We are strictly independent advisors and always undertake our own analyses of an investor’s ability and willingness to take financial risks. We specialize in the use of quantitative and qualitative methods to find the most suitable fund investments and match these to our clients’ needs. This helps us to provide an investment concept and we will give this report in writing to the investor to allow them to consider in their own time.
Germany has a strong investment culture, with products ranging from the excellent to the downright dubious; so much so that the more dubious investments here should be seen as an entrepreneurial exercise with ‘investor beware’ a constant and very serious watchword.
It is strongly recommended to use a ‘platform’ to administer German investments. Investors always retain the ownership of their assets, but the collection of dividends and payments from stocks, bonds and funds is automated and efficient. Above all, the annual costs of using a platform are low.
US citizens can invest in stocks, bonds and funds as long as they do so via a platform that is willing to make the necessary income reports to the IRS. The product providers must also have made their products available for placement with US investors in Europe. Most German organizations however refuse to allow this, being wary of the painful penalties for making an error or an omission. There are however a very few professional platforms available to US investors residing in Germany which allow a considered investment.
Seeking advice on investments
The tradition in Germany has long been to buy financial products from one of the far too many banks here. An investor must be aware of the risks involved in using this source of advice and financial product. The German commercial and savings banking system has become an efficient sales machine, so far lacking strong controls or serious supervision from central authorities and happily unencumbered by any but the most minimal consumer protection laws.
Some investment advisors are biased, whether legally or emotionally, to the products of a single or limited number of fund companies (or KAG). The emotion all too often has a direct correlation with the level of front end fees paid to the agent. This is fine if an investor knows precisely which funds they want to invest in and how large the fees are, but is less useful when seeking independent advice. Investor and consumer protection legislation is improving in Germany, but from a low base, with the result that an investor can today expect to receive assurances that stand a little more chance of becoming reality than in the past.
Investment products to consider
There is a risk ladder which offers broad guidance on investment products for investors of different temperaments. The investment markets should only be used by longer term investors with a time horizon of
3 years or more. Any shorter period runs the risk of falling between adverse market cycles. There is no good reason to risk capital losses by speculating within a short investment time horizon.
From the least risky to the most adventurous:
- Cash savings plan / bank deposit with a bank covered by the government guarantee scheme. This has the drawback of not offering any interest and not being inflation proofed
- Guaranteed pension plan or deposit with an insurance company
- Investment or mutual funds – ranging from Risk Category 1 (the least risky) to 5 (potentially a wild ride)
- Closed-ended funds, (Geschlossene Fonds) with a finite maturity date and all too often a distinct entrepreneurial risk* Here a thorough understanding of credit analysis is distinctly useful
- Direct investments in Government subsidized long-term projects
- Investment in residential property especially in the big cities
- ETFs and Zertifikate – certificates or instruments using derivatives to reflect movements in indices or markets, currently in vogue, though most people don’t understand the costs and potential risks
- Hedge Funds / Private Equity Investments
*Recent changes in German law require an investor to receive an up to date prospectus, which sets out the risks and opportunities of the fund; the potential investor should normally be asked to sign a declaration that the prospectus has been received, read and the risks understood. All prospectuses have to be approved by the German authorities (BaFin) as far as the structure of their contents is concerned. This approval has ABSOLUTELY NO reflection on the viability of the fund or the chances of it meeting any of its financial goals.
At the time of writing, the already opaque taxation regulations are being changed: This should happen by 01. January 2018, but a general election and political inertia means this could be delayed.
Investment income receives some tax reduction allowances and also suffers a different and lower taxation rate than active income.
A tax consultant in Germany, ever mindful of their potential professional liability, will not normally give an opinion on the economic viability of a project, but will give a confirmation (or denial if necessary), of the stated tax implications of an investment.
Basic principles of investing in Germany
- Treat all complex schemes using multiple products with suspicion; they are rarely designed to be in the best interests of the investor.
- There are no rules governing the promise of abnormally high returns to potential investors or the use of a famous face to give respectability to a product; if an investment scheme sounds too good to be true, it probably is.
- Beware of imprecise claims regarding the returns from an investment. The magic words ‘Chance auf’, all too often followed by a very high percentage yield and are almost always based on an improbable combination of events; if the goals are indeed ever achieved, it is probably due more to accident than design.
- Without regard to your own political views, it pays to be financially conservative.
- Always consult an independent advisor and insist on receiving a copy of all documentation, including a record and risk analysis of your needs and wishes, (a Beratungsprotokoll and an Anlageempfehlung), an up to date prospectus and any application forms before agreeing to any investment. You will need these in case of a dispute.
- Investors have a two week cooling-off period after the signing of an application form. This is your right, you should be aware of it and use it if you feel even remotely uncomfortable with a suggested investment.
- Always spread your investment risks, ideally never having more than 10% of your portfolio with any one fund, fund manager or strategy, irrespective of the product.
- Guarantees are only as good as the company that issues them, which is often not very.
John Townsend advises clients on their investment portfolios for Matz-Townsend Finanzplanung. He is a Fellow of the Chartered Institute for Securities and Investment in London.