Retail or institutional investors: what’s the difference?

In terms of investment, the distinction between an institutional investor and a retail investor is worth considering, as it influences not only investment strategies but also market dynamics. myLIFE explores the main differences between the two for you before clarifying the notion of a well-informed investor.*

Let’s define

Intuitively, everyone knows what a retail investor (or an individual investor) is. It is an individual who invests on their own behalf, generally (but not always) without having an in-depth knowledge of financial markets and, most of the time, without exceeding the limit of the funds they personally have. Ideally, they allocate their assets according to a progression that ranges from precautionary savings to riskier investments. The investment decisions they make are based on their investor profile and their own life goals, such as retirement planning or children’s education. In general, retail investors buy and sell debt securities, stocks, and other investments through a bank or broker.

An institutional investor, on the other hand, is an entity (bank, pension fund, insurance company, investment fund, etc.) that invests funds on behalf of other people or organizations. Typically handling large sums of money, its investment decisions are based on specific financial objectives and are likely to influence market dynamics. The institutional investor has communication duties with its clients (largely defined by the MiFID II directive), particularly regarding transparency on the pursued strategy, associated risks, invested products, as well as applicable fees and charges. Although significantly fewer in number than private investors, institutional investors account for about 80% of the trading volume on the New York Stock Exchange.

Although significantly fewer in number than private investors, institutional investors account for about 80% of the trading volume on the New York Stock Exchange.

Let’s compare

One should not believe that only the amounts invested distinguish the retail investor from the institutional investor. In reality, the differences are numerous. Here is a brief, somewhat caricatured overview to clearly highlight the differences, although the boundaries are not always so obvious given the vast diversity of investors and their profiles.

A well-informed investor is distinguished by their knowledge and experience, which allow them to better understand complex financial products and the associated risks.

What is a well-informed investor?

A well-informed investor is distinguished by their knowledge and experience, which allow them to better understand complex financial products and the associated risks. This expertise gives them access to investments that are not available to investors that are not well-informed, such as certain hedge funds or derivative products. Being considered more competent, well-informed investors are subject to fewer restrictive regulations than investors not considered as well-informed.

As formulated in Annex II of Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments, a well-informed investor is a professional investor, meaning one who possesses the experience, knowledge, and competence necessary to make their own investment decisions and properly assess the risks involved. This essentially includes institutional investors, large companies meeting certain criteria (balance sheet, equity, net revenues), and certain public bodies.

Does this mean that retail investors are automatically excluded from this status and cannot invest in reserved alternative funds? No, the European directive provides for the possibility of extending this well-informed investor status to any non-professional investor who meets certain conditions. In Luxembourg, these conditions are as follows: the investor has declared in writing that he or she is a well-informed investor, and,

• • invest a minimum of €100,000 (previously €125,000) in the reserved alternative investment fund, or
  • he/she has received an assessment from an authorized credit institution, management company or alternative investment fund manager, certifying his/her expertise, experience and knowledge to adequately assess the investment made in the reserved alternative investment fund.

In summary, the main difference between a well-informed investor and an “uninformed” investor lies in their level of knowledge, experience, and ability to make informed investment decisions. Well-informed investors are better equipped to navigate complex investment environments, while other investors benefit from additional protections to help them avoid potentially harmful investment choices.

At the end of this useful but not very exciting content, there is a much more interesting question for the retail investor to ask: Can I draw inspiration from institutional practices to better manage my investments? Find out the answer in the article “What you can learn from institutional investors.”

* Content translated from French by the BIL GPT AI tool