Seeking advice on investments

The tradition in Germany has long been to buy financial products from one of the very many banks here. An investor must be aware of the risks involved in using this source of advice and product. The German commercial and savings banking system is an efficient sales machine, lacking the strong controls or serious supervision from central authorities and happily unencumbered by any but the most minimal consumer protection laws. Many German commercial banks now refuse to provide accounts to US persons, citing the FATCA penalties as their reason for doing so.

Those bank employees with direct customer contact are often judged for the furtherance of their careers by their ability to sell their employers’ financial products. Banks have mainly their own and a small selection of other products available for sale to customers; in our experience of unwinding unsuitable investments, these products are placed with clients with scant regard paid to their suitability, but greater emphasis on the fee income they might throw off. It should also be remembered that banks can afford better and more expensive attorneys than most of their customers and the enforcement of investors’ rights could be a long drawn out and expensive process.

On occasion, depending on an individual’s credit worthiness, a bank will suggest extending a loan to allow an increase in the investment in that bank’s fund products. Unless a desire for risk lies prominently in mind and is an express wish of an investor, such leveraging should be resisted, as any losses are directly for the client’s account and a leveraged position loses money at a much faster rate than simply using available funds.

There is a trend towards offering inexpensive on-line bank accounts, all too often these organizations tend to be small and not especially creditworthy. They spring up, attract clients who see the low costs and deposit money with them and can then disappear almost as quickly. These new ideas should be watched with interest until it is certain that they have reached a maturity where it becomes less likely that they disappear, taking their clients’ money with them.

Some investment advisors are biased, whether legally or emotionally, to the products of a single fund company (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 stocks, bonds, or funds they want to invest in, but is less useful when seeking independent advice. Investor and consumer protection legislation is less advanced in Germany than in many other countries; the result is that an investor can receive assurances that stand little or no chance of becoming reality.

There is a new trend towards the so-called Robo-advisers which are designed to build and adjust investment portfolios according to the target risk profile of an investor and execute investment decisions that theoretically optimize the shape a portfolio. These systems carry with them risks of their own. The systems have to meet the requirements set by the regulatory authorities, assuming there are any. They have to be able to understand a client’s risk tolerance and behavioral bias and be seen to take decisions which are not based on fees to the advisor alone. All this assuming up to date technologies. Robots tend to be insensitive to their client’s wishes as long as these are not purely based on a drive for outright profits alone. For clients who need flexibility, they are, under current circumstances at least suboptimal!

Professional independent advisors undertake their own analyses of an investor’s ability and willingness to take risks, as well as using quantitative and qualitative methods to find the most suitable investments. They will provide an investment concept based on matching the clients’ needs with suitable investment products and will give this report in writing for the investor to consider. We strongly recommend that if an investment advisor is unwilling to commit their thoughts to paper by providing such a written concept, a potential investor should look elsewhere.

Beware of popular products with names such as Riester, Rürup or Basis-Rente, which are all too often sold as tax saving vehicles, but are in reality long-term pension products, offering no access to invested funds until you reach the age of 62. If a foreign investor leaves Germany, the funds have to be left behind to accumulate or simply moulder until they mature, and any remaining value will then be paid out only as a life-time annuity. The investor needs to be certain at the outset that this will meet their requirements.

Other bandwagons include the Crypto-Currencies which were all the rage for a couple of years. Popular emotions drove the prices of such products to amazing heights, even though there was nothing other than a computer program and lots of processing capacity behind them. There were many cryptocurrencies on offer, and all were highly volatile in their pricing. The inevitable crash, in the best traditions of the Dutch tulip mania has lost many investors a great deal of money. For those people who wish to bet and cannot afford to travel to Hong Kong to follow the horse races there, it might be an inexpensive way to have a thrill. For serious investors cryptocurrencies are a potential disaster.

