DVAG takes on Germany’s rural savings banks

Ralf Götz, director at DVAG, Germany’s largest independent financial advisory network, has a challenge ahead of him. He glances out onto Frankfurt’s Münchener Strasse, from the 8th floor of his old-fashioned dark red-brick building and delivers his verdict on the sour state of Germany’s financial services market. “The problem is that many Germans don’t trust their own companies any more. Foreigners trust them, as you can see in the number of pension funds buying into German companies,” says Mr Götz. “The number of people saving in equity funds reduced last year, due to experience with bad performance in and after 2000. So instead of benefiting from the rising market, they sell as soon as they get the same price they got in 2000. It seems many Germans don’t trust their own market.” Simple products This slightly downbeat picture, however, bodes well for independent advisers, believes Mr Götz, particularly those able to create simple products specifically for their client base. “It needs to be taken into account that Germans are very risk-averse. They like products with the chance to win, but they don’t want to lose,” says Mr Götz, who is responsible for research and strategy related to more than 33,000 advisers servicing four million clients across Germany. These clients have invested more than e10bn in funds chosen by DVAG advisers. Typically, DVAG will go to one of Germany’s largest managers, such as Deutsche Bank’s fund manufacturing arm, DWS, and ask them to create a tailored product for the advisory group’s customers. “This is the difference between us and smaller distribution companies,” says Mr Götz. “If we go to DWS and ask them for a new product, they create it for us. But if you are just number seven or eight in the distribution field, they really don’t care about you.” The guaranteed equity funds which DWS has manufactured for its distribution partner, have raised close to ?1bn. “We do also have contracts with other companies, but DWS is our premium provider,” says Mr Götz. “They have a strong business here. We see also other strong companies in the German market. But the main challenge for them is to find the right partner for distribution to gain in sustainable distribution power and to deal with redemption in special market situations.” DVAG in fact has 20 partners, but mutual funds are only one part of the company’s ‘Allfinanz’ strategy, developed by the company’s founder, majority shareholder and chairman, Professor Reinfried Pohl. The company is also strong in the insurance business, with AachenMünchener and in mortgages with Commerzbank, HVB and other providers. Before 2001, DVAG used mutual funds mainly sourced from former Dresdner Bank subsidiary dit, which now belongs to Allianz Global Investors. But since then, the relationship with DWS has gone from strength to strength. This concept of independent advisers using such a limited number of providers is difficult for Anglo Saxon advisory groups – who pride themselves in offering the best funds in the market – to accept. Having your favourites However, given a broad palate of German and foreign managers, Mr Götz still feels it is preferable to restrict the choice to a handful of local groups, which have products which his customers will buy and his advisers can sell. “The number of products an adviser has in the market counts,” says Mr Götz. “If you have 200 products, like our premium partner, DWS, then we will clearly sell less of other products.”

High hopes: DVAG remains optimistic The back office is extremely difficult to organise if a distributor is to have links with more than a handful of managers, believes Mr Götz. He also thinks it is pointless for a retailer to display 3,000 fund products on their shelves if nobody buys them. “An adviser will only sell what he knows and feels familiar with. If the adviser feels unsafe or uncomfortable and unfamiliar with a product, then the customer can also feel it.” He believes advisory groups will continue to flourish – alongside the powerful banks – because investors using IFAs have a longer time horizon, and share details of a much broader portfolio. He compares this to the banks, who turn over funds several times a year to grab commissions. “Many people thought that because we have had good profits, we change our portfolios more than a bank, but that is not true in reality.” DVAG made a net profit of more than e86m in 2005 – more than the majority of M-Dax listed companies – and the 2006 figure should exceed ?100m. Each year, ?40m is re-invested in training advisers, in 11 regional centres. “The emphasis of our advisers must be on careful analysis of customers’ needs and priorities,” believes Mr Götz. “But only for a whole of life solution.” Joining forces The biggest competitors for financial advisers are not the retail banks – of which the leader is Deutsche, with less than 8 per cent of the market – but the savings banks or Sparkassen. These local and regional institutions enjoy a market share of around 60 per cent. So rather than compete with the urban-based retail banks, IFAs should join forces with them to fight their common rural foes, believes Mr Götz. “We have a very strong presence in the countryside, where the Sparkassen and Volksbanken are,” says Mr Götz, whose advisers compete head to head with the local banks for accounts linked to state-sponsored Reister personal pension plans. DVAG has a 10 per cent share of the Reister market, but has evidence that the Volksbanken have used Professor Pohl’s mission statement for Reister business in their own presentations. “These savings banks are our main competitors. With Deutsche Bank, it is different – we bring them accounts. Of their 8.5m customers in Germany, we have brought them half a million or more. “There are huge problems for old banks in getting new customers,” he ponders, especially as the retailers’ most loyal clients are ageing fast. “But DVAG can help recruit customers who would otherwise never set foot in a branch of Commerzbank or Deutsche.” With the DVAG model, the adviser visits the customer, driving up to 30km for a meeting. “In our situation, we focus not just on one person, but on the family,” he adds. “You never see the whole family going into a bank branch and getting advice. But in the living room, there is a lot more space. Banks are reducing their branch networks today, as they are dealing with fewer and fewer people. This is good news for us, as we can get even closer to the customer.” So what happens if a DVAG customer wants to move away from the standard product offer which they are normally given – is there any room for a more flexible approach to a customer’s needs? It appears that if a DVAG customer wants to buy a fund managed by a boutique, the door is firmly shut. “We have 33,000 advisers, so there is a huge risk of a mousetrap if we give a broad base of our customers advice to go into a smaller fund and then we can’t get them out. It’s our system to focus on bigger funds,” says Mr Götz. Structured products are not sold by DVAG for legal reasons, and also “because we are convinced that we can fulfill the needs of any customer through mutual funds. We also have a big problem with the transparency of structured products.” Alternatives is also an area which DVAG is unlikely to breach in the near future. “If customers – like most of ours – are saving ?200 a month, then hedge funds are not right for them,” says Mr Götz. “Just give them a good European or worldwide equity fund. If we have rich customers and they really demand these products, then we don’t keep them. Basically, if it doesn’t fit with out business model, we don’t keep the customer.” The story is the same with funds of groups not managed by chosen providers. “If a customer demands a Threadneedle fund, we would try and convince them to take a DWS or Allianz fund with a similar risk/return profile. If they don’t want it, and insist on Threadneedle, then it’s not possible for our people to organise, and the customer should look for another adviser.” This intransigent attitude and apparent lack of an open philosophy for selecting funds has come under some criticism in the German market. Changing up top “DVAG has been setting the pace in terms of partnerships, and is in strong partnership with DWS, but its management is old-fashioned,” says a prominent fund selector at one of Germany’s retail banks. “Once the current generation of DVAG managers retires, things will change very fast from the current closed shop of DWS plus two partners and nothing else. There will be a new strategic approach.” It is not an argument Mr Götz buys into, although he will not discount future changes in policy. “At the moment, we have very strong links to the Deutsche Bank group, and we don’t see the need for further diversification,” he says. “The world could change dramatically, but we feel comfortable with what we have.” He points out that Professor Pohl has been asked to take over the entire distribution network of Germany’s second largest life insurer, AachenMünchener. “DVAG will grow further and there is no intention to change our successful business model,” says Mr Götz.