Selected challenges and megatrends in financial services distribution
The image of financial services sales of credit institutions and insurers has been suffering for years, especially due to TV documentaries about dubious business models or manipulation of interest rates, share prices and commodity prices. Product providers are also in the pillory, for example when up to more than a billion in investor funds are affected by insolvency, or customer profits are said to have been generated on the basis of tax evasion, e.g. in Cum-Ex transactions. The classics for wealth accumulation, real estate and life insurance, appear risky due to price bubbles and junk real estate or a low interest rate policy with the prospect of a losing proposition. Recently, the Federal Minister of Justice had research show that up to less than 1/3 of intermediaries and consultants comply with their documentation obligations. Higher courts have drawn consequences from this that amount to a shift in the burden of proof; and further damage to the company’s image.
Selection and colleague networks
With the prospect on up to more than 15% commission closed participations are gladly mediated. The fact that perhaps only up to little more than 1/3 of the yield prognoses correspond later to reality, and possibly up to more than half of the offers turned out later as criminal in the background and/or loss business after taxes, leads to the distrust of the investors. Only very few initiators can show a track record that has for many years without exception yielded more than about 8%. With professional employment by the mediator, a folder examination appraisal can protect this from recourse, and the investor from bad surprises. So far, the legislator does not oblige the initiators to have an IDW S4 expert opinion available that is free of objections.
The level of risk is reflected in the fact that VSH insurers are required to provide the minimum cover for licences in accordance with § 34 f (1), § 34 f (2) and § 34 f (3). GewO demand an increasing VSH premium of around EUR 1, 3 and 7 thousand respectively. A critical exchange with colleagues is helpful for the selection, in order to identify the very few serious offers at the end. The forthcoming further regulations are shifting the focus to institutional investors as the target group for initiators – the offering is increasingly no longer directed at independent brokers, especially if, following the “Prokon” case, advertising to end customers is no longer permitted. This favours financial houses, such as credit institutions, which can quietly place their private placements with their customer base, as they have done in the past.
Qualification, dual authorisation and fee-based advisory services
Recently, it has become possible to register as a fee-based investment advisor in accordance with the WpHG with BaFin for advice on financial instruments (e.g. shares, bonds), and as a fee-based financial investment advisor in accordance with § 36 h GewO with the IHK (Chamber of Industry and Commerce) for advice on open-ended funds, etc. Fee-based advisory services for credit brokering are also to be established – always without simultaneous registration for activities for which brokerage fees or commissions usually accrue. Already years ago, tax or insurance consultants first charged a fee in order to then also take the commission business via the wife, their own limited company or a business partner.
The advice of a broker aims at selling a specific product to the client, whereas the advice of a (fee/insurance) advisor aims at an objective comparative assessment. While an insurance broker is only supposed to advise on a “sufficient number” of offers, and even less intensively depending on the amount of the premium, an insurance advisor, for example, is always expected to provide comprehensive, complete case processing and advice. The idea of the legislator to establish such a fee-based advisory service remains wishful thinking the lower the licensing requirements are.
Cannibalisation of insurance distribution
For years, insurance agents have been complaining that they initially give advice, but then the smarter customer takes out a policy via the Internet – not infrequently rates that the agent cannot even offer. According to this, the insurer, and in the case of assignment of Internet customers to an agency, also the insurance agent remains under the obligation to provide advice if there is cause to do so.
The trend towards online policies cannot be stopped in private health insurance either. Even if so far probably only one insurer also offers net tariffs for fee-based advice, the perhaps unavoidable brokerage or commission can nevertheless be reimbursed to the customer. Commercial and industrial insurance brokers have been accustomed for decades to passing on a share of their income to the clientele, perhaps a purchaser or a works council; in fact, a form of remuneration according to expenditure similar to fee-based consultancy has already become established here.
