Independent financial advice is characterized by the fact that the advisor does not favor and recommend products or services of a specific bank, insurance company or other institution. The independent financial advisor draws on a wide range of financial products and services that best suit the needs and goals of his clients. For this purpose, the client’s situation is analyzed individually. At least that’s the theory…
Remuneration of Financial Advisors in Germany
In Germany, there are various remuneration models, some of which are described below:
- Commissions: Some financial advisors receive commissions for financial products sold to clients. The amount of the commission usually depends on the type of product and the sales volume.
- Fee-based remuneration: Here, the financial advisor is paid directly by the client, usually through a fee or charge. The amount of the fee is agreed in advance and depends on the type and scope of the advice.
- Combined remuneration: Some financial advisors offer a combination of commissions and fee-based remuneration. As a rule, the client is informed how the financial advisor is remunerated.
The article “Calculation of further result components” in the book “Value-oriented bank management*” describes comprehensibly which transactions in the financial sector generate commissions. Commission-based consulting is the most widespread form of financial advice. Even long-established private banks, savings banks and cooperative banks receive commissions for the brokerage of financial products such as building society contracts.
Every financial advisor who wants to sell individual financial products in Germany must register. The DIHK’s intermediary register allows the verification of individual registered financial advisors. In addition, further statistics on registered financial advisors are available. In January 2023, only 306 fee-based advisors and, in comparison, 39,949 financial investment intermediaries were registered. It becomes clear that fee-based consulting plays a subordinate role in Germany.
In the general population, the demand for financial advice on a fee basis is low. For this reason, some financial advisors offer not only the advice on a fee basis that has existed since 2014, but also leave the choice to the customer. In doing so, a financial advisor who advises on both a fee and commission basis must ensure that he always puts the interests of the client first and does not make recommendations that would earn him higher commissions. It is also important that the advisor provides the client with complete transparency about his remuneration and informs him about all possible conflicts of interest.
Costs of Financial Advice
However, when you think about the remuneration of the financial advisor, a dilemma arises. With remuneration on a commission basis, there is a risk that the financial advisor will not recommend the financial product that best suits the needs of the client, but the one that earns the financial advisor the highest commission. However, how much commission a financial advisor receives is not easy to say. Normally, financial advisors receive a portfolio commission of approximately 0.3 to 0.8 percent per contract they manage. However, they receive additional one-off commissions for the brokerage, so for investment funds it is often around 5 percent of the invested sum.
Fee-based consulting costs approximately 150 to 250 EUR per hour. It is the case that some questions about the account or a call money account are quickly clarified. However, advice in the context of long-term wealth accumulation can also take several hours. This can then quickly become expensive if the client receives comprehensive advice.
So you can’t say across the board whether advice on a fee or commission is independent financial advice in the client’s interest. In principle, a financial advisor can work more in his own interest in both variants.
Independent Financial Advice – What is Better Fee or Commission?
I discussed this with my students in the Financing & Investment module in the Digital Live Study at the FOM University of Applied Sciences for Economics & Management, the members of the Federal Association of German Economists & Business Economists (bdvb) and other interested parties on 02.05.2023. For this purpose, my association colleague Falko Block, also known from Fit4Trading – The Podcast, and I won Stefan Schießer from Frankfurter Honorarberatung as discussion partners.
We discussed many questions:
- How easily do financial intermediaries earn their money and why?
- How much commission does a normal bank employee get?
- Who pays the highest commissions?
- When does a financial advisor make sense?
- What does financial advice cost in general?
- Who offers free financial advice?
- Where can I get free financial advice?
- Which model is more suitable for young people?
As written at the beginning, independent financial advice is a simple topic in theory … The focus of independent financial advice is on providing objective, unbiased advice that is solely in the best interest of the client. The advisor works closely with the client to understand their financial situation and identify their goals and needs. Based on this information, the advisor develops an individual financial plan and recommends products and services that help the client achieve their goals. However, the explanations make it clear that it is not so easy in practice and conflicts of interest exist. These are also not reduced politically, as there are no advisory vouchers or the like for career starters, for example.
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