Brussels German banks and insurance companies are looking with trepidation at the small investor strategy of the European Commission, which is expected in the first quarter. Because there are increasing indications that the Brussels authority could ban commission-based financial advice. In Germany, this would mean a radical change in the business model for around 300,000 investment advisors.
Industry associations in Germany, Austria, France, Italy and Spain are up in arms against the plans. “If the ban on commission comes, the Commission will pull the plug on an entire industry,” says Helge Lach, chairman of the Federal Association of German Investment Advisors. 95 percent of the consultants would give up their job, the customers are threatened with a “service desert” with telephone hotlines instead of personal contacts.
There are essentially two remuneration models for investment advice: When a customer buys a fund product or an insurance policy, the customer advisor collects a commission in most European countries, i.e. a certain percentage of the contract amount. However, this is not due immediately, but is paid in installments over the term of the contract.
In the Netherlands and Great Britain, on the other hand, commissions were abolished a few years ago and replaced by flat-rate fees. This was justified by the fact that commissions create false incentives because they reward the consultant for selling the most expensive products possible. Fees, on the other hand, are intended to ensure independent advice in the interests of the customer.
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EU Finance Commissioner Mairead McGuinness now seems determined to prescribe the fee model throughout Europe. At least that’s what a letter that the Irish woman wrote to CSU MEP Markus Ferber suggests shortly before Christmas. In it, she rejects point by point all concerns about a commission ban.
McGuinness wrote that the commission-based model may not deliver the best performance for retail investors. Because they are sold products that, according to a study, are on average 35 percent more expensive than other offers. In the Netherlands and the UK, the cost of financial products fell after commissions were banned.
McGuinness for independent financial advice
The commissioner also pointed out that the EU financial market directive Mifid 2 had not led to an increase in independent investment advice as originally hoped. The law has been in force since 2018 and requires more transparency for investment advisors, but has not changed the dominance of the commission model.
McGuinness emphasized that since small investors only have limited funds at their disposal, it is particularly important that they benefit from cheap products and independent advice. A commission ban could promote “innovation and competition”.
The letter was seen as a declaration of war in the financial sector. McGuinness thus gave new impetus to the old debate about a ban on commissions – and positioned himself clearly in the camp of consumer advocates.
“We have been observing for years that consumers are being badly advised because commissions create false incentives,” says Dorothea Mohn from the Federal Association of Consumer Organizations. “The consultant is paid when a contract is signed. He has an incentive to always sell the product with the highest commission. Consumer interest is secondary.”
Britta Langenberg from the Finanzwende association argues in a similar way. Good advice can lead to the advisor telling the customer that they don’t need the product, she explains. But that doesn’t happen with banks and insurance companies, because “the employees aren’t consultants, they’re salespeople.”
Wealth Advisor: No Evidence of “Mis-Selling”
Industry representatives decisively reject the criticism. “Consumer advocates only cite individual cases in which a consultant allegedly sold someone the wrong product,” says association president Lach. In view of the many hundreds of thousands of consultations every day in Germany alone, the number of such cases is “homeopathic”. Neither the EU Commission nor consumer advice centers nor the supervisory authority could ever have proven widespread “mis-selling”.
Wiebke Schwarz from the German Savings Banks and Giro Association points out that commissions make it possible to provide advice to all sections of the population. Because if someone only invests a small sum, they pay less commission than someone who invests a large fortune. So there is a certain amount of cross-subsidisation. The model is “social, fair and has proven itself in practice,” says Schwarz.
A switch to fixed fees, on the other hand, could have the effect that many consumers no longer seek advice because the barriers to entry would be too high, says Schwarz. Because fees are usually due immediately.
Commission ban would have far-reaching consequences
It is still unclear which camp will win the fight at EU level. Should McGuinness actually propose a ban on commissions, she would take on powerful associations in the largest EU countries.
The federal government is still finding it difficult to find a position, because the Greens and the FDP represent different camps on the issue. Consumer advocate Mohn believes that the traffic light government will never advocate a commission ban because it is too heavily influenced by the financial sector. That’s why it’s now up to Brussels.
Industry associations and consumer advocates agree on one thing: a commission ban would have far-reaching consequences. “The system of commissions has led to the sales apparatus in Germany being oversized,” says Langenberg from the Finanzwende association. The 300,000 investment advisors from banks and insurance companies are opposed to 300 independent advisors. With a commission ban, this ratio would shift in the medium term.
Lach estimates that if the consultants switched to fees, only five percent would continue. Fees would not cover costs, especially for small investors, as the example of Great Britain shows. In the case of banks and savings banks, the branch deaths would accelerate further, because “the branches finance their costs to a clearly double-digit percentage from commission income,” he says.
However, this argument does not seem to make any impression on McGuinness either. The dying of branches is a consequence of digitization, she wrote in her letter. “The cost of maintaining branches should not be borne by retail investors.”
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