they will ask you to fill up a liability form. Basically it means that being an AI, you are accorded a lower level of regulatory protection as you are considered to be better able to protect your own interests.  However, this presumption may not be true for all investors who meet the prescribed wealth or income thresholds.

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.

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.

           Gold and Silver Bullion

Hunt in packs

Banks and financial institutes often hunt in packs to go after your wealth. Thus, it is your responsibility to safeguard your money. Don’t be naïve to think that the wealth managers are there to make money for you. Their goals may not be aligned with your personal financial goals. The moment you are accorded the accredited investor status, you should not celebrate. Instead, you must be wary and fearful because you are targeted.

Under the accredited investor rule, investors do 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.

In today’s low interest rate environment, 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 AIs 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.

Changing rules

The Monetary Authority of Singapore is currently reviewing the accredited investor rule so that accredited investors would be granted the same level of protection as ordinary investors. The rule changes are expected to kick in around middle of 2017. Until then, wealth builders must be vigilant and not fall into investment traps.

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 industry exploit the accredited investor rule to the maximum.

So if something is too good to be true, most probably they are. Don’t be afraid to walk away when your banker try to hard sell their latest “last day” investment offers to you. Always remember the return of your wealth is always more important than the return on your wealth.

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SG Wealth Builder

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9 Comments

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  1. Thanks for raising this for discussion. Too many scams or near scams around.

    The culprits are usually banks themselves, not companies. When biz companies need to raise funds such as bonds, debentures, going IPOs and other products, they seek banks as underwriters who provide the expertise, advice and to underwrite by buying all the issues for a fee but mostly a percentage. It then re-sells them to retail investors mostly their banking clients. It is a very lucrative profit for these investment banks, better than the business of lending. They have all their rich clients data and through their ‘relationship managers'(RM), who call them to market these products. They also market the Notes, bonds, whatever fanciful product names from overseas.

    In 2008 during the GFC, our local banks import many of these toxic products ( which you mentioned) from US to market them here. Some years back, even POSB is not excluded in its fervor to direct clients (with big sums) to be interviewed by RMs for some fishy products.

    Yes, hopefully MAS tightens the definition of AI. It is too loose. Those complicated products also require us to sit for a so called test. Haha….ask most people taken this test, might as well not bother.

  2. Thank your Lucky Stars or your GOD if you escape from buying anything from this so called RMs from your banking activity.

    Not only HNIs are targeted, those who have higher amount of FD in the banks too.

    MAS’s legislations or not, just thank your Lucky Star or your GOD that Greed has not taken over your Wit at the spur of the moment.

    After a few skirmishes with Bank RMS, they will most probably don’t want to waste their time on you anymore.

  3. will a cert or sth similar be provided by bank or financial institution once qualified as accredited investor?

  4. Good and truthful article. With interest rates at a low, customers have to be alert.

  5. Thanks Philip. Yes, Singaporeans need to be aware of the scheme to avoid paying painful money lessons.

    Regards,
    Gerald
    http://www.sgwealthbuilder.com

  6. Hi Bruce,

    I am not aware of any certificates to be granted because accredited scheme reflects a person financial status. You don’t need to undertake any courses or examinations to be qualified as accredited investor.

    Regards,
    Gerald
    http://www.sgwealthbuilder.com

  7. I guess Singaporeans need to be vigilant and read the forms before signing our wealth away.
    You might have relatives or family members qualified as accredited investors. So I guess you should remind them of the peril.

    Regards,
    Gerald
    http://www.sgwealthbuilder.com

  8. As far as I understand, AI scheme is different from SIP which requires test.
    To qualify as AI, you just need to have the asset or income.

    Regards,
    Gerald
    http://www.sgwealthbuilder.com

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