Liability risks in the accompanying music

All too often, intermediaries in investment sales blindly rely on external expert opinions and apparent evidence. At the same time, it is precisely the music accompanying the sales prospectus that sometimes provides the reasons to be cautious.


Ralf Werner Barth: “Every advisor is well advised, even obliged, to inform himself carefully about the product to be brokered.”

Today’s advisor has a tough row to hoe on many over-the-counter investment products. They have become hard to sell lately – no wonder after the media scandals about profit participation rights, closed-end funds or order bonds. Such products require explanation, are often intransparent and: Is everything in the sales prospectus [2] actually true?

The providers therefore equip the intermediaries immediately with expert opinions, proofs and test results. Agents who believe that this extra paper will make the overall package easier are mistaken. Physically, it is always more difficult, and whether an expert opinion is worth the paper it is written on or whether the advisor would be better off getting rid of it straight away, often only becomes apparent when damage occurs.

Nevertheless, every advisor is well advised, even obliged, to inform himself carefully about the product to be brokered. For liability reasons. He shouldn’t even touch a tax-effective product without a tax opinion. However, he must also know that there are economic interests behind the external product and plausibility checks [3].

Advisors must question product and plausibility checks

It is generally known that analysis houses and comparable media get paid for their results or for the further use of them. Money also flows in the case of tax or legal opinions. These connections are legitimate, but to be clear, they are also a gateway for manipulation.

Tax consultants, notaries and lawyers are honorary professions. Their seriousness is not to be doubted at first. But even they can err, and some err more skillfully. The intermediary is therefore called upon to exercise even more due diligence in the case of complicated products and also to critically scrutinise the accompanying music.

Because: If he uses these expertises, proofs and test results in his mediation discussion, he raises his function and himself opposite the investor to the expert and stands thereby also for these papers, respectively for the later results, in the liability. In case of doubt, no liability umbrella will help him [4].

Reverse conclusion: If the advisor has not understood the expert opinion or has not questioned the product and plausibility check, he should have the client confirm in writing that he has left these documents to the client with the explanation that he should find out for himself. And date it, two weeks before signing the subscription form. Probably the mediator disqualifies himself with such practices then anyway and that would be also good in such a way.

What can a reputable intermediary do if he wants to include a product in his portfolio?

Dr. Johannes Fiala: “If the provider is no longer monetarily or physically available in the event of a claim, along with its appraisers, the intermediary is quickly in the fire.”

If he wants to include a product in his portfolio, an intermediary should:

– also check with other media and analysis houses in order to determine whether the product analysis offered to him is not biased against other results.

– become alert when above-average commissions [7] are accompanied by conspicuously good analyses.

– become very vigilant when celebrities are used for promotional purposes.

– ask whether the provider always uses the same tax advisor or lawyer for his expert opinions.

– it can be demonstrated that the appraisals are sufficiently highly insured in relation to the issue volume.

– in any case require an information agreement with the respective appraiser for both the intermediary and the customer.

– seek the opinion of an additional expert if even the slightest residual doubt remains about an expert opinion.

Document critical review

If the consultant takes this to heart, and documents this procedure, he can certainly go ahead with the mediation with a clear conscience. Nevertheless, damage can occur. For example, if the supplier does not control his product, unplanned changes occur in the market or even criminal machinations are involved.

If, in the event of a claim, the provider and his assessor are no longer available either monetarily or physically, the intermediary left behind is quickly caught in the fire.

For these cases, a pecuniary loss liability insurance is professionally prescribed for him. He should always have a specialist broker check from time to time whether it is sufficient in terms of scope and level of cover.

All the more so if he intends to include products from areas other than those previously insured. With an additional criminal legal protection insurance he is – as long as he observes the aforementioned basic rules – even further on the safe side. For this purpose, he should seek comprehensive advice from a specialist broker and also implement his advice.

by Dr. Johannes Fiala and Ralf Werner Barth

published in

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About the author

Dr. Johannes Fiala Dr. Johannes Fiala

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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