Banks and other financial intermediaries make a lot of money selling expensive financial products. Badly informed customers are left behind, for whom only meager returns are left after deducting all commissions and costs. Anyone who does not want to be satisfied with the crumbs that fall from the richly laid table of the financial industry can cut costs significantly – and thus increase the chances of winning.
When you take out an investment, it is not uncommon for you to be lousy. The reason is the costs associated with buying financial products. They are deducted from the purchase as a commission. It may take some time for your system to recoup these costs and for you to earn something – depending on the product in question and market developments. First of all, the bank collects before your investment earns you anything.
In some cases high commission
The closing commission is taken from you by the product providers and paid out to the banks (or other intermediaries) as a reward for selling the product. In the case of funds and certificates, the acquisition commission is known as the “issue surcharge” or “agio”. It is always calculated as a percentage. This means that the absolute amount of your costs also depends on the amount invested. If you invest 100,000 dollars in a fund and the commission is 5 percent, around 5,000 dollars go to the bank or broker.
The percentage of the investment that is spent as a closing commission varies from product to product. Financial advisors make the biggest profits with so-called closed funds. In the case of investments in ships, it is often up to 15 percent of the investment amount. But banks do not only collect commission for funds and other securities, but also for the purchase of insurance or building society contracts.
Even more lucrative: portfolio commissions
However, banks are not satisfied with the acquisition fees. For most products, they also collect so-called inventory commissions. They are also called “sales follow-up commissions”. The product providers pay the portfolio commission to the bank every year as long as a product is in a customer’s depot.
Additional cost factors for funds
In addition to the management fee, fund providers often charge a performance fee, which the financial industry also calls a “performance fee” . It is due when the fund has exceeded a predetermined minimum performance or has performed better than a benchmark index. Then the fund company collects between 10 and 25 percent of the profit that exceeds the minimum or index return, sometimes more.
In addition, investors are often disadvantaged when calculating the success fee. The BaFin supervisory authority has now banned many unfair tricks . For example, it was often common practice to recalculate success every year – even if the fund had not reached its standard the year before.
In future, providers will have to extrapolate poor results over five years. This means that they are only allowed to collect a success commission when they have caught up with the backlog from previous years. Some companies charge performance commissions on a quarterly or monthly basis. Investors had to pay even though the fund had not achieved any success over the year.
Some providers calculated success without deducting the costs beforehand. The bottom line was that investors often had no additional income at all, but had to pay anyway. Companies now have to deduct other costs from the income statement. The companies can still collect a success fee if the fund was better than the benchmark index, but in the red.
Fundamentally, success commissions that have to be paid in addition to a fixed management fee are a tangible problem from an investor’s point of view. Because they set the wrong incentives. Fund managers are tempted to take higher risks. If your risky strategies work, you will earn high commissions. If they are wrong, they always get the fixed management fee, while the investor may be sitting on high losses. Investing more conservatively, which is in the interests of the investor, who generally wants to avoid losses, is not rewarded with this remuneration system. Things would look very different if fund managers were to receive only a contingency fee. In that case, their interests would be largely aligned with those of the investors. So before you buy a fund, find out whether the provider company collects a profit-sharing scheme. If this is the case, you can inquire for a thorough clarification of the terms and conditions of the remuneration. In principle, investors should better avoid funds that cash in on profit sharing. There are usually cheaper alternatives.
Insurers hide costs and commissions
Commissions are also paid when concluding insurance contracts. For private pension insurance, 4% of the gross amount owed is normal. As an exmaple, if a customer wants to pay in a total of 40,000 dollars in premiums by the start of retirement, the insurer picks up 1,600 dollars for the conclusion; some providers even more. The administrative costs come on top.
However, high acquisition and administrative costs reduce the future pension considerably. Customers can usually hardly see through this. Because insurance companies and intermediaries like to throw sand in their eyes. It is true that since 2008 insurers have been obliged to state the conclusion and administrative costs in dollars. However, they still present the costs in such a way that even the experts struggle to understand them. The whole thing is then completely opaque for the customer. Both intermediaries and insurers are also vehemently opposed to disclosing the agency commission.