Shifting Challenges in the German Market

On episode 5 of The Wealth Cast, Chas welcomes Christoph Kanzler, a German financial industry veteran whose current focus is on creating a greater distribution of wealth and equal opportunities for the people of Germany. He discusses the way the internet changed investing, bringing more “regular people” into the fold, the way that economic crises have shaped his and other financiers’ careers, and various other changes he has seen in Germany over the past several decades.

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The summary below has been created by a professional transcription vendor upon review of the recorded presentation. Please excuse any typos as well as portions noted to be inaudible.

Hello, and welcome to The Wealth Cast. I’m your host, Charles Boinske. We bring you expert knowledge and show you how to manage your wealth so that you can experience the luxury of financial independence and have more time to do the things that you love, like my personal favorite, fly fishing.

Today, our guest is Christoph Kanzler. Today, he’s going to share his evolution in the financial services industry, and talk about what the future holds in Germany and the implications for the rest of the world.

Christoph, welcome to The Wealth Cast. I’m so pleased to have you join me today to talk about the financial markets in Germany and the U.S.

Chas, thank you very much for inviting me. I’m really looking forward, for the next 30 minutes to share a little bit, the German experience in investing in capital markets.

Well, I’m really happy to have you here, and I think, you know, the experiences we’ve had together over the years—I think it’s now since 2012, that we’ve traveled together and made presentations all over Germany. You know, we’ve learned a lot from each other, and I think it’d be helpful to the listeners to hear the German perspective on the capital markets and the evolution of the markets and their financial advice models, etc.

Perhaps you could start at the beginning, so Christoph: When you first entered the capital markets or started working in the capital markets, what was it like and what led to your evolution?

I entered the industry in 1995, more or less by accident. So I started studying in Munich, and there was an internship offered by our—called the discount broker. It was the first discount broker inspired by Charles Schwab in the U.S., and it belonged to Munich Bank, they called it at this time HVB, HypoVereinsbank. And it was an internship—about six or seven weeks, yeah? It was so exciting that the people in the bank loved me and I loved, the bank, so I started there half-time, and after I finished my studies, I started full time there.

And when I started to work as a broker, so we executed their transactions, and if you recall, this time, 1995 in Germany, the kind of stock market became a little bit more efficient than the past. Till this day in 1995, just this kind of rich people were invested in capital markets and stocks were super expensive because of the nominees of the shares. And this slightly changed in 1998. Then, the German Telecom was issued, and this was a big party here, and everybody wanted to have this Telecom share, and it was really promoted, promoted, promoted. And this was more or less the rise of the brokerage industry and the stock industry about selling stocks into the German market.

It was quite exciting since the internet was just raising up, and I still can recall my first transactions—they arrived by fax.

That’s great!

I got the fax and collected the faxes, and then put it into the system. And then I brought the faxes two levels down to the order desk. So it was really a wild, wild west, yeah? It was not seamless. But it was quite exciting, since you learned how this kind of industry were starting to grow and to get modern, and the internet was a kind of a turbobooster, how this pushed forward, since it got much more easier to trade and to sell and to buy etc. for retail clients.

That’s really interesting. So it was Deutsche Telekom that really sort of opened the door for the retail investor—the issuance of those shares. And I actually remember that, at the time just reading about it and  hearing about it. So what was next for you?

Yeah, the next was that I ran from a first crisis, yeah? 2000. 

Yes. 

The dotcom, then shortly after that, 9/11. And it was for me I was, yeah, I was super young at this time, but it was quite, quite hard since it really impacted the industry quite heavily. I was lucky, since I was on the right side, I was on the execute-only business. It was quite bad for others who really invested a lot of time to build up private banking structures, etc. It was completely shut down—everything. And so the execution-only business was surviving, but also, the market was changing, since all the people were invested in the telecom stocks in Germany, and I think the shareholders rised from 5% till 20%, and then because of these two crises, the telecom stocks were just crashing. 

So it was great that everybody had this thing in their accounts, but the experience was quite bad, combined with a bad experience of the dotcom bubble, that everybody rushed into the internet funds, and they really—people lost so much money, they lost so much money, but people learned their lessons about risk: single stock risk, dotcoms, innovations, whatever. ETFs, or diversification, just kind of works for existing, but not really, anybody knew “What does this mean?” The kind of evidence on how markets work were not really existing.

Now, the Fama French model? I think if you ask somebody, “Yeah, I’ve heard something,” but nobody really transferred it in their daily investing procedures. So it really was still wild west, you sold single stocks, you could sell everything. But the experience was quite bad. And so the industry were shrinking again. It took about one, two years, and then you know, between 2001 2008, the stock markets went up like hell, everybody was invested again, everything was running, all this kind of really toxic stuff was sold and was bought on the other side, and then 2008 happened.

