Investor Experience and Portfolio Choice: Regulatory Costs from MiFID II

Summary:

MiFID II forces banks and wealth managers to ask clients for their investment knowledge and experience. The implied regulatory view is that less experience should result in less risk taking. While this is neither shared in theoretical nor in empirical finance, it becomes a source of legal risk for asset managers and banks. How do banks react? What are the welfare implications? So far, this question was impossible to answer. The relevant data have not been available as they are not shared by banks. The authors circumvent this problem by using publicly available portfolio recommendations from robo-advisory firms.

They find that less educated and less experienced investors receive on average lower recommended equity allocations. This ingrains rather than corrects behavioural biases.