FTT Embedded Finance


Regulation as Competitive Advantage

Pr. Bertrand Munier explains how NERP can be used to support MiFID II’s impact in wealth management in this Q&A. NERP can work as a very effective coordinating device in wealth management organisations and can be a very important first step in the digital transformation of banking, according to Munier.

Can you tell us a bit more about NERP and its impact on wealth management?

One of the major regulations bearing on wealth management at present is MIFID-II and its implementation. The European Securities and Market Authority recently published its “Guidelines on certain aspects of the suitability requirements” of MIFID-II.

There are two ways of viewing the regulations:

  • A Complaining attitude: Insisting – quite rightfully -that it represents a cost and is simply another burden for financial investment companies.
  • An Innovating attitude: Examining how the costs can be compensated for and turned into a competitive advantage, yielding profits and clientele enhancement.

The Complaining attitude leads to resistance to fully implementing the regulations and, most of the time, elaborating in-house sort of “window-dressing” solutions (to satisfy the Authorities when required).

Many of the questionnaires used by financial institutions are of that type and claim to determine the risk-profile of a potential investor but the truth is that they are not underpinned by science . The aren’t particularly informative, lead to frequent mistakes and open the door to client complaints, who will show little loyalty when suing the financial institution they once trusted. Group actions are to be particularly feared in the near future.

Does Riskinnov Ltd. contribute to an ‘Innovating Attitude’?

Yes indeed. Riskinnov offers a solution supporting the Innovating attitude, yielding profits in both the short and long-term. In this sense, it opens a “New Era” of Risk Profiling.

It is a mixed computer system, consisting of one fully MIFID-II-compliant questionnaire, followed by a related interactive session, which determines the investor’s risk profile by leveraging the best available techniques of experimental decision making and behavioural finance. It requires, at least in part, the presence of an advisor and can, in a sense, be categorized as a “mixed-robo” risk-profiler.

The output is not an automatically shaped portfolio, but rather a distribution of portfolio returns which make a “suitable” investment given the determined risk profile of the investor.

NERP is extremely easy to adopt. It can be either embedded within a larger questionnaire that the bank may want to have – and, in that case, would work as a complementary information system– or, alternatively, a well-designed bank approved questionnaire can be embedded in the NERP computer system – and work as a comprehensive mixed procedure to determine a risk profile. In both cases, a risk profile is obtained from objective data as well as from subjective reactions.

Why are “questionnaire-interactive computer sessions” dominating strategies?

To determine any risk profile, one needs both objective data and subjectively originating type of reaction/evaluation.

The objective part is the easiest one to cover and banks usually do a (more or less) satisfactory job in this respect. The subjective part is much more intricate process to determine in a reasonably robust, to some extent measurable (this would require details beyond the scope of this discussion) and contextually meaningful way. This is crucial information yet is simply ignored by many banks. This leads to the adoption of the complaining attitude noted abovw and all of its shortcomings.

Another reason why such mixed questionnaires-interactive computer sessions are slowly becoming best practice strategies is due to the fact that they are able to minimise the bulky silos of old banking infrastructure wealth management. It is often the case that account managers cannot make any use of the risk profile communicated by clientele officers. The risk profile, therefore, becomes mere window dressing.

NERP can work as a very effective coordinating device in the organisation and overcomes this well-known shortcoming. Indeed, NERP is a very important first step in the digital transformation of banking!