And this was the next kind of milestone that again, my career was hit by the next crisis. In this meantime, I went from HVB to Credit Suisse, and from Credit Suisse to CitiGroup. And, yeah, it was kind of a great experience. 

So the way you’re describing it, the evolution was sort of in a couple of parts, not only for you personally, but also the industry—the financial services industry in Germany. First was the issuance of telecom stock, and everybody thought a diversified portfolio was you own telecom stock and your wife owns telecom stock.

Right.

There was no sense of diversification yet, because basically, the whole country was new to investing in stocks, and then add on top of that the dotcom crash, and then the Great Recession in 2008—this sort of double whammy for the German public in learning how to invest must have been really difficult to navigate.

Yeah, and like you said, there was no really financial literacy in Germany still on average. Yeah, there were absolutely no kind of guidance here. What was investing, investing means buying single stocks, buying funds, which sounds great, but there was not really any evidence-driven approach to this. And so that means people Germany bought everything, what sounds great, and then the next hit came with the financial crisis, and all these toxic things just get passed down.

So again, people were willing to adapt to the stock market, but they run into one, another crisis, and then the regulation changed in the banks everywhere—really they sold so much weird things here in Germany and it was bought by people that have no clue what’s going on.

Yeah, that’s really interesting. So this led, I imagine, to you rethinking the industry and your role in it, and what the next step would be for you. Is that right?

After the Citigroup experience that was close to leav the industry since again, I don’t want to miss a time, but it completely runs against my values. And then by accident, I run into into a guy called Karl, and we know us for a couple of years since he was the founder—he would say the first discount broker, I would say, the second discount broker. No, we know he’s from the industry, and he’s like “Christoph, I have the idea to found or to launch a bank, in which this case, we’re just paid by the clients, not any more by hidden provisions—we just get paid by the clients.” And he asked me, “Christoph, I’m looking for a guy like you, who did all this kind of stuff, selling products and designing products and earning a lot of money, and shows exactly the opposite—so that means, how can we build an investment-driven business, which serves the needs of the clients, and we get paid by the client.”

And this was a kind of a challenging question, since if you’re saying, “Okay, how does your business case look like if you’re not paid by products?” It’s one sentence, but suddenly, your life becomes quite easy, since you don’t have to look into 99.9% of the offered products—you don’t have to look anymore.

And then the ETF time arrived, and I’m really proud that the Korean bank—what was the nam, at this time—were the first person who really understood how to integrate ETFs into index-driven strategies, which have no hidden costs or provisions. And we were really a kind of a competence center here in Germany—the first one who really discovered the ETF, understood how ETFs worked and how these advantages can be used, that the clients can get a better investment experience. It was a quite cool time.

Yeah, I know just from my own personal experience working with you, and in Germany, and speaking with so many advisors, that transition from the commission-driven business, which is product driven, etc., to the more fiduciary business that we’ve practiced here in the U.S. for some time now, is a really difficult transition. Not from an intellectual standpoint, because I think people can easily understand why it’s better, but the infrastructure of the markets, and the business models in Germany made it very difficult. That’s been my experience in having the conversations with German advisors. Is that fair?

Yeah, absolutely. And also, this is something that if you come from a traditional world, you used to think, a special way—that you were structured by processes. So yeah, it was a business model. And after a while, I understood that this “active-passive” discussion was just, would I say, it’s an alibi discussion, since if we started to work this way, then a lot of advisors who were still working in the old fashioned , you can’t do indexing. The client doesn’t want to have average, they want to have outperformance and, if they’re both in performance.

And after a while, I understood that that the real reason is that active management is a business model. It’s just a business model. It’s not working, it’s dysfunctional. For that you don’t need any studies, you just need common sense. Nobody can predict the future. If nobody can predict your future, nobody can pick stocks or predict any stock market developments. And this was just this kind of exclusion from a whole industry—okay, it’s about performance. And then you look into the numbers and the numbers are just terrible.

So it’s not about active-passive, it’s a business model. And it’s completely fair in a free market that exists. The industry is trying to, yes, defend their business model as long as possible. But I think for me, it was a big step in the right direction to understand it’s not about active-passive, it’s a business model. It’s just a business model.

And this helped me pretty much not to go the way to say, “Okay active-passive, good or bad,” it was more or less, “Okay, we help you to build a business with index-driven strategies.” So not to speak about active-passive, since you know, you can’t win this game. It’s just how you look into this, and there are studies arguing for that and that, but again, if you get the understanding, it’s a business model, and the business model works pretty well, but are pretty unstable, since it can cause a lot of fruits for the advisor since he’s selling things which are not working. And then suddenly you say, “Okay, it’s a business model, and we help you to build the index-driven investment business, which results in a very successful business model for advisors.” It was a different game.

