12 May 2022

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The path to investment

Author: Luigi Campopiano

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Following the trend of the previous document, the financial objectives derive from future spending needs and the ability to save. Achievement of objectives also depends on risk preferences and available investment options. In defining the objectives, it will be necessary to evaluate how much to invest, when you will need the money invested (time horizon), the returns you aspire to, and the risk you are willing to assume. These are the elements that define the financial profile.

What to know before investing?

• Risk and expected return grow together (we must be wary of easy and safe earnings proposals);

• Diversify (do not put eggs in the same basket). Not all in one security/issuer; better to choose different investments. Diversification makes it possible to reduce the overall risk of the portfolio;

• Not trusting one's intuition and perceptions. Acting on intuition allows you to make immediate but not always correct choices, and the way in which information is presented can guide the perception of risk and decisions. Before investing, it is necessary to reflect and dissolve all doubts;

• Always check that the person proposing an investment service or activity is authorized.

In relation to the last point, intermediaries authorized to provide investment services must:

• Acting honestly, fairly, and professionally to best serve the client's interests;

• Provide correct, clear, and not misleading information;

• Classify the customer as retail (retail: there are greater protections) or professional (if you do not meet the requirements of Consob Regulation no. 20307/2018);

• Offer services that take into account the client's individual situation (investments must correspond to the investor's profile and his needs).

Authorized firms may offer one or more of the following types of investment services:

• Recommendations regarding investments, products, and lines of action (investment advice);

• Management of his investments on behalf of the client;

• Purchases and sales of financial products without receiving investment advice (in this case, the level of protection is lower than that provided for the two previous services);

• Special precautions are necessary for the opportunities offered on the Internet to reduce the risks associated with investing online.

What to invest in?

After the premise made a few lines above, it is necessary to choose among the vast range of financial instruments existing on the market the products that, due to their risk and return characteristics, are suitable for the characteristics and objectives of the customers. If you are not an expert, you can use a professionally trained person, able to recommend appropriate / adequate products to the investor's profile and needs.

The risks associated with purchasing complex financial instruments must be carefully evaluated. Consob recommended that intermediaries adopt particular precautions regarding complex products, up to, in some cases, advising against their distribution to retail customers. It is necessary to carefully consider the risks associated with the purchase of securities not listed on regulated markets or not disclosed to the public because disinvesting these securities could be difficult and could take place at a lower price than the purchase price.

Use the information available

Read "critically" the information document of the financial product in which you are considering investing and ask the intermediary for clarification. If doubts persist, do not invest. Authorized intermediaries (and financial advisors) have specific disclosure obligations:

• Provide adequate information, prior to subscription, on the characteristics of the investment and the related risks;

• Make available, in the case of investment solicitation operations, the prospectus relating to the financial instruments offered;

• Send the contractual documentation, i.e. the documents that refer to the service for which you are paying.

It may happen that a greater amount of information does not improve the ability to analyze and choose (the excess of information can even prove to be counterproductive and generate confusion; too technical expressions can be incomprehensible and generate misunderstandings). It is possible that the nature, characteristics, and risks of an investment are not understood despite reading the available documents and the information received. In this case, it might be useful to ask some key questions to the intermediary.

The methods of presenting information can guide perceptions and decisions. The aptitude for simplifying the information received through various mental shortcuts can compromise the correct use of the information acquired. It is necessary to express in the client's words the information that was transmitted and ask the consultant/promoter if the reading is correct. If you have not been able to understand the risks you face despite all the precautions, it is better not to invest, especially when it comes to particularly complex products.

Profiling and active participation: the adequacy assessment

Investment advice and portfolio management are the most complex investment services with the highest added value, and, for this reason, specific protections are provided. In fact, the intermediary acting in the capacity of consultant and/or portfolio manager has the duty to assess whether the product he proposes is coherent, i.e. he must evaluate the adequacy with respect to the client's profile (the profile is defined with respect to knowledge and investment experience and the specific type of product or service, the client's financial situation, and investment objectives). The tool used for the adequacy assessment is the "MiFID questionnaire", which contains a series of questions aimed at detecting the information mentioned above (each intermediary uses its own questionnaire). The intermediary who does not collect sufficient information to correctly profile the customer is prohibited from providing consulting or portfolio management services.

In summary

The adequacy assessment is the highest form of protection for the saver and is a heavy commitment for the intermediary who will have the burden of implementing or recommending only suitable operations. The customer must actively participate in the information exchange because a complete exchange of information will allow the intermediary to better calibrate the investment in relation to needs and profile. We must be wary of the intermediary who does not ask for anything or underestimates the importance of completing the questionnaire. The customer must answer all the questions in the questionnaire, and if they are vague or incomprehensible, he must ask for clarification, carefully considering how to answer the questions.

Assessment of appropriateness

In the underwriting and placement services, the intermediary must assess that the investment instrument or service offered or requested is appropriate, requesting information regarding, exclusively, the knowledge and experience about the type of instrument or service offered or requested. If the intermediary deems the investment inappropriate, he is required to warn you, but he can still provide the service: if you receive this warning.

Additional warnings

• Do not sign blank forms;

• Use foreseen and safe means of payment (no cash, no checks without a header or made out to the promoter).

After investing

Investments must be followed over time, as the characteristics of the chosen product and needs can change over time. It is necessary to read the periodic reporting documentation and be careful not to automatically react to the short-term results of investments (before moving the portfolio, remember the objectives and the time horizon: beware of "behavioral traps" and "mental shortcuts" ). It is advisable to reflect and resolve doubts with the help of an expert.

Incorrect behavior of the intermediary

A detailed written complaint or complaint must be submitted if the intermediary has violated contractual commitments or has engaged in incorrect behavior.