Skip to main content

Suitability Checks and Household Investments in Structured Products

  • Eric C. Chang (a1), Dragon Yongjun Tang (a2) and Miao Ben Zhang (a3)

The suitability of complex financial products for household investors is an important issue in light of consumer financial protection. The U.S. Dodd–Frank Act, for instance, mandates that distributors check suitability when selling structured products to retail investors. However, little empirical evidence exists on such transactions. Using data from Hong Kong, we find that investors purchase 8% more structured products, on average, when the suitability is not checked. The effect of suitability checks is more pronounced for less financially literate investors. Moreover, investors tend to buy products with lower risk-adjusted returns when product suitability is not checked.

Corresponding author
*Corresponding author:
Hide All
Andersen, S., and Nielsen, K. M.. “Participation Constraints in the Stock Market: Evidence from Unexpected Inheritance Due to Sudden Death.” Review of Financial Studies, 24 (2011), 16671697.
Barber, B.; Odean, T.; and Zheng, L.. “Out of Sight, Out of Mind: The Effects of Expenses on Mutual Fund Flows.” Journal of Business, 78 (2005), 20952120.
Benmelech, E., and Moskowitz, T.. “The Political Economy of Financial Regulation: Evidence from U.S. State Usury Laws in the 19th Century.” Journal of Finance, 65 (2010), 10291073.
Bergstresser, D. “The Retail Market for Structured Notes: Issuance Patterns and Performance, 1995–2008.” Working Paper, Harvard Business School (2008).
Bernard, C.; Boyle, P.; and Gornall, W.. “Locally Capped Investment Products and the Retail Investor.” Journal of Derivatives, 18 (2011), 7288.
Bertrand, M., and Morse, A.. “Information Disclosure, Cognitive Biases, and Payday Borrowing.” Journal of Finance, 66 (2011), 18651893.
Calvet, L. E.; Campbell, J. Y.; and Sodini, P.. “Measuring the Financial Sophistication of Households.” American Economic Review, 99 (2009), 393398.
Campbell, J. Y. “Household Finance.” Journal of Finance, 61 (2006), 15531604.
Campbell, J.; Jackson, H.; Madrian, B.; Tufano, P.. “Consumer Financial Protection.” Journal of Economic Perspectives, 25 (2011), 91114.
Cao, H. H.; Han, B.; Hirshleifer, D.; and Zhang, H. H.. “Fear of the Unknown: The Effects of Familiarity on Financial Decisions.” Review of Finance, 15 (2011), 173206.
Carlin, B. I. “Strategic Price Complexity in Retail Financial Markets.” Journal of Financial Economics, 91 (2009), 278287.
Carlin, B. I., and Gervais, S.. “Legal Protection in Retail Financial Markets.” Review of Corporate Finance Studies, 1 (2012), 68108.
Carlin, B. I., and Robinson, D. T.. “Financial Education and Timely Decision Support: Lessons from Junior Achievement.” American Economic Review, 102 (2012), 305308.
Chen, R., and Sopranzetti, B.. “The Valuation of Default-Triggered Credit Derivatives.” Journal of Financial and Quantitative Analysis, 38 (2003), 359382.
Choi, J. J.; Laibson, D.; and Madrian, B. C.. “Why Does the Law of One Price Fail? An Experiment on Index Mutual Funds.” Review of Financial Studies, 23 (2010), 14051432.
Cohen, L.; Frazzini, A.; and Malloy, C.. “Hiring Cheerleaders: Board Appointments of ‘Independent’ Directors.” Management Science, 58 (2012), 10391058.
Cole, S.; Sampson, T.; and Zia, B.. “Prices or Knowledge? What Drives Demand for Financial Services in Emerging Markets?” Journal of Finance, 66 (2011), 19331967.
Friedman, M. “The Real Lesson of Hong Kong.” National Review (Dec. 31, 1997).
Gabaix, X., and Laibson, D.. “Shrouded Attributes, Consumer Myopia, and Information Suppression in Competitive Markets.” Quarterly Journal of Economics, 121 (2006), 505540.
Gennaioli, N.; Shleifer, A.; and Vishny, R.. “Neglected Risks, Financial Innovation, and Financial Fragility.” Journal of Financial Economics, 104 (2012), 452468.
Henderson, B. J., and Pearson, N. D.. “The Dark Side of Financial Innovation: A Case Study of the Pricing of a Retail Financial Product.” Journal of Financial Economics, 100 (2011), 227247.
Inderst, R., and Ottaviani, M.. “Misselling Through Agents.” American Economic Review, 99 (2009), 883908.
Inderst, R., and Ottaviani, M.. “How (Not) to Pay for Advice: A Framework for Consumer Financial Protection.” Journal of Financial Economics, 105 (2012), 393411.
Karlan, D.; McConnell, M.; Mullainathan, S.; and Zinman, J.. “Getting to the Top of Mind: How Reminders Increase Saving.” Working Paper, Yale University (2011).
Lee, J., and Chang, V.. “A Survey on the Retail Structured Notes Market in Hong Kong.” Hong Kong SFC Research Paper No. 24 (2005).
Lee, J., and Chang, V.. “The Retail Structured Notes Market in Hong Kong Amid a Rate Hike Cycle.” Hong Kong SFC Research Paper No. 34 (2006).
Li, G., and Zhang, C.. “Why Are Derivative Warrants More Expensive Than Options? An Empirical Study.” Journal of Financial and Quantitative Analysis, 46 (2011), 275297.
Securities and Exchange Commission. “Staff Summary Report on Issues Identified in Examination of Certain Structured Securities Products Sold to Retail Investors” (2011).
Securities Industry and Financial Markets Association. “Standard of Care Harmonization: Impact Assessment for SEC” (2010).
Stoimenov, P. A., and Wilkens, S.. “Are Structured Products Fairly Priced? An Analysis of the German Market for Equity-Linked Instruments.” Journal of Banking and Finance, 29 (2005), 29712993.
Tufano, P. “Consumer Finance.” Annual Review of Financial Economics, 1 (2009), 227247.
Van Rooij, M.; Lusardi, A.; and Alessie, R.. “Financial Literacy and Stock Market Participation.” Journal of Financial Economics, 101 (2011), 449472.
Wachter, J. A., and Yogo, M.. “Why Do Household Portfolio Shares Rise in Wealth?” Review of Financial Studies, 23 (2010), 39293956.
Wasik, J. F. “How Safe Are Your Savings? How Complex Derivative Products Imperil Seniors’ Retirement Security.” Research Report from Demos and the Nation Institute (2011).
Wu, P. “Applying a Factor Copula to Value Basket Credit Linked Notes with Issuer Default Risk.” Finance Research Letters, 7 (2010), 178183.
Recommend this journal

Email your librarian or administrator to recommend adding this journal to your organisation's collection.

Journal of Financial and Quantitative Analysis
  • ISSN: 0022-1090
  • EISSN: 1756-6916
  • URL: /core/journals/journal-of-financial-and-quantitative-analysis
Please enter your name
Please enter a valid email address
Who would you like to send this to? *


Full text views

Total number of HTML views: 0
Total number of PDF views: 0 *
Loading metrics...

Abstract views

Total abstract views: 0 *
Loading metrics...

* Views captured on Cambridge Core between <date>. This data will be updated every 24 hours.

Usage data cannot currently be displayed