How are clients' risk profiles assessed today?

Five years after the publication of most European reports and guidelines on client suitability assessment, it is worthwhile to review implemented practices to address regulators’ requirements. To do so, we collected 500 questionnaires, both from European and non-European countries, to get a new insight into practices of financial intermediaries as of 2017.

Methodology

The 500 risk profiling questionnaires were collected in 50 countries. 23 were from European Union Member States and made up 48% of the total number of questionnaires. The others were from out of the European Union, mostly from North America. Later, we will use the term “European” to refer to questionnaires from the European Union (EU). This will exclude countries like Switzerland or Serbia. Questionnaires were used by various financial intermediaries, ranging from Banks and Asset Management firms to Robot-Advisors. We only analyzed questionnaires used for non-Professional Investors who are the target of the regulation.

As most Client Suitability Assessment tools are available online on the website of Financial Intermediaries, we collected most of them on the web. Only 10 of them were physically collected from financial institutions. Online research was carried out in different European languages in order to get a diverse panel of questionnaires.

Repartition of questionnaires by country
Country Country Country
Argentina 2 Germany 24 Poland 4
Australia 15 Greece 4 Portugal 3
Austria 13 Hongkong 40 Romania 1
Belgium 15 Hungary 14 Russia 1
Bermuda 1 India 3 Serbia 1
Brazil 26 Ireland 1 Singapore 4
Bulgaria 1 Italy 10 Slovakia 6
Canada 39 Latvia 2 Slovenie 1
Chile 2 Luxembourg 4 South Africa 5
China 2 Mexico 1 Spain 5
Colombia 8 Morocco 3 Sri Lanka 1
Costa Rica 2 The Netherlands 41 Switzerland 5
Croatia 2 New Zealand 4 Thailand 1
Cyprus 2 Nigeria 1 United Kingdom 35
Czech Republic 22 Panama 1 United States 79
Estonia 1 Peru 1 Venezuela 1
France 37 Philippines 2
TOTAL 500

Results

1) Number of questions

In European and non-European countries, the number of questions varied from 3 to 26 questions for the whole Client Suitability assessment process and from 2 to 25 for the Risk Profiling process.

The average number of questions for all countries was 11 questions for the whole Client Suitability assessment process and 6 for the Risk Profiling process.

2) Scoring method

In line with ESMA guidelines, most European questionnaires (163) did not display to their clients the calculation of their risk profile while most non-European countries did (170). Among questionnaires displaying their scoring method, the most common scoring method was a simple average of all questions (71% of cases).

3) Risk Profiling

Among the 248 European questionnaires, only 49 met all the MiF criteria for risk profiling, asking for risk or/and loss tolerance, investment objectives and investment horizon.

21 non-European questionnaires met these criteria.

4) Demographic questions

If questions regarding profession, education, marital status, household composition and gender are recommended but not required (ESMA, Response form to the MiFID II/MiFID Consultation Paper, 2014), the regulator has pointed out the importance of taking the age of the investor into account.

However, only 63 European questionnaires included this piece of information. The majority of questionnaires, both in and out the EU, asked no demographic questions at all.

5) Content and structure of questions

In spite of this heterogeneity, the content and structure of the questions themselves were very similar from one questionnaire and one country to the other.

Most questionnaires have adopted a three-section structure as suggested by MiFID, asking clients for financial product knowledge/experience, financial situation and investment objectives, including risk profile. In our sample, risk profiling made up on average 56% of the whole questionnaire.

For risk profile assessment, 49 % of questionnaires asked directly clients to evaluate their risk profile and 55% assessed risk preference by offering clients to pick up in a list their favorite portfolio.

41% of questionnaires assessed loss tolerance by asking clients about their reaction after a potential substantial loss. This question was suggested in 2012 ESMA guidelines and is used both by many European and non-European financial intermediaries.

A large majority of questionnaires (more than 70%) included questions about investment horizon and objectives.

Below is a synthesis of the most common questions asked in each category (risk profile, risk preference, investment objective, investment horizon, loss tolerance). Questions were very similar between European and non-European countries.

Most common questions per category
Total percentage of questionnaires asking this question or category of question
Risk profile 49%
What is your risk tolerance/risk attitude? Which one of these options best decribes your risk attitude/tolerance? 18%
Risk preferences 58%
In which of these portfolios would you like to invest? / With which of these scenarios are you comfortable with? 55%
Investment objectives 76%
What are your investment objectives? 40%
Loss tolerance 58%
How would you cope permanently with loosing x euros on your y euros investments? 41%
Investment horizons 79%
What is your investment horizon? 54%