Yeah, you do well by doing the right thing for your clients, in your view.

Exactly. And also, with your help, which we’re really so thankful, I appreciate that you’ve been here with us—they saw that it was working. So you were standing in front of one hundred advisors, and telling them “Hey, it’s not about active-passive. Look, I worked for the last fifteen  years with index-driven, and I’m sorry to say this, I’m sorry, super successful guys,” yeah? “I generate value for my clients, and it’s also economic. So it’s working guys. Yeah, it’s not about active. The business model is working.”

And it has so much advantages from an economic point of view, also for you as an entrepreneur, and then slowly we get traction and this was common in my world, it was just how to have advisors build businesses and do the right thing. And with their resolve to be economically successful.

Well, I know it wasn’t easy to be that successful. Because every time I would speak with you on the telephone, you were in a different city somewhere in Germany, or maybe in London, and I know there was a tremendous amount of work there.

When you started, you mentioned there were zero assets in Germany. And when you left Dimensional last year, what was the asset level in Germany?

Oh, good question. About 3 billion.

Yeah, so tremendous success over that period of time. I think it’s testimony to the fact that A: you worked really hard, in my estimation. But also the messaging and the business model was the right thing to do for the clients—this is the most important thing. When you’re doing the right thing for your clients, good things happen. That’s just my personal view.

And I saw it in action, not only in individual firms in Germany, but for the whole industry to change, was a really exciting thing to watch and to participate in, in a very, very minor role. It’s been very interesting.

So  what’s next for Christoph? What’s what are you working on now? What’s your big challenge?

So as you know, I left Dimensional in end of August 2019, because of different reasons. But it was a super great time, I don’t want to miss it. It was super. And then I really enjoyed a couple of months of doing nothing, did a really great sabbatical, which was the first time after 25 years of hard working—not hard in a bad way, you know I love my job. I know, I do not have a job, I’m on a mission. So I do not really distinguish between private and business. I love what I do.

And and what I do now, is that what I also had, in my bigger mission to say, “You know, our mission was to turn Germany into a better place for advisors,” but I also learned that there is maybe not a more valuable mission, but there are much more people who need a different narrative about stock markets. These are the people who can’t invest hundreds of thousands of dollars. Who have a normal, average income, but have a completely wrong understanding of capital markets. So we have here in Germany, about 12%, like I said, using the stock market for their investments or having funds, whatever.

So only about 12% of the German population own stocks.

Yeah. So that means if you see it from the other side, there, is about 90% of people who need help, yeah? And we have about 3 billion euros lying on zero interest rates accounts. We have one charity. We have a lot of things, which means that the traditional way of retirement schemes are not working anymore since a lot of these things are interest-driven, and if you have no interest, it’s not working.

Yes.

Well, what I founded is, I founded Der Kanzler, so that me as as an international speaker, so that means I give talks, I give keynotes, give keynote webinars. And I work with my all-new clients, so that means I work with insurance companies and banks and advisors. They book me, helping them to share a different narrative about stock markets to their end clients, and also to advisors.

But I can do this completely . That sort of means I don’t have to take care of any compliance or legal things, since I don’t speak about specific funds. It’s quite cool for me now, since I worked 25 years in a heavily regulated industry, in the end, it was really a little bit annoying, what kind of regulation you have to meet to do the simple things—which is totally fine, since this was the effect that the industry was unwilling to learn in Germany, like in other states. 

But now I’m completely free. And you know, the general story about the narrative about capital markets is quite generic: markets are working, markets are having increased stock raises of 10% and more in the last one hundred years, and so it’s a good thing, markets are your friend, so why not using it? In Germany, we think markets are bad, it’s devil, and we’ll go into this direction, and we’ll educate what I say are the mass investor. and for that, I founded with two other partners, a company called 30plusX. And the mission of this company is to increase the number of shareholders in Germany from now 12%, up to 30%, and more till 2035. So this is our kind of North Star, big carrier.

Yes. Understood. It’s a laudable goal. You know, the hard thing about changing attitudes is that you need to develop an educational strategy to do that, you know? To get them the information, they need to make good decisions, etc. And that’s hard in any industry, but it’s particularly hard in the financial services industry, right? Because you have all these different sources of information, all of this noise coming from competing sources—whether they be product-driven places, or people using the old business model. And it’s very hard for someone who is new to the markets to understand, and be able to differentiate between all the different noises. And so I’m sure it’s going to be a big challenge. But if I know anybody that can do it, it’s you, in my experience.

