Accredited investors in Singapore are high networth individuals. Accredited investors are also at greater risk of being mislead compared to others.
Under the Securities and Futures Act, an accredited investor means
(i) an individual —
(A) whose net personal assets exceed in value S$2 million (or its equivalent in a foreign currency) or such other amount as the Authority may prescribe in place of the first amount; or
(B) 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;
(ii) a corporation with net assets exceeding $10 million in value (or its equivalent in a foreign currency) or such other amount as the Authority may prescribe, in place of the first amount, as determined by —
(A) the most recent audited balance-sheet of the corporation; or
(B) where the corporation is not required to prepare audited accounts regularly, a balance-sheet of the corporation certified by the corporation as giving a true and fair view of the state of affairs of the corporation as of the date of the balance-sheet, which date shall be within the preceding 12 months;
An accredited investor should not be too happy because they do not have the full protection from the law. Specifically, according to the Financial Advisers Regulation (FAR) Section 33, 34 and 35, financial advisers who deal with accredited investors are exempted from Section 25, Section 27 and Section 36 of the Financial Advisers Act (FAA). The following is a summary of the important matters which accredited investors must take note off when dealing with financial advisers:
- Section 25 of the FAA spell out the obligation of the financial adviser with regard to product disclosure such as terms and conditions, cost, name of the product manufacturer, etc. Financial advisers dealing with accredited investors do NOT need to disclose any terms and conditions, cost and even the name of the product manufacturer! I have even seen cases in which accredited investors bought life insurance policies when they thought it is an investment product! Why? Because product disclosure is NOT required when dealing with accredited investors.
- Section 27 of the FAA spell out the obligation of the financial adviser with regard to recommending products based on a reasonable basis. When dealing with accredited investors, financial advisers can recommended products that are UNREASONABLE and clearly NOT suitable. Some people in the industry says that since accredited investors are so rich, it is okay to milk their money like robin hood. Robin hood rob the rich to give to the poor. These financial advisers 'rob' the rich for their own benefit.
- Section 36 of the FAA spell out the obligation of the financial adviser with regard to conflict of interest when making a recommendation. The "conflict of interest' refers to whether does the financial adviser gains financially from the acquisition or the disposal of the securities concerned. For example, a bank may underwrite an IPO. If the same bank also recommends that the client buys the IPO shares, it is a conflict of interest. Those dealing with accredited investors do NOT need to disclose the conflict of interest!
As it can be seen that accredited investors are often at the raw end of the deal. Society often assumes that accredited investors can take care of themselves because they are rich enough to hire their own lawyers or they are savvy enough to make their own decisions. To me, this is just stereotype. Consider the following examples:
- A widow who inherited $2 million from a term insurance due to the death of her husband need the money to support her growing up children. She needs the full protection of the law like everybody else.
- A scientist in biomedical field knows nothing about investments. How could such a person be considered to be an investment guru?
- A retiree who has $2 million of net assets due staying in the same landed property for 40 years when it was purchased at a very cheap price. Is such a retiree an investment guru? When such a retiree get cheated, does that means there is no protection?
We do not expect a doctor to have the same expert knowledge in law like a judge. We do not expect an architect to have the same expert knowledge in chemistry like chemistry professor. Yet, accredited investors are expected to have the same expert knowledge as an investment professional.
What kind of investment products are exempted?
ALL regulated financial products are affected by the exemption and not just 'restricted' products. For example, theoretically there is no need to provide a benefit illustration when selling a regular premium life policy to accredited investors. There is no need to give the details of a unit trusts when selling it to the accredited investors. Even for simple hospital and surgical plans like medisave-approved private intergrated shield plans, financial advisers are not required to disclose the fineprints of these products to the accredited investors!
How NOT to be an accredited investor?
Under Section 33(2) of the FAR, the financial advisers must disclose to the accredited investors of this exemption (there are exemption to this disclosure). However, it seems there is no way for an accredited investor to 'opt-out' to be an accredited investors. This means once a financial adviser has proof that an individual has a salary of at least S$300,000 a year or a networth of at least S$2 million, the individually is automatically 'opted-in' as accredited investors.
'Restricted' products are products that can only be sold to accredited investors. All financial advisers would require the client to declare and proof they are accredited investors before purchasing the restricted product. However, there is no such requirement when purchasing a 'retail' product like a medisave-approved integrated shield plan, investment linked policy, whole life policy or a unit trust. This does not mean that the client is fully protected by law because a client is automatically 'opted-in' as an accredited investors if they are indeed accredited investors.
To be an accredited investor is not a good thing
As it can be seen that to be an accredited investor is a raw deal. How can accredited investors protect themselves without resorting to paying exorbitant legal fees for lawsuits? I suggest 2 ways.
- You can avoid disclosing your true wealth and income. This is not the same as disclosing a fictitious wealth and income which would result in products that are not suitable (this is not what you want!). Without proof you are an accredited investors, your financial advisers would tend to act in a way as if you are fully protected by the law. However, with effect from the beginning of 2015, non-disclosure of wealth and income is no longer a viable option (long story for another blog).
- You can provide a full disclosure of your true wealth and income but insists that your financial adviser and you sign a financial planning contract . This will force your financial adviser to ensure any advice given is in favour of your interest.
As I practice professional financial planning, all cases would require the client to sign a contract.
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