To what extent can MiFID tests be informative?

Since November 2007, investment firms operating in the EU are forced to submit MiFID tests to their clients in order to determine their level of knowledge, their experience in complex instruments and their investment profile. Such tests should help offer them suitable services accordingly. Since they force investors to self-assess their financial literacy and report a lot of individual preferences it is worth addressing to what extent statements made by retail investors are trustworthy and in line with their actual financial behaviors. Focusing on the financial literacy, we address the informative content of the MiFID tests for characterizing retail investors' behavior. First of all, we report strong measures of association between the self-reported literacy in both the Suitability test and the Appropriateness test. Secondly, we find overall high level of consistency between direct proxies of financial sophistication ("objective" literacy) and self-reported financial literacy ("subjective" literacy). These findings suggest that MiFID tests are informative to characterize retail investors. Given their relevance, they may be useful for investment firms as well as for regulators in their concern to provide investors with suitable services. MiFID tests deserve definitively more attention in that perspective.