Accredited Investors typically have access to more complex investments than regular investors. This can also be seen as investments that are more difficult to grasp, and Accredited Investors are better equipped to determine whether such investments are appropriate for them.
The concept of Accredited Investors has been a subject of debate in recent years, with some arguing that the criteria for qualification may be outdated or insufficient. Critics argue that net worth or income alone may not necessarily indicate financial sophistication or risk tolerance. As a result, regulatory bodies in various countries have been reviewing and updating their definitions of Accredited Investors to better reflect the modern financial landscape.
Since early 2019, financial institutions can no longer determine if a client qualifies as an Accredited Investor. Instead, they must get specific consent from consumers who meet the requirements for Accredited Investor status.
What Does It Mean to be an Accredited Investor?
First, let us clarify that there are two sorts of non-retail investors: 1) Accredited Investors; 2) Institutional Investors.
We look at who the MAS defines as an Accredited Investor:
- Individuals with more than $2 million in personal net worth;
- Those with more than $1 million in financial assets (e.g. deposits or investments).
- Individuals earning $300,000 or more in the previous year;
- iCorporations with net assets over $10 million in their most recent balance sheet;
- Trustees of trusts approved by the MAS; or
- MAS-approved individuals.
To learn about who the MAS considers an institutional investor, go to the bottom of the article, where we've listed the relevant entities.
Individuals who meet the criteria for Accredited Investor status are generally considered wealthy. They have a better net worth and/or earnings potential.
While the criteria for Accredited Investors are primarily financial, it's important to note that wealth alone does not guarantee financial acumen. Many high-net-worth individuals may have acquired their wealth through inheritance, successful business ventures, or other means that don't necessarily correlate with investment expertise. This disconnect between wealth and financial literacy has led to calls for more comprehensive evaluation methods to determine investor sophistication.
Regardless of how these individuals obtained their wealth, which could be a combination of property price increase, running a business, or even winning the lottery, they can be labeled an Accredited Investor if they meet the requirements.
This is especially concerning because individuals with a higher net worth may not be more financially savvy or more suited to manage their own investment risks than average retail investors. This is why the regulations safeguard Accredited Investors by forcing financial institutions to get an explicit opt-in, ensuring that they understand they are investing in more complex financial products that are not available to the general public.
For example, investments marketed to the public, such as shares, bonds, or investment funds, must be accompanied with a prospectus that has been registered with the MAS. Intermediaries that deal with clients must also be licensed by MAS. These can be avoided when investment goods are sold to Accredited Investors.
The relaxation of certain regulatory requirements for Accredited Investors has raised concerns about potential exploitation. Some financial institutions may view Accredited Investors as prime targets for high-risk, high-fee investment products. This has led to increased scrutiny of the marketing practices employed by financial firms when dealing with Accredited Investors, with regulators emphasizing the importance of transparent disclosure and ethical conduct in these transactions.
How MAS has modified this classification over time.
To tighten the process of becoming an Accredited Investor, the MAS implemented two primary initiatives. 1) An individual's principal house can only contribute up to $1 million of the needed $2 million in personal net assets; and 2) Individuals must request to be considered as an Accredited Investor.
Previously, the entire sum of $2 million might have come from an individual's property value. Needless to say, this was a more "dangerous" method to define someone who owns a $2 million property as financially savvy than the average person and capable of managing and taking on more risks.
Furthermore, such a person may be treated as an Accredited Investor despite having no prior knowledge of the status. They may have been introduced to complex and dangerous financial products without realizing that they were being treated differently than regular investors.
Furthermore, certain statutory boards, such as municipal councils, educational institutions, and religious organizations, will no longer be automatically classed as Accredited Investors. They now have to opt in as well. This makes sense because these entities are not supposed to have professional investment knowledge in the first place.
The evolution of Accredited Investor regulations reflects a growing awareness of the need for more nuanced approaches to investor protection. As financial markets become increasingly complex, regulators are grappling with the challenge of balancing investor access to sophisticated investment opportunities with the need to safeguard individuals from undue risk. This ongoing process of regulatory refinement aims to create a more robust and equitable investment landscape for all participants.
Reasons to avoid opting in as an accredited investor, even if you meet the requirements:
You may not be financially savvy enough to manage risk on your own.
If you or your parents are not investment experts but meet the criteria for Accredited Investor status, you should think twice before participating. This is because you do not have the same level of regulatory protection as ordinary investors, and you may be marketed sophisticated investments that do not match your investment objectives.
Simply having more investment options does not guarantee that you will be better off. If you don't properly grasp what you're investing in, you risk losing money.
Even if you believe you understand what you're investing in, you may not fully understand how the investment is organized or the level of risk you're incurring to get a somewhat higher return.
You're A Risk-Averse Investor.
If you do not wish to face bigger risks with your money, you should not apply for the Accredited Investor designation.
A significant advantage of becoming an Accredited Investor is access to riskier and more complex financial products that are not widely available to the general public. An investment with minimal risk almost always goes through the time-consuming process of becoming available to the general public.
You will become a primary target for some investments.
As an Accredited Investor, you will be a "target" for riskier assets that cannot be sold to the general public. This means that your bank's relationship manager or financial advisor can recommend goods not available to the broader public.
Taking up a higher risk does not always mean receiving higher returns.
While lower-risk investments nearly always provide lower returns, you should be aware that a greater-risk investment does not guarantee higher profits. Instead, it suggests that there is a greater danger of loss, particularly in the short term, or even failure.
If you are unsure about an investment, the best course of action is to avoid it.
Who Qualified as an Institutional Investor?
According to the MAS, an institutional investor is:
- Licensed banks under Singapore's Banking Act
- Merchant banks under Singapore's Monetary Authority of Singapore Act
- Finance companies licensed under the Finance Companies Act
- Insurance companies or co-operatives licensed under the Insurance Act
- Trust companies licensed under the Trust Companies Act
- Singapore government
- Statutory bodies under any Act viii) Pension funds or collective investment schemes
- Holders of capital markets services licenses dealing in securities, fund management, custodial services for securities, real estate investment trust (REIT) management, securities financing, or futures contract trading.
- Bond dealers with accredited or competent investors. xi) MAS-approved trustees.
- Certain individuals approved by the MAS
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