Guest Comment: Thierry Lombard on the future of wealth management
Looking forward, thinking back
The relief among commentators and in the markets is palpable. Around the world, people are "calling the bottom" and declaring the worst of the financial crisis over. Here at Lombard Odier we remain cautious, perhaps because of long experience: we have endured in excess of 40 such crises across more than 200 years of banking.
What is the basis of our caution this time around? True, the liquidity crisis seems to have passed and the solvency issues in banking are being addressed. Yet, we still haven't seen any significant restructuring of debt – vital, we believe, if economies are to return to an even keel. US consumer debt is $44 trillion, three times US GDP.
Foreclosures are still coming through: we can expect more bad debts and more markdowns. Bailouts and fiscal stimuli only defer the restructuring of debt. We'd like to see debt-to equity swaps recapitalising banks while the slow, essential deleveraging of consumer debt continues.
Governments vs. banks. A conflict of interest ?
Across the world, states have extended aid to support ailing banks and in return taken equity stakes. While these were essential measures at the time (the Lehman experience made bank insolvency the nightmare scenario for politicians around the world), the result is the curious and somewhat unsatisfactory position where governments now wield huge influence over the destinies of banks – and of their clients.
During the worst of the turmoil, a state guarantee seemed attractive but now government influence (in some cases effective control) could, we believe, lead to conflicts of interest. Not all banks, however, needed state support. Lombard Odier for instance remains an independent private banker.
To some people our business model, an unlimited liability partnership, unchanged since 1796, may seem old-fashioned but we believe it enshrines prudence in our approach and, even more importantly, aligns our interests with those of our clients. How can such an alignment occur where a bank (perhaps still guided by the management that steered it into trouble) is part owned by a government with its own priorities?
The return of the specialist...
It's axiomatic that people who specialise in one core skill are more likely to excel at that skill. Rare is the champion tennis player by day, who is also an accomplished concert