In an opinion piece in the July 10th edition of the German daily “Frankfurter Allgemeine Zeitung,” Andreas Hackethal, Professor of Finance at Goethe University and Principal Investigator at SAFE, and Hessian Minister of Finance Thomas Schäfer explain where improvements in investor protection are needed, and point to certain measures that could help increase returns for average investors.
The authors argue that effective investor protection comprises three dimensions: “The obligation of financial institutions to inform investors; the obligation of investors themselves to actively stay informed; and, lastly, transparency on promised performance.” In Germany, only the supply-side investor protection has so far been improved by new legislation on financial institutions, while the demand side has been left untouched, Hackethal and Schäfer note. Since 2010, for example, financial institutions have been required to write up minutes of meetings where they give financial advice to clients, and to provide individual investors with a product information sheet before any investment decisions.
Nevertheless, despite these reforms, Hackethal and colleagues from Goethe University have found that customers who receive financial advice ‘miss out’ on 4% of returns per year on average – just as much as customers who did not receive any advice. Thus, improvements in financial advice cannot automatically prevent mistaken investment decisions. The reason, according to the researchers, is that customers do not always follow advisors’ recommendations even if they would benefit from doing so. “Good financial advice rarely translates into increased return on investment, since clients rarely comply,” Hackethal and Schäfer write. They therefore contend that investors should be required to take on more responsibility for their investment decisions, and that the quality of financial advice has to become more transparent. Better education of potential investors on the fundamentals of risk and return could be a good start, they note.
