Who pays for the investment advice provided by banks and other investment services enterprises? Ultimately it is the client who pays – albeit in most cases indirectly. Those who pay directly for investment advice are usually third parties, for example the providers or issuers of financial products. They pay a commission (inducement) for the distribution of their products and the investment services enterprise then uses this inducement to pay the investment adviser. The providers or issuers finance these commissions from the total of invested assets or from the income generated.

Do such arrangements make conflicts of interest inevitable? The legislature has made provisions for this: anyone offering commission-based investment advice, as it is often known, must disclose to the client the benefits (inducements) they receive from third parties. And they must make sure that the inducements are designed to enhance the quality of the investment advice, for example, by offering an annual suitability assessment in addition to the investment advice. Furthermore, they must take measures to ensure that clients nevertheless receive investment advice in accordance with their best interests (see expert article on the BaFin website dated 24 September 2018).

Independent fee-based investment advice

As an alternative to commission-based investment advice, since 1 August 2014, investment services enterprises have also had the option of offering fee-based investment advice (see expert article on the BaFin website dated 15 July 2014). Since 3 January 2018, this advice has been officially termed “independent fee-based investment advice”. The key difference here is that those offering fee-based investment advice may be remunerated for their services by the client only. And they must take a sufficient range of financial instruments available on the market into account when making their recommendations. They are not allowed to limit their advice to offerings or issues from undertakings with which they are closely linked. Moreover, fee-based investment advice must be separated from commission-based investment advice in terms of organisation, functions and staffing. This means, for example, that those offering fee-based investment advice may not additionally offer advice on a commission basis. A list of investment services enterprises offering independent fee-based investment advice can be found on the BaFin website.

Mixed forms

Many banks now offer de facto fee-based investment advice but do not ensure sufficient separation, in terms of their organisational structure, from other sections offering investment advice. They are therefore not authorised to use the legally protected term “independent fee-based investment adviser”. If the investment advice is paid for solely on the basis of the fee agreed between the bank and the client, no conflicts of interest can occur at least with regard to the remuneration. But they can arise elsewhere, for example if these investment advisers also make use of the same products or distribution structures that they use in their commission-based investment advice, especially if they provide both commission-based and fee-based investment advice at the same time.

But investors should be clear of one thing: whether fee-based or commission-based, the form of payment does not guarantee the quality of the advice given to them.