How to Elicit the True Evaluation of Financial Risk in Wealth Management? A Criticism of MIFID II

The outflows of funds under management in private banks as well as in other wealth
management institutions in the recent period have reached surprising amounts,
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sometimes imperiling the temporary profitability of the institutions they flow out from.
The present article therefore suggests designing a proactive client-risk management
grounded on a convincing explanation of such outflows. An innovative implementation
of article 25 of the MIFID-II regulation could have provided an appropriate basis to this
end. The present article shows that such is not the case, given the tools of implementation
essentially selected, based on fixed questioning and qualitative scoring, leading to results
opposed to the ones the notion of client suitability intended to reach. Beyond this
assessment, the paper dwells on a synthetic view of the evolution of risk analysis and shows
that only today’s generalized appraisal of risk tolerance, beyond Von Neumann
Morgenstern’s vision, can provide the explanation searched for. The authors recommend
using digital interactive tools, based on this model and quickly “learning” the investor’s
risk-profile, to implement a proactive client-risk management. This solution at the same
time restores a true compliance to MIFID-II regulation.