This book revolves around the concept of financial risk tolerance and its role in financial markets. Bridging different literatures and reviewing in detail the impact of European regulation on the evolution of risk tolerance assessment, this book discusses the intersection of scholarly research, practitioner experience and current and likely normative developments.
In particular, the book focuses on the evolution of the debate on the suitability questionnaire – a key tool introduced with the Markets in Financial Instruments Directive (MiFID) and further developed with MiFID’s successor - comparing it with empirical evidence on financial risk tolerance determinants, spanning from sociodemographic to behavioral components and life events.
The book also looks at the future evolution of the normative framework post MiFID2 addressing in detail two key trends that are already affecting the way in which risk tolerance is dealt with in European financial markets – sustainable development and fintech and roboadvisory.
The book includes an original survey run with financial market experts to assess the perceptions regarding these two trends and includes commentaries by a professional financial advisor on the key topics discussed.
Author(s): Caterina Cruciani, Gloria Gardenal, Giuseppe Amitrano
Publisher: Palgrave Pivot
Year: 2022
Language: English
Pages: 192
City: Cham
Preface
Acknowledgments
Contents
About the Authors
List of Figures
List of Tables
1 Financial Risk Tolerance: Where Does It All Start From?
1 A Crossroad: Why Looking at Risk Tolerance?
1.1 The Economists’ View
1.2 The Macroeconomic Perspective
1.3 The Regulator’s View
2 Trends in Financial Risk Tolerance
2.1 Definitions of Risk Tolerance
2.2 Risk Tolerance Determinants
2.2.1 Socio-Demographic Factors
2.2.2 Economic Factors
2.2.3 Personality Psychology
2.3 Measurement Tools
2.3.1 Choice Dilemmas
2.3.2 Expected-Utility-Based Tools
2.3.3 Objective Measures
2.3.4 Heuristic Methods
2.3.5 Self-Reported/Subjective Risk Measures
2.3.6 Risk-Behavior Scales
3 Conclusions and Roadmap of the Book
References
2 Risk Tolerance Tools: From Academia to Regulation and Back
1 The Market in Financial Instruments Directive (MiFID) and its Impact on Risk Tolerance Measurement
1.1 Introducing MiFID
1.1.1 A Brief History, Context, and Content
1.1.2 Classification of Clients, Disclosure Obligations, Assessment of Appropriateness and Suitability
1.2 MiFID and the Suitability Questionnaire
1.2.1 Questionnaire Overview
1.2.2 Implementing the Directive: Empirical Evidence and Practitioners’ Views
2 The Academic Debate After MiFID
2.1 Socio-Demographic Variables
2.2 Life Events
2.3 Behavioral and Personality Factors
2.4 Risk Tolerance: Stable Trait or Adaptive Feature?
3 The Market in Financial Instruments Directive 2 (MiFID2)
3.1 MiFID2, Context and Content
3.2 Suitability and MiFID2
3.3 Implementing the Directive: Empirical Evidence and Practitioners’ Views
4 The Academic Debate After MiFID2
4.1 Socio-Demographic Factors
4.2 Life Events
4.3 Behavioral and Personality Factors
4.4 Risk Tolerance: Stable Trait or Adaptive Feature?
5 Taking Stock and Looking at the Challenges Ahead
References
3 Challenges and Opportunities in the Regulation of Financial Instruments Post-MiFID2—Sustainable Finance
1 Sustainable Finance in a Sustainable Union
1.1 Sustainable Development in the European Union Legislation
1.2 From Theory to Action: The EU Action Plan on Sustainable Development
1.3 Setting the Plan into Action
1.3.1 Goal 1—Re-Orienting Investment Toward Sustainable Finance
1.3.2 Goal 2—Sustainability in Risk Management
1.3.3 Goal 3—Fostering Transparency and Long-Termism
1.4 The Action Plan and Investor Protection: Taking Stock and Moving Forward
2 Investing in Sustainability—Investor Preferences, Risk Tolerance, and Investment Behavior
2.1 Sustainability Investment—Where Does Europe Stand?
2.2 Sustainable Investors—Who Are They and Why Do They Choose Sustainable Products?
2.2.1 Demographic Characteristics
2.2.2 Economic Reasons
2.2.3 Social Reasons
2.3 Are Sustainable Investors Biased?
2.3.1 Updating Information and the Role of the Past
2.3.2 The Disposition Effect and Emotions
3 Implications for Financial Risk Tolerance and Investment Choices
References
4 The Digital Challenge: How Are New Technologies Shaping the Financial Industry?
1 The Technological Revolution of the Financial Services Industry
1.1 The Digitalization and Open Challenges
2 Fintech
2.1 A Definition
2.2 Fintech Users
2.3 Fintech Services
2.4 The Academic Point of View on Fintech
3 Open Banking and Open Finance
3.1 A Definition of Open Banking
3.2 The Evolution of Open Banking: Toward Open Finance
3.3 The Academic Point of View on Open Banking
4 Robo Advisory
4.1 A Definition of Robo-Advisory Services
4.2 Business Models for Robo Advisory
4.3 The Academic Point of View on Robo Advisory
5 The Regulatory Framework
5.1 The Payment Services Directive (PSD2)
5.2 The Revised Guidelines on Suitability by ESMA (2018)
6 Conclusions
References
5 Challenges and Opportunities for the Future Investor: A Practitioner’s Guide
1 The Survey
1.1 Some Reasons Why
1.2 Survey Structure and Participant Pool
1.2.1 General Information
1.2.2 The Sustainable-Finance Section
1.2.3 Robo Advisory and Open Finance
1.2.4 Socio-Demographic Characteristics
2 Survey Results
2.1 Participants Overview
2.2 Sustainable Finance
2.3 Robo Advisory and Open Finance
3 Final Discussion and Conclusions
Appendix: The Questionnaire
Index
