Investment advice: What to think of financial advice according to the DIN standard

by Sabine Hildebrandt-Woeckel, Euro on Sunday

unOur life is determined in many places by the German Institute for Standardization (DIN). One of the best-known areas are paper formats, for example DIN EN ISO 216. It regulates that a DIN A4 sheet must have the exact dimensions of 210 millimeters by 297 millimeters – and thus makes it possible for it to be used internationally in all folders and printers fits. A DIN spokesman explains that there are a total of around 34,000 standards in Germany. Most apply to Europe or even worldwide.

What is less well known is that the DIN not only regulates technical processes and products, but also services. There is even a committee of its own, to which tourism, health and social standards have been assigned for years. Then came finances. Result: The first standard for financial services has been in force since January 2019 – DIN 77230, which deals with the basic financial analysis for private households. In September 2021, the business customer standard DIN 77235 was also published. It describes a financial and risk analysis for the self-employed and small and medium-sized enterprises (SMEs).

The history of the standard for private individuals goes back a long way: to the founding of the company Formaxx in 2007, in which financial advisors from various sales organizations came together to set up a joint company. What had made life difficult for consumers long before became an internal problem: financial advice often depended – and still depends – on the sales approach of the intermediary. Or to put it another way: If a customer goes to a bank to secure his retirement, the analysis usually shows that he should choose a savings account. If an insurance broker is sitting across from him, life insurance is the method of choice when in doubt.

“And yet,” says Klaus Möller, “it is obvious to everyone that after a comprehensive examination of the financial situation there can only ever be one result for each customer.” And this is exactly what the 77230 standard is supposed to deliver. Möller, a former top manager at MLP financial sales, is now a board member at Defino Institut für Finanznorm AG, which emerged from a Formaxx spin-off. Defino initially started developing standardized processes internally and then poured them into an official form, i.e. a standard, together with DIN.

Today, its primary task is to certify people and companies that implement the standard, and it also deals – still in close cooperation with DIN – with the development and implementation of other financial standards. Möller expects the first software applications for the implementation of the business customer standard DIN 77235 in the first quarter of 2022. Only then will banks, tax consultants, insurance companies, insurance brokers and auditors be able to advise their customers in this standardized way.

As is generally the case with the development of standards, the committees do not work in private when it comes to service processes, but with the participation of the entire range of relevant industries and experts. That has to be the case, explains Möller, because standards are not laws, but, as the technical term goes, have a supplementary character. Which means: They have to be worked out in a multi-year, multi-stage process in such a way that a court can decide in the event of a dispute whether advice was provided in accordance with the norm or not.

Consumer advocates disagree

The initiators emphasize that consumer advocates were also at the table during the development process of DIN 77230. And in fact, experts such as Stiftung Warentest or Hermann-Josef Tenhagen, editor-in-chief of the non-profit consumer portal Finanztip.de, have expressed positive opinions in the past. At the same time, there has been heavy criticism, especially from the consumer advice centers.

The consultants there came across several aspects at once, says Niels Nauhauser from the consumer advice center in Baden-Württemberg. Firstly, the DIN certificate gives the impression of working with scientifically based standards. “But that’s not documented anywhere.” Second, the standard only deals with the so-called financial analysis, i.e. the examination of the current situation. Good advice, Nauhauser clarifies, has three phases: exploration, information and result. The DIN regulates only the first phase. “In the end, it is up to the certified consultants themselves which products they then sell based on the results.”

And thirdly, the individual needs are not determined even during the analysis, “but a prioritization is given”. According to Nauhauser, there is no objective need at all, only an individual one. Ultimately, the standard is therefore just an attempt, he concludes, “to cover up the loss of trust that the financial sector has suffered in recent years with a seal with the good reputation of a DIN certificate”. The advisors are thus given a marketing tool, but the problem of poor advice for the customer is not solved.

persuasion needed

Co-initiator Klaus Möller follows the critic on one point – at least in part. Of course, he admits, it cannot be denied that even with a good analysis, mistakes can still be made afterwards. “But at the end of the day there is a clear list of priorities, which is also available to the customer and makes it much more difficult for salespeople to sell the wrong product.”

But Defino is now also thinking ahead and, in addition to the analysis standard, is also working on the next step, at least for the investment area. In order to prevent suggestion and manipulation of private customers with regard to their allocation to certain types of investors, a generally applicable system is to be developed here as well. Möller calculates that it could be in about half a year.

The big ones are shy. Before that, however, it is important to do a lot of persuasion work in your own industry. Because it is not only the consumer advice centers that are skeptical about the DIN finance system. Just under 2,000 consultants – out of an estimated 200,000 – have been certified by Defino so far. Most of the big players like Vema (a cooperative of insurance brokers), the financial sales company DVAG and Möller’s former employer MLP are having just as much trouble as many independent consultants.

The reasons for this are quite different. Large companies or associations often already have their own processes that “go beyond the DIN standard,” according to the Federal Association of German Volks- und Raiffeisenbanken. DVAG is also of the opinion that its own holistic analysis process, which is “continuously adjusted”, is completely sufficient. The DVAG therefore does not see any need for action to “include the DIN 77230 procedure in the business model of allfinanz advice”.

On the other hand, many providers who specialize in certain products do not want to give up this approach at all. Especially since the use of the DIN would mean a massive change in the business model for them. However, as Möller clarifies, the standard in no way prescribes that in the future there may only be holistic analyses, but only what they should look like if one is advisable or desired.

What makes smaller agencies or independent consultants hesitate is the considerable effort involved in switching to DIN consulting. Because it’s not just about appropriate training, which must be carried out by approved trainers, and then your own certification. First of all, the appropriate software must be purchased. The DIN cannot be applied manually on a sheet of paper, as many consultants still do today.

But the fact that paperwork and gut feelings are eliminated is, from the proponents’ point of view, the guarantee that a high-quality result will come out in the end. Stephan Hinzen, economic and financial consultant in Münster, is also convinced of this in the medium term, the DIN will establish itself as the standard and thus separate the wheat from the chaff, especially among independent consultants.

It depends on the expertise

Hinzen, who primarily advises dentists and doctors and has used the tool from the start, does not deny that additional business can sometimes be generated through DIN advice. However, he does not share the fear that the seal could be misused solely as a marketing tool, as consumer advocate Nauhauser fears. “In order to be able to assert oneself on the market, despite all objectification, the good expertise of the consultant is still important.”

So far, advocate Möller believes, there were mainly two aspects that initially stalled the interest in the Defino certificate, which has meanwhile increased: on the one hand the Corona crisis, on the other hand the lack of software. However, there are now nine providers with software applications for implementing DIN 77230 on the market. “And Corona will also be over at some point.” After that, the consumers decide whether the DIN prevails in financial advice or not.

New module on sustainability

Meanwhile, it is becoming apparent that the standard for private households will soon be expanded. By April 2022, a draft should be available to include a “Query of sustainability preferences” module in DIN 77230. A final version should be available by July, so that the planned guide should be available in August.

The members of the DIN committee justify the addition with the fact that “sustainability preferences influence people’s attitudes and behavior”. Therefore, these aspects should be included in the financial advice of private individuals.

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Image sources: Szepy/iStock, kan_chana / Shutterstock.com, Finanzen Verlag