DAX shareholders can currently look forward to distributions of 25 billion euros. But many a certificate holder goes away empty-handed. Dividends are deducted from the share price on the trading day after the Annual General Meeting and the share is then traded “ex-dividend”. Such a price drop can be momentous for derivatives. This applies in particular to high-risk knock-out securities. They may expire worthless if the underlying stock touches a predetermined price threshold. However, the guarantee products increasingly offered after the financial crisis are also subject to considerable risk. If, for example, the share underlying a bonus certificate breaches a certain price barrier, the promised bonus is forfeited.
About 40 percent yield loss due to certificates
In the 1950s, according to the S&P index, share price performance plus dividend payments resulted in a total return of 467 percent; in the 1980s and 1990s, for example, it was 389 and 423 percent, respectively. Around 60 percent of these total returns resulted from the share price performance – and around 40 percent from the dividend contribution. It looked particularly drastic for certificate holders in the 2000s, when the share price was down 24 percent and the dividend contribution was only 15 percent.
From a legal point of view, the question arises as to whether the investment adviser has drawn attention to the interrelationships described. It can be assumed that investors would have chosen a different asset class if the dividend risk had been explained to them. Buyers of certificates, who are promised protection against losses and attractive returns, forego dividend yields averaging 3.5 percent on the DAX. If the investment adviser fails to disclose this risk, the advice is not appropriate for the investor. This is only the case if the financial services provider has informed the client of all facts that may be of significance for the client’s investment decision. Claims for damages against the Bank may result.
Billions invested in windy deals
Zero risk, high return, and secure tax benefits. These promises accompany certificates, closed-end investments, profit participation rights, private equity investments and hedge funds. The advisors themselves have rarely read – let alone understood – the often hundreds to hundreds of pages of conditions. What is important to the advisors with the certificates is usually the high commission of around eight percent as well as the ongoing administrative costs, which drive the investor’s return into the red. Numerous financial products of this type are blocked for active distribution to private clients abroad, because these investments usually resemble a game of chance in which there is only one sure winner, the advisor. In practice investors have regularly also therefore good chances on back completion, because nearly all banks for years Kick backs and/or hidden commissions let themselves pay, the courts in it however in the meantime a systematic fraudulent behavior recognize.
by Dr. Johannes Fiala and Günther Hemmerlin
by courtesy of
www.kaden-verlag.de (published in CHAZ 9/2011, page 536 )
and
www.pt-magazin.de (published on 04.08.2011 under the headline: 25 billion euros in dividends for DAX shareholders)
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About the author
Dr. Johannes FialaPhD, MBA, MM
Dr. Johannes Fiala has been working for more than 25 years as a lawyer and attorney with his own law firm in Munich. He is intensively involved in real estate, financial law, tax and insurance law. The numerous stages of his professional career enable him to provide his clients with comprehensive advice and to act as a lawyer in the event of disputes.
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