Financial advisory and broking services including robo advisory and auto-trading
FinTechs belonging to this category offer advisory and broking services for investments usually via an Internet platform. Robo advisory services usually offer an investment proposition following a series of questions concerning the personal financial background and the risk-bearing capacity of the user. Sometimes the respective platform also enables the user to directly execute the proposed investment. Auto-trading concerns all services which automatically trade on behalf of the customer according to his/her specifications. Apart from that, some FinTechs collect and offer merely, or as an ancillary service, market information or operate comparison portals to increase the transparency of the capital markets and to help the investor with his decision-making. There are also FinTech-advertising-services which market various financial services or products.
Attitude of the country towards modern financial advisory and broking services
The acceptance of automated consulting and broking services as well as of robo advisory and auto-trading services is growing, although a high percentage of the people either still don’t know these services or don’t use them.
In 2020, the biggest robo advisor in Germany, Scalable Capital, with a market share of 37.3% in 2019, had the worst performance during the 2020 stock market crash. This showed the risks of fully automated portfolio management systems.
Obligations and requirements to provide financial advisory and broking services, or ancillary services described above
Consulting, broking, robo advisory and auto-trading services are financial services activities in the form of investment advice, investment or contract broking or portfolio management governed by the German Securities Institutions Act (Wertpapierinstitutsgesetz – WpIG) and, as the case may be, the German Banking Act (Kreditwesengesetz – KWG). In addition to WpIG and KWG, the EU-wide Regulation (EU) 2019/2033 on the prudential requirements of investment firms from 27 November 2019 (Investment Firms Regulation – IFR) as well as anti-money laundering and data protection regulations are to be complied with. The WpIG derives from the Directive (EU) 2019/2034 on the prudential supervision of investment firms from 27 November 2019 (Investment Firms Directive – IFD).
According to WpIG and KWG, offering investment advice or investment or contract broking requires a license in cases where the investment firm is granted a broad discretionary power to make decisions on behalf of the client. Whether WpIG or KWG provisions apply depends on the scope of business. KWG applies in cases of more than EUR 30bn on their balance sheets on monthly average in the last 12 months and the conduction of issuing business, proprietary trading, or proprietary business. In all other cases, WpIG applies.
License costs depend on the specific business model and result from fixed and time spent costs. Fixed costs are typically in the range between EUR 3,262.00 and EUR 10,114.00 and additional time spent costs depend on the complexity of respective business model.
Among other things, particularly sufficient initial capital consisting of Common Equity Tier 1 capital (CET1) available in Germany is required to obtain a license. In case of investment advice, investment or contract broking or portfolio management, where the service providers, in providing financial services, are not authorised to obtain ownership or possession of funds or securities of customers and who do not trade in financial instruments for their own account, an amount equivalent to at least EUR 50,000.00 in CET1 is required.
When offering financial advisory and broking services, the service providers are to comply with requirements for the initial capital, as well as with the funds requirements at all times. According to Art. 92 Regulation (EU) No. 575/2013 (Capital Requirements Regulation – CRR), these are: a CET1 capital ratio of 4.5%, a Tier 1 capital ratio of 6% and a total capital ratio of 8%. When calculating the capital ratios, the fixed overheads of the respective financial service providers have an important impact.
Additional comments regarding the legal situation for financial advisory and broking services, or adjacent services or what FinTech’s must be aware of in this business area
A license is not required, where consulting, broking, robo advisory and auto-trading services are organised in a way that they don’t meet the requirements for investment advice, in-vestment or contract broking or portfolio management services.
Market size for financial advisory and broking services as well as adjacent services and biggest companies in this business area
In 2019, around EUR 5,4bn were under management by approx. 30 robo advisory FinTechs. This market segment is growing rapidly with an average growth rate of 318,5% between 2013 and 2019. The market for robo advisory services alone is estimated to include over EUR 10bn in assets under management in 2022.
Additional comments regarding the economic situation for financial advisory and broking services as well as adjacent services or what FinTech’s must be aware of in this business area
Although the German market provides for some large capital providers, early-stage financings of young FinTechs continuously increase by an average of 6% per quarter in 2021. It might therefore be worth the effort to entry the market despite the mostly distributed market shares.