It may seem like you have more options but will you really make more money?

Accredited investors have access to financial products that regular investors don’t. On the surface, that seems like you have a lot more options, but can accredited investors really make more money? A lot of the time, the answer is no:

What is an accredited investor?

An accredited investor is anyone with a net worth of above S$2 million*, and a provable income of at least $300,000 over the past 12 months. Once the requirements are met, anyone can choose to register themselves as an accredited investor.

Accredited investors are assumed to be financially savvy. When dealing with these investors, financial institutions have less stringent requirements. For example, accredited investors can be sold unrated bonds, or complex investment products.

The typical argument for being an accredited investor is that you can optimise your wealth. High net-worth investors can take risks that retail investors cannot, and thus gain higher returns on their assets. But practically speaking, there may be more downsides than upsides. Here’s why:

*Property assets can only account for half the total net worth

Accredited investors get risky products pushed on them all the time

In 2016, oil and gas exploration company Swiber Holdings collapsed. Bond holders suffered significant losses, and this drew attention to the fact that most Swiber bonds – in fact most unrated bonds in general – were sold to accredited investors via private banks.

In the aftermath of the Swiber disaster, Bloomberg noted that private banks took up 49 to 92 percent of unrated notes by PT Tikomsel Oke, Pacific Andes, and Swiber Holdings, all of which were companies that defaulted. One cause was that bond issuers offered banks rebates of as high as one per cent, to sell these unrated securities.

(Companies save significant sums by not having their bonds rated, via credit ratings organisations such as Moody’s.)

While some private bankers may look for long term client relationships, others will see accredited investors as nothing more than immediate sales targets. Bear in mind that, if your private banker destroys your wealth, you won’t get back a single cent that you’ve paid in fees and commissions.

It’s a mistake to assume that accredited means savvy

Accredited investors are assumed to be financially savvy, but that isn’t always the case. Some people may have acquired their wealth without ever touching a single stock (e.g. celebrities, successful restauranteurs, app developers).

These people may qualify as accredited investors on paper, but they know no more about pricing models or emerging market bonds than the average Singaporean. Most of the time, these people end up believing almost anything a wealth manager tells them (see point 1).

If you could qualify to be an accredited investor, but you know you don’t really understand finance, then don’t register. Remain a retail investor, as it restricts your exposure to  lower risk products.

Being an accredited investor doesn’t always mean your financial products will make you more money

The theory behind allowing accredited investors to buy high risk products is just higher returns. They can afford to risk more, and hence they can also gain more. But if you think this is a vague argument, you’re right.

We don’t know if being an accredited investor, and thus being allowed to buy risky products, means you’ll make more money. There are no statistics to show this. Even if there were, those statistics would apply to a collective whole – it may not apply to you as an individual.

The Singaporeans who bought Swiber bonds certainly haven’t made money and there’s nothing to suggest that reliable products, such as ETFs, can’t serve the wealthy the same way they do the public.

Your Content Goes HereThere is often an inherent mismatch in the risk profile

One of the key principles, when buying financial products, is to buy something that matches your risk appetite. If you’re a risk averse investor, the psychological effect of losing several hundred thousand dollars may be worse for you than for an investor who’s prepared.

This psychological reason is part of why you pay a wealth manager, such as a private banker. But it makes no sense to think risk profiles match, when you can be sold products without proper explanation. Without clear risk ratings, how can anyone tell if you’re buying something that matches your risk appetite?

And even when you’re told a product is safe, you can never be sure due to lax disclosure rules; a company doesn’t even need to provide a prospectus to sell its stocks to an accredited investor.

You know yourself whether you’re “savvy”

Even if you can achieve accredited investor status, be honest to yourself. If you know you’re not financially savvy enough, there’s no embarrassment in staying a retail investor. Neither is it right for you to assume that you’ll somehow “make less” – plenty of billionaires still stick to conventional products like investment grade bonds, or indexed funds.

(If you want to know more about these safer products, speak to one of our financial advisers at RAY ALLIANCE Financial Advisers. You don’t need to be accredited for us to help you).

Otherwise, you can use the Wizard at FinAlly.sg to compare financial products yourself. Just list your needs in the quick questionnaire, and you can browse options with no one to pressure you.

FinAlly.sg is an easy way to plan for your financial needs, without having to consult agents. You’ll save on fees and commissions, and you can easily compare between a range of different products. Get your portfolio in shape with just a few clicks of your mouse.

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