Long Read  

What's wrong with the German financial advice market?

What's wrong with the German financial advice market?

Precisely at a time when I already had serious misgivings about the handling of investors and their investments by the banks and savings banks in Germany, a very frank and damning book on this subject has appeared. 

Many people entrust banks with their money, believing that they will be well looked after and that the money is safe there.  While they certainly will not abscond with the funds, the odds of getting good, objective advice and suitable investments are low.  

Furthermore, as authors Bosetti and Walz of Beraten statt Verraten* (translates as 'Advised rather than betrayed') point out, it takes years or even decades to discover the harsh reality, namely that the returns on one’s portfolio are unacceptably low and that one is more or less saving oneself into poverty.

Transparency

Due to the excessively high and opaque cost structures and nature of the investments themselves, the money is often little more than parked for the long term, but this is not revealed up front of course.

For a start, what is presented and literally labelled as financial advice (Beratung) is nothing of the kind, but simply selling. The process should be very different from buying a product at a store, but it is not. 

The so-called advisers basically sell you what they want to sell or are instructed to do so, because it yields the greatest revenue for the bank. This is particularly serious, because every euro that they gain, is one lost for you.  

Furthermore, most investors do not understand how damaging the “costs” (their slice of the pie) really are.

If a fund only yields, say, 6 per cent gross, which is not unrealistic, and only in good times please note, after 2 per cent costs, 2 per cent inflation (now far more) and taxes, you come out with a roughly zero real return. How many people understand this and what bank adviser will even hint at this reality? 

This brings us to the first trick, that everything is presented in nominal terms, without adjusting for inflation. Bosetti and Walz rightly criticise  banks for persistently talking in “nominal terms”, which, for long-term investments is fundamentally misleading and right now just hopeless.  

The broader public, they argue, just does not understand the inherent and substantial conflict of interests between the seller and the buyer of financial products. Fee-only advisers may also have motives to advise in a specific direction, even if they do not earn a direct commission. The level of informational asymmetry in the financial industry is extremely high. 

Walz and Bosetti further warn that the complexity of many financial products cannot be overestimated. 

In essence, the book explains that all too often there is massive pressure on the bank adviser to generate revenue, irrespective of the risk profile, needs and interests of the client. Accordingly, the heat is on to sell: