Learning to Trust a Little Less

  • Why it matters

    Why it matters

    Many small German investors were burned by bad advice in the financial crisis, but consumer protection organizations say reforms have not gone far enough.

  • Facts


    • The financial crisis of 2007-08 hit small German investors who had been lured by aggressive marketing of financial products.
    • In the wake of the crisis, reforms were introduced to make financial advising more transparent and to increase the liability of advisers.
    • Consumer protection and investor organizations say investors should retain a healthy skepticism about financial advice.
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Neues Beschwerderegister der Finanzaufsicht BaFin soll besser vor Falschberatung schuetzen
"Bank advisement is fraud": German investors are still fed up with their financial advisers. Source: AP

To be honest, the financial crisis a decade ago didn’t discriminate in its victims: pros and amateurs alike got walloped. The meltdown on securities markets in 2007-08 bored holes in the balance sheets of major financial institutions, but also retirement accounts of small-time investors.

Andreas Oehler, a professor of finance at the University of Bamberg, said lessons have not really been learned from the debacle. Granted, all classes of assets took a battering, but most have now recovered; investors driven by wishful thinking tend to have short memories. With markets again swimming in money, even assets that crashed and burned in the crisis, such as real-estate funds, are back in fashion.

But in Germany, one investment is still tainted by events of a decade ago: the retail derivatives with the reassuring name “Zertifikate,” or certificates, issued by Lehman Brothers. Touted as being safer than stocks, these securities were rendered worthless by the crash. According to the federal financial supervisory authority BaFin, 60,000 German small investors lost around €500 million ($588 million) in investment in certificates. Much of this money had been invested by Germans seeking a secure retirement.

Unsurprisingly, criticism rained down on the financial advisers who had sold the duff certificates. Meanwhile, the image of the “Lehman grandmother” – a small, clueless, victimized investor – struck a chord with the German public.

“It is systematically difficult for customers to be well-informed.”

Andreas Oehler, professor of finance, University of Bamberg

Since then, reforms have been instituted to protect small investors. Since 2010, German law requires financial advisers to present and sign a written account of the advice they gave to customers – known as an “advice protocol” – which can, in theory, be used in lawsuits against them. Since 2011, advertising brochures of financial products must lay out how an instrument works and what risks are involved. For sales of European investment funds, an EU directive requires banks (including big asset managers such as BlackRock, Deutsche Bank, and Morgan Stanley) to provide a standardized summary that tracks a fund’s value over a five or 10-year period, and rates risk on a scale of one to seven. BaFin, meanwhile, has set up a register of complaints.

Despite these measures, consumer protection bodies and experts in the finance industry complain that not much has changed. Klaus Nieding, vice-president of the DSW, Germany’s largest association of private investors, described the reforms as “very small steps.” Niels Nauhauser, finance expert at the consumer protection authority of Baden-Württemberg, claims the advice protocol serves mainly as a “safeguard against possible compensation claims,” rather than guide advisers’ actions. Financial products remain opaque and difficult to understand, says Mr. Oehler. “It is systematically difficult for customers to be well-informed,” he said.

The German Banking Industry Committee, which represents five finance industry organizations, sees things differently. “Investment advice is more transparent and more structured now than it was before the financial crisis,” a spokesman for the committee said in response to Handelsblatt’s queries. Customers had information, but it was their duty to make use of it, the spokesman said.

“When it comes to advice, investors are still very trusting.”

Klaus Nieding, vice-president of DSW, Germany's largest association of private investors

While it’s much easier these days to gather key details of financial products, few consumers actually do so. “When it comes to advice, investors are still very trusting,” Mr. Nieding complained.

German consumer protection agencies, investment lawyers and academics have long argued a thorough reform of the financial advice sector is needed. Advice based on commission, in which the adviser takes a cut from selling a particular product, comes in for particular criticism.

“As long as there is commission-based advice, this will have an influence on which products are sold to investors,” warned Mr. Nieding. “Whether the product is actually suitable for the investor is secondary.” He pointed out Germans are often reluctant to pay directly for financial advice – although they often pay indirectly without knowing it.

While fee-based advice is generally regarded as independent, it’s not a cure-all. Changing the burden of proof in compensation cases for miscounseling, Mr. Niedling said, would be “a big improvement.” Mr. Oehler, the finance professor, agreed. “As things are now, the customer is supposed to completely understand the product and the protocol,” he said. “But the point is, these people are looking for advice precisely because they don’t have enough understanding of financial products.”

For the moment, investors will have to rely on a healthy dose of skepticism and remember a basic rule of investing, and of business: Never buy anything you don’t understand.


Jessica Schwarzer heads Handelsblatt’s finance department. To contact the author:

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