And as you know, this is exactly what the challenge is. We are not in the investment business. We are in the people’s business. As you know, I also finished a book, so it will be published next March. And so my target was to write a book about investments and to not speak about investments, since, as you said, is, as soon you say stock or free markets, or capitalism, people show resistance, so they close. You have to find a different narrative, how to approach the people.

The first experience with that was slowly with webinars, then it works. Since as you said, it’s a different way of communicating, it’s a communication thing. It’s not an investment thing. Then at the end of the day, they use ETFs for diversified portfolios—it’s not the main thing, it’s just a result of a way we started with education where we guide them through, and if they understand it, and it’s, still we have to figure out how we do it in detail, but if they figure it out, and they follow the knowledge, they automatically come to diversified portfolios, and ETFs. You don’t have to pitch active-passive, or ETFs, whatever.

Yeah.

It’s a normal process that people will say, “Oh, cool. Capital markets are for everybody, first, capital market returns are coming not from fund managers and banks, they’re coming from consumers, and from the industry.. It’s the free market.”

Yeah, basic economics. From the free market.

“And I’m part of this super successful story, and I can take my share, and I get my share in buying global portfolios,” what we call it, the you call it here the Welt AG, which means “the global AG.”

Aggregate.

Yeah. And that’s it, and it’s super simple, since from a technical point of view, everybody has nearly an account, there was a discount broker or direct bank, it’s just one click to buy your ETF. That’s it. And then they have a perfect investment strategy—they can start at 25, 30, 50 euros a month, and then they can start building up wealth.

Since you know, when you start, or if you start with 20, you have 40, 50 years. And then the compounding effect starts. And this is what we tell the people—it’s not about being rich, it’s  everybody has the right to get the shares, so everybody’s part of this super successful story, which we call it free market capitalism. But because it’s Germany, you have this not-evidence-driven understanding of capital markets—it’s more just kind of, “the earth is flat and not a globe.” You just have to change the narrative just, is easy saying, but it’s a way. It’s quite simple.

Yeah, once, right? It’s like riding a bicycle. Once you figure this out, you easily ride the bicycle. Yeah, once you figure out how capital markets work, it all makes sense. And it’s easy to tune the noise out.

Yeah. And really, if you boil it down—and this is I think, what scares a little bit the marketeers. As you know, I’m quite well known in the market, but it will also turn out that it’s super simple. You need the knowledge, you need ETF, and then you just have to hold it.

Like many things in life, right? Everything seems really complex, until you understand you only need the relatively simple components to be successful: Whether it’s fly fishing or investing, it’s all the same. Your tennis, you know, I’m sure has the similar characteristics, where once you understand the basics of how this works, you can get rid of all the extra noise in the system.

Exactly.

Focus on the three things you need to do, or the four things you need to do to be successful.

Yeah.

Well, I mean, that’s exciting, Christoph, and it’s really good to hear that you’ve found a next cause, a next mission, to move towards. It’s certainly a laudable mission, a worthy mission, and I really wish you the best of luck with it.

Thank you, Chas.

It’s been great to see you help the German financial services industry develop over the last ten or so years, and I’m really looking forward to seeing what the next ten or so years brings. And I’m sure we’ll be talking again in the future to get an update.

Absolutely, and as you know, Chas, I hope to have you here, over to your inspiring talks to advisors, also to clients, that they see it’s working

Well, I would be glad to do it. And I hope that the current health situation changes rapidly to enable us to do it again, because, as I’ve told so many people, the experiences I had with you in Germany, talking to advisors, and clients, etc., over the last seven or so years, has been one of the best professional experiences of my career. So I’m very optimistic for you. I’m very hopeful that things continue to progress the way they have. I’m in your camp and really hoping that that the future is bright.

That’s great, Chas. So thank you very much.

Thank you, Christoph. Have a great day. We’ll talk again soon.

Yes, you too Chas. Goodbye.

Thank you so much for joining us today for our discussion with Christoph Kanzler. Until next time, thanks for joining us. Stay well.

About Christoph

Christoff “The Chancellor” Kanzler has held various senior positions in the international financial industry. Now, as a strategic visionary, he creates a new understanding around the topics of investing, saving and capital markets. He works with insurers, banks, wealth managers and investment advisors and is recognized worldwide as a highly experienced and renowned top expert in his industry. Known as “the banker who loves people,” Kanzler motivates his listeners to recognize the prosperity of free markets and to use them for themselves.

At the core of his talks is the fundamental question: “What would the distribution of wealth and equal opportunities look like in Germany if more people knew about the added value of free markets?”