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Knowledge and experiences
In order for investors to make an investment a check of the knowledge and experiences of the investor is mandatory. This is intended to protect investors from making uninformed investment decisions that can result in a loss of a substantial amount of their capital. This requirement is set up in relation to § 63 sec. (5) WpHG.
For each investment opportunity a theoretic target market is defined. This target market defines an investor profile based on a minimum set of knowledge and experiences. If an investor fits into that target market, they are supposed to understand the product and the risks involved.
The target market definition contains four dimensions:
- The customer segment describes if the investor is a retail or a professional investor
- The knowledge and experiences that an investor has in relation to a set of financial product types
- The experiences an investor has with investment services
- The past transaction behavior of the investor
If an investor fits into a target market is assessed by asking questions. Each dimension has a set of questions investors need to answer with a set of defined answers and a minimum score describing the customer profile. Depending on an investor's answer, points are assigned that add up. If an investor reaches more points than the minimum score of each dimension, the investor passes the test.
The "Customer segment" dimension is not directly asked because all investors are considered retail investors.
Investors may also decide to not provide any information. They are able to invest nonetheless but they have to sign a waiver.
Also, if an investor doesn't fit into the target market they are not prevented from investing. However, they also need to sign a waiver.