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The world of banking and finance is subject to the MiFID II regulations, which are intended to offer the best possible protection to investors. For example, in banking, while “support” and “advice” might seem very similar, they are two very different things, because “advice” is very highly regulated. The difference is such that, when a bank is giving you advice, it is then obliged to determine your investor profile beforehand.
This aims to place you in a specific investor category, taking into account, among other things, your level of investment knowledge and your risk appetite. The advisor will consequently meet your requirements and offer investments matching your level as an investor and your investment strategy. This is done to avoid poorly-informed customers undertaking highly complex and/or excessively risky transactions, without being in a position to assess the real impact.
First of all, it is important to realise that banks distinguish retail customers from business customers. The first are typically customers who intend to start investing and have neither the knowledge nor the necessary experience, whereas business customers already possess this knowledge. This being so, retail customers receive the highest level of protection.
Once your categorisation as a customer becomes clear, your advisor will look at your yield objectives, risk appetite and other criteria to define your investor profile.
In the wake of the MiFID II directive, Luxembourg banks have developed a questionnaire for all their customers wishing to receive investment advice to determine their requirements and knowledge of the subject.
This questionnaire is completed by the advisor, who asks a series of questions, structured at two levels. Firstly, it seeks to identify the customer’s command of the financial products, and secondly it seeks to get to know the customer better.
More practically, the questionnaire contains the following components:
1. Your financial situation – an assessment of your income, capital and how you manage your finances.
2. Your requirements – the yield you are hoping to achieve, your appetite for risk, attitude towards losses, etc. will be determined.
3. Your plans – your investment horizon, and whether it is more short-term or long-term.
4. Your knowledge – the experience you demonstrate regarding existing financial products and your knowledge will be assessed.
Once the questionnaire has been filled in, a “score” is awarded on the basis of the investment period, risk appetite, etc. This score will ultimately determine your investor profile.
A balance has to be struck between yield, risk and the investment period. You cannot get high yields without taking risk and investing only over the short term.Paul Welbes, Team Manager, Product Management, Private Banking Business Unit
The bank offers you support, establishes your investor profile with a view to providing the best advice, and gives you a full guide including the benefits and risks you need to know about investments and financial products.
Refer to your bank in order to receive the best possible support.
Be honest and transparent with your advisor when filling in the questionnaire to establish your profile.
Accept the possibility that your perception of your spending might be wrong.
Do not forget that everything you disclose to your banker will be treated confidentially.