Inconsistent Risk Profiles within Pan-European Private Banks: Insufficient Transparency for Retail Investors

Abstract

The Markets in Financial Instruments Directive (MiFID) must protect retail investors and increase risk transparency. To disclose and mitigate investment risks effectively, banks use standardized risk profiles. Through a scenario-based case study, we demonstrate that based on future risk-adjusted returns and volatility, these risk profiles of pan-European private banks significantly differ. Even though MiFID is not subject to bandwidth restrictions, differences could interfere with risk transparency and lead to significant differences in future risk, return, and managed expectations of clients due to profile overlap. This article uses the risk profiles of twelve pan-European private banks. We found significant non-equality among three rebalancing strategies: buy-and-hold, yearly rebalancing, and bandwidth rebalancing. The impact of broader bandwidths in the rebalancing strategy results in a significantly higher risk and return for investors due to greater flexibility in equity weights. Consequently, this article presents inconsistencies in private banks’ risk profiles. Future regulations should address and reconstitute guidelines to mitigate risk discrepancies. The difference in risk and return within the pan-European private banks creates a lack of transparency and does not contribute to investor protection envisaged by MiFID.