investment advice

The debate on commission-based investment advice has flared up again in Brussels. EU Financial Markets Commissioner Mairead McGuinness complains that this leads to small investors being sold expensive financial products. Now she is planning reforms and does not rule out a Europe-wide ban on commission. The BVI supports the coexistence of commission-based and fee-based advisory services.

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Discussions about a ban on commission for investment advisory services have flared up time and time again. At the end of 2022, EU Financial Markets Commissioner Mairead McGuinness again put commission-based investment advice under scrutiny. She is complaining that commission-based advice often leads to retail investors being sold expensive or unsuitable products. And the disclosure of costs for financial products regulated in MiFID II has not led to a shift from commission-based to fee-based advice. At the beginning of May 2023, she wants to present her proposals within the framework of the announced retail investment strategy.

The BVI considers a ban on commission to be wrong and is committed to keeping the freedom of choice between commission-based and fee-based advice. Especially for small investors, commission-based advice has clear advantages: people who invest a lot pay a lot, and people who don't invest much, dont't pay much. In addition, the advice is free of charge if savers do not buy anything. Even today, consumers can freely choose between commission-based and fee-based advice. Nevertheless, according to a survey by the market research company Kantar, only 16 percent of Germans can imagine paying a separate fee for advice. A ban on commission would therefore lead to an advsory gap and many consumers would seek less advice or non at all. The consequence of this woul be that that - contrary to the declared goal of EU legislators - they would either steer clear of the financial markets and no longer buy financial products or buy products without advice with a correspondingly higher risk.

This is also shown by a look at the UK, where a ban on commission has been in place for ten years. Broad sections of the population there are now cut off from advice. The UK financial supervisory authority, the FCA, found that the advisory market is oriented towards assets of at least higher five-digit pound amounts. Above all, savers with small or medium-sized investment amounts can no longer afford advice, or just don’t want it. The situation is similar in the Netherlands. Here, commission is also prohibited, but the need for private provision and thus investment advice is much lower due to the high occupational pension provision. Traditional investment advice is found almost exclusively in private banking and often requires assets of at least EUR 500,000, as a KPMG study shows.

Moreover, a ban on commission limited to the sale of securities, as is currently being discussed, is unacceptable. It would harm consumers because it distorts competition between securities and insurance. Funds would probably be increasingly put into insurance wrappers. This would lead to additional costs for investors.

Furthermore, a ban on commission would have consequences for the implementation of the "Green Deal". The fund industry plays a key role on the way to more sustainability, and investment advice is a crucial factor in taking ESG-relevant developments into account and thus driving sustainable transformation.

Finally, a ban on commission would not only have a negative impact on consumers. Commission is an important source of income for credit institutions and thus contributes to financial stability. This is because income from commission reacts to different shocks than income from interest and thus supports a stable earnings situation for banks, which is regularly required by banking supervisory authorities.

More on this topic

Disclosure, inducements, and suitability rules for retail investors study

Study EU Commission7/2022

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An analysis of non-traditional activities at German savings banks – Does the type of fee and commission income matter?

Deutsche Bundesbank: Discussion Paper No 01/2018

© / Agatha_Kadar

BVI's position from a-z

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