Journal of Wealth Management
Vandenbroucke, J. and G. Fortuna (2019), “Loss aversion derived from a risk-based questionnaire”, Journal of Wealth Management. DOI 10.3905/jwm.2019.22.1.039
In a nutshell
In a consultation paper of 2017 on suitability requirements, the European Securities and Market Authority (ESMA) suggests enriching the current approach of investor profiling by including behavioral finance findings. The classic, rational approach falls short in capturing the richness of actual investor behavior. ESMA proposes to include elements from the emotional and psychological sphere.
The current publication describes a simple extension of the traditional approach. Investors that share a common, existing classic risk profile are subdivided based on their attitude towards loss. The differentiation is derived from available information collected through an existing regulatory compliant questionnaire.
Although we criticize the questionnaire-approach as such, the predictions of the model are validated through extensive field research. Observations of actual investor behavior reported by financial advisors match the refinement proposed by the model. Processing existing data differently hence allows providing more client-centric and future-proof investment advice. There is no need to ask existing investors for additional information.