Dr. Johannes Fiala and Dipl.-Math. Peter A. Schramm on the pre-programmed investor bankruptcy
An 80-year-old business widow appears at the bank counter with her savings book. “Young man, I want to take off”. Upon further inquiry, “Everything!”. She didn’t care about the interest on advances. Fifteen minutes later, she returns to the checkout counter. “Young man, I want to put it back on – all of it.” Then she explained, “You know, I just wanted to check and see if my money was still there.” Deutsche Bundesbank: Is the investor to blame for his behaviour?
In the case of investment fraud and other advisory errors, financial institutions like to defend themselves by saying “it’s always the customer’s fault”. This is apparently also the line taken by the Deutsche Bundesbank in its monthly report of January 2011. The new panacea against mispricing of risks that are difficult to identify is a “product information sheet” – in line with the legislator’s draft from 2010 to improve investor protection.
Despondency of the legislator or pure intention under European law?
There’s a saying from seasoned hiring managers, “Making a mistake once is negligence, twice is stupidity, three times is sabotage.” As early as 01.07.2008, the legislator made a “product information sheet” compulsory for insurance brokers through the Ordinance on Information Duties. This implementation of European law requirements has also led to insurance mediation resembling a bureaucratic monster. However, the quality of advice has not changed much, because intermediaries who are technically overburdened are still allowed to participate in the advice process.
The financial science fairy tale of the risk-free interest rate and the store of value
Anyone who invests their savings, for example in government bonds or shares, combines this with the hope that someone will pay back the money later – if possible with interest or an increase in value. In this respect, it makes no difference whether the money is invested on a funded basis or in the pay-as-you-go system of the intergenerational contract for old-age provision – it is gone for the time being, and repayment is uncertain. One person’s capital assets are another person’s debts. So-called capital cover based on government debt to be paid interest on and repaid by future taxpayers is no more secure than the hope that future contributors will participate in a pay-as-you-go system – in both cases they will be forced to do so by the state.
Secure the standard of living in old age
The British have abolished the retirement age altogether, because this led to less protest than an increase to age 75. This British measure is also supposed to help avoid the old-age poverty that seems to be pre-programmed by the socialisation of the bank(st)er casino losses. Scoffers claim that not only the “perceived” inflation will ensure that the number of millionaires will still increase by leaps and bounds.
Those who cut back today and supposedly make provisions against poverty in old age have at least one advantage: they have already learned to save today and are thus more likely to be able to bear future tax and social security burdens in old age. When there is an increasing shortage of labour, it is still preferable to forced labour for 70-year-olds to work voluntarily in order to be able to afford the butter on their bread. The Bundeswehr reform alone hardly helps here, even if former conscripts are replaced by Gurkha warriors.
Business model of blind trust: hardly any expertise – no control
It’s an open secret among financial advisors that one key to career advancement is for clients to trust their free advice as blindly as possible. The middle class is particularly predestined for this – physicians and board members are affected conspicuously often. What many have in common is that they hardly ever like to decide anything themselves and therefore leave this to the advisor. It is astonishing that the Deutsche Bundesbank has not even begun to recognise that there are apparently hardly any advisors who can recognise investment product risks because they lack the specialist knowledge and are themselves only familiar with colourful brochures from marketing. Has the Bundesbank really not yet recognised that numerous financial institutions have for years attached little importance to the competence and further training of their staff? Expertise is harmful to sales – without it, you’re more likely to sell with a clear conscience. The suitability and harmlessness of the products have then allegedly already been tested by others.
No brain – No pain
In contrast, multimillionaires are increasingly using their own, self-paid fee-based advisors and controllers to avoid errors and deception. After all, what good are 25 percent tax savings if the investment is 150 percent overpriced and you don’t know the risks? Or how is one supposed to recognize, without looking into contract conditions and law books, that banks and insurance companies like to advertise “guarantee products”, which afterwards can be shown to be quite legally depreciable?
There is only one guarantee here, and that is to bet that probably over 99 percent of financial advisors don’t know this, are selling products quite differently. “The dumber the product salesperson, the happier the sales executive”? It is very easy to sell masses of products which allow the supplier to deduct his imputed costs from the investment in any amount at his own discretion. Often it is only at the end that the investor wonders where the money has gone and why this was allowed and agreed.
It seems quite typical for investment advisors to make their clients believe, without any reason, that one has IT tools to manage risks. However, to date no financial institution provides its clients with a “risk balance sheet”, as this would be too frightening. The certified financial strength of the provider is also often advertised – without anyone noticing that this consists of the provider’s ability to reduce its obligations to investors at any time.
At the beginning of a misadvice is the error
A survey was conducted in Russia: according to this survey, 60 percent of the people believe that the sun revolves around the earth, 40 percent that radioactivity is a human invention, and 30 percent that humans already lived at the time of the dinosaurs. Numerous investors believe that financial houses keep their money free of charge in bags with their name on shelf compartments in the vault or that the paid-in contributions are still there in any case – then even qualified advice makes no sense. Quite a few are not even interested in what the information sheet says about the costs, because they assume that someone other than themselves will bear them. And as a rule also the page by page references to the total loss risk and the like are signed without hesitation, if only someone says that one must write this only for legal reasons in such a way, everything is however in reality as safe as a savings book.
by Dr. Johannes Fiala and Dipl.-Math. Peter A. Schramm
by courtesy of
www.network-karriere.com (published in Network Karriere 05/2011, pages 34)
www.handwerke.de (published in Computers in Crafts 05/2011, pages pages 6-7 under the heading:
Preprogrammed investor bankruptcy: high return, no risk, zero costs, a lot of trust)
www.kompetenznetz-mittelstand.de (published on
03/04/2011 under the headline: Preprogrammed investor bust: high return, no risk, zero cost, lots of confidence)
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About the author
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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