Assessing Investment Preferences

Measuring is defining. Is thus measuring your investment preferences defining them?

Some answers in the following working paper recently appeared in the series by the CAREFIN - Center for Applied Research in Finance, Bocconi University, Milan.


The recent introduction of the European Commission’s Markets in Financial Instruments Directive (MiFID) was intended to enhance assessment of consumers’ investment preferences, but it raises new challenges. The effectiveness of the MiFID as a tool to improve the relationships of investment service providers and their customers is questionable due to evident variability in implementation not only across most European countries but also across national financial institutions, as well. An inadequate questionnaire design induces mis-profiling of existing and potential clients, thus endangering the long-term relationships of financial institutions and their clients and affecting the future economic outcomes of the clientele, as well as the reputation of the company itself.
To enhance our understanding of how best to assess investment preferences, with the goal of providing feasible solutions for improving MiFID questionnaires, we explored the relevant research on some important determinants, such as the financial agent–client relationship, risk assessment, validity and reliability of questionnaires, and information communication, including language fluency, visual framing, and financial literacy. Additionally, to assess common problems that have been noted with MiFID questionnaires, we conducted an experimental study in which we administered a questionnaire to 73 clients of two retail banks, inquiring mainly into their financial expertise, investment product knowledge, obstacles to and opportunities for better understanding an investment, risk perception, and relationship with a financial adviser.
Fifty-eight percent of questionnaire respondents assessed their financial knowledge as poor, a result that could explain the clients’ reliance on financial advisers for investment decisions. The customers resorted to professionals mainly because they deemed professionals to be knowledgeable of financial markets and because of their own limited experience. Our results will be useful to policy makers, questionnaire designers, financial advisers, and the customers themselves.
Aimed at protecting individual investors, the MiFID may achieve its objectives only for those consumers who have been properly profiled. As mis-profiling is quite common, it is imperative before launching a questionnaire to test the effects of the proposed questions across a range of consumer groups and to assess the risk of unintended consequences for particular customer populations. Financial institutions must then use the data they obtain to fulfill the one of the main goal of the Directive—protecting investors—by offering appropriate products to each client. We provide guidelines to help policy makers develop questionnaires that are comprehensible and valid and take into account consumers’ real investment preferences and their decision-making processes.

Keywords: MiFID, Behavioral finance, Investment decision making, Assessment of investment preferences

A. Balatel, R. Boero, I. Jonaityte, M. Monti, M. Novarese, and V. Pacelli
Beyond the MiFID: Envisioning cognitively suitable and representationally supportive approaches to assessing investment preferences for more informed financial decisions” (2013), CAREFIN - Center for Applied Research in Finance, Bocconi University, Milan.

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