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 and a time horizon of less than 3 years runs the risk of falling between adverse market cycles. There is no good reason to risk capital losses 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
  • Guaranteed pension plan or deposit with an insurance company
  • Investments within an insurance wrapper (if an insurance company guarantee is included)
  • Investment or mutual funds – ranging from Risk Category 1 (the least risky) to 7 (potentially a wild ride at the horse races)
  • Investment in residential property
  • Closed-ended funds, (Geschlossene Fonds) with a finite maturity date and all too often a distinct entrepreneurial risk*
  • Direct investments in Government subsidized long-term projects
  • Zertifikate / ETFs – certificates or instruments using derivatives to reflect movements in indices or markets
  • 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 has however ABSOLUTELY NO reflection on the viability of the fund or the chances of it meeting any of its financial goals.

Insurance backed investments are held in deep suspicion by some investors, who assume that these are completely inflexible annuities from which there is no escape. In reality, a modern insurance wrapper is a way of using the German and US tax structures in an efficient and flexible way.

Some insurance companies offer tariffs whereby wrappers are offered to investors which put a shell around a normal investment portfolio within an insurance policy. The portfolio remains as it is. The tax treatment and reporting is however different. The portfolio can still be adjusted or increased or indeed decreased at will by the investor.


Successive governments have worked hard to close the loop-holes that their predecessors might have thought a good idea. Sometimes the volte-face can be retroactive, which causes consternation, but normally there is fair warning of impending changes. Many tax laws have not been as carefully drafted as one might have hoped, with the result that the courts rather than the government end up as the final arbiter of what was intended, and tax laws being newly interpreted.

On 01 January 2009, Germany introduced a 25% investment tax which encompasses all capital gains and income from investments entered into after that date. The change was preceded by a fanfare of new products, but in the end came at the same time as the worst economic crisis in living memory, resulting in a muted response from investors whose portfolio values had fallen so far that it would be some time before a capital gain could become a meaningful prospect. All new investments will however be subject to the new tax structure, while existing portfolios dating back to before 2009 remain unencumbered. Suggestions from advisors to change or sell investments dating back to before 2009, need to be reviewed very carefully, to ensure that tax free profits are not being wasted.

There is an annual 801 Euro (1602 Euros for a married couple) tax allowance on income stemming from interest and investments; this can be divided up between institutions, but the tax authorities seriously object to any attempt at exceeding the overall allowance and the punishments can be painful and are well worth avoiding.

There are some, though very few, exceptions to the general dearth of tax reducing schemes. For instance, double taxation agreements between Germany and several other countries, resulting in potentially useful tax allowances or an investment in property. It is important that all foreign investors considering an investment in any German market should consult a tax specialist before making a decision. Equally, planning to sell a property or other asset outside Germany in order to bring the proceeds here, needs careful though when it comes to timing and method. The tax implications of poor timing and structures can be painful.

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 such an investment.

Basic principles of investing in Germany

  1. Treat all complex schemes using multiple products with suspicion; they are rarely designed to be in the best interests of the investor.

  2. There are no rules governing the promise of abnormally high returns to potential investors; if an investment scheme sounds too good to be true, it probably is.

  3. 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, 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.

  4. Without regard to your own political views, it pays to be financially conservative.

  5. 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, an up-to-date prospectus and any application forms. You will need these in case of a dispute.

  6. 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.

  7. Always spread your investment risks, ideally never having more than 10% of your portfolio with any one fund or strategy, irrespective of the product.

  8. Guarantees are only as good as the company that issues them.

Important information for US Citizens

US citizens can invest in stocks, bonds, ETFs, and funds as long as they do so via a platform that is willing to make the necessary income reports to the IRS. An increasing number of German organizations refuse to do this, being wary of the very severe penalties for making an error or omission.

The HIRE Act of 2010 and its component FATCA, (Foreign Account Tax Compliance Act), was designed to ensure that U.S. taxpayers are not able to avoid US taxes by holding investments in offshore accounts. The same act threatened draconian penalties both for individuals and institutions which did not file reports on financial accounts held by U.S. taxpayers. What is strange about FATCA is that while it was aimed at the ‘Fat Cats’ avoiding, or evading, U.S. taxes, it singularly fails to catch them. Instead, it is the unwary smaller investor whose savings are being penalized. There are however still a few, but enough, professional platforms available to U.S. investors residing in Germany to be able to make a considered selection.

Article contributed by John Townsend. 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.

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