Long Read  

What's wrong with the German financial advice market?

  • As much as possible in terms of money invested;
  • As often as possible, the notorious churning (in extreme cases a criminal offence, but a bit here and there, more insidious); and 
  • With the greatest possible commission or 'costs' for the bank.

It is also fundamental to note that, although they are not necessarily bad people, as stressed in the book, these advisers generally have far too many clients for them to do anything other than communicate superficially and go for a quick and easy sale.   

Products

So what gets sold under these circumstances? 

For a start, actively managed funds that charge as much as 5 per cent up front and 2 per cent a year. Furthermore, these advisors generally push a narrow range of high-revenue products, even though they could in fact choose from a wide range.

No wonder Germans are themselves moving their money into trackers and ETFs in droves, including various friends and acquaintances of mine.   

And then there are insurance-linked products, or at least offers from investment companies. One such gem entices the unwary as follows: “You can share in stock market gains with no downside risk.” The small print, however, reveals that the gains are capped at 2 per cent, at the time, precisely the rate of inflation.

Furthermore, your money is locked in for 10 years, so that in fact you could ride out stock market volatility anyway in a far more effective and lucrative vehicle. This type of basically pointless asset (for the investor) is foisted onto many innocents who have some spare cash available, as an unsavoury form of cross-selling – an important concept in this entire scenario. 

Such products are incredible money spinners for the bank and the underlying company, who rake in the cash, get the full stock market returns over the long run, and pay out a couple of percent to the hapless investor. 

Far better to simply put the money in a low-cost fund, or just leave it in cash till you find something that is really promising, perhaps in a bear market. Similar issues arise with some home savings contracts. 

Then there are pension schemes, which are touted with regular frequency. These are sold to the public as a great way to save for your future, again because you benefit from stock market returns over time and there are allegedly substantial tax advantages. 

The problem here, the authors stress, is that the tax benefits are in fact minimal, and like the above products, your share of the returns are poor. Again, just investing in a sensible mix of assets is a far better bet.

Furthermore, the overemphasis on the alleged tax benefits, say the intrepid authors, is a deliberate smokescreen to draw attention from the other undesirable aspects of the investment.