In the case of licensed fee-based advisors, there is an obligation to reimburse commission payments, with some tax advisors, for example, practicing to circumvent this by involving related third parties. The difficulty for the insurance broker is that he can only effectively agree a consultancy fee for his professional advice in B2B business. The Trade Regulation Act does not permit brokerage advice to consumers for a fee without successful mediation. Many a broker or agent is pleased when he is now employed by an insurer, perhaps also in order to get back into the GKV, and because the portfolios valued today at about a factor of 0.8 can hardly ensure retirement provision after a company or portfolio sale.
Other brokers have had good success for years in having private clients promise to reimburse them for out-of-pocket expenses and costs. These then also agree completely legally on a time remuneration, for example for the (secretarial, possibly electronic) keeping of insurance files, and the regular compilation of financial investments of all kinds, including a presentation of the performance. This overall view then resembles more a financial planning and less a contract management, to which some brokers commit themselves without being insured for it. It makes sense to customers to pay their own agent’s commission when they are offered a net tariff and it is pointed out that the brokerage payment by the insurer feels as similar as if the tax office were to pay one’s own tax adviser.
The Legal Services Act (RDG) allows legal advice as so-called ancillary services, provided that they are kept simple. If, for example, a pension plan is brokered, questions may arise in connection with living wills, testaments and health care proxies. Another potential key to the broker’s success is specialization in certain professional groups and/or selected specialty lines of insurance.
Brokerage commitments as an expropriation trap
There is a risk that life insurance companies will use the Life Insurance Regulation Act (LVRG) to cut back on one-off acquisition commissions in favour of ongoing commissions, in particular portfolio maintenance commissions. However, many brokers rely on larger one-off payments because they do not yet have a large portfolio with high ongoing commissions already agreed.
For new entrants, therefore, the profession of broker is becoming less attractive, and for agents the switch to broker is becoming increasingly unattractive, because they will then neither have received higher one-off commissions to date, nor will they be allowed to keep the higher ongoing commissions paid instead, now that they no longer maintain the portfolio. So you would have to start all over again with then low one time commissions. And the old-age provision – not only of the agent – is endangered, because the portfolio maintenance commissions do not count in the assessment of the compensation claim or, in contrast to follow-up commissions, are also omitted when the brokerage activity is discontinued.
Brokers then risk even more that an agency or another broker takes over the now much more lucrative portfolio management. In any case, if it does not succeed in declaring this as a closing follow-up fee. The theory that these must be closing follow-up fees is of little use if the LVU has promised otherwise, and the broker cannot – as a rule – disprove this in court.
The theory is therefore only one argument for insisting on a correspondingly clear brokerage commitment from the LVU. Otherwise, the widow of the insurance broker will be informed that without the assistance of the deceased broker, there will be no more portfolio commission. Similarly, some insurers also had brokers who had surrendered their licenses or had had them revoked. Such de facto expropriations can often be avoided by legal contractual arrangements – but not if the child has already fallen into the well, because such a thing has a lead time of up to more than a year.
Evasion strategy, even without approval
The segment of trading in art objects, classic cars, physical commodities, in particular precious metals and diamonds, is becoming increasingly established. Many an intermediary rubs his eyes afterwards when the judiciary suspects fraud or embezzlement because an agreed margin was deviated from or a payment system for intermediaries was operated on the basis of concealed kickbacks. Many an experienced financial services provider has helped his top clients to set up their own family office, and then got a job there as a part-time consultant or permanent interim manager – without a business licence.
This opens the door to more comprehensive legal and tax services on a case-by-case basis, as well as the provision of financial and insurance services “from a single source”.
It has not yet been extensively used that a simple insurance intermediary can broker arbitrarily dangerous financial products without a licence, if they are designed as fund policies, because it is sufficient to be allowed to broker life insurance policies. However, this approval can also be waived if the unit-linked policy has already had at least one “day approval” and can then be sold as a second-hand policy by anyone, with a small initial premium beforehand and any flexible payments in and out after the sale.
by Dr. Johannes Fiala and Dipl.-Math. Peter A. Schramm
by courtesy of
www.wmd-brockerchannel.de (Sales Success 2014, September issue)
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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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