Risk profiling and current suitability practices: what can be learned from a sample of Italian householders

According to the Markets in Financial Instruments Directive (MiFID), financial intermediaries are requested to assess the suitability of the products they sell to clients, particularly in respect of retail clients. Supervisory Authorities have pointed out that one of the main problems in the practical implementation of the MiFID suitability rule stems from the omission or impreciseness of the questions addressed to know the customer’s characteristics with specific reference to their risk profile. With this paper we try to shed light on the information an intermediary should collect from customers in order to properly define their risk profile. We analyze a sample of 2995 suitable portfolios and we put their risk composition in relation with some characteristics of the owner. By using the Heckit two-steps estimation procedure we are also able to set apart the variables that mainly explain the risk-holding decision (whether to acquire risky assets) and the risk-allocation decision (what fraction of wealth to invest in these assets). We find that the former decision may be induced by a smaller set of variables, essentially related to the capability of understanding and emotionally bearing the risk, while the latter is more related to the individual economic and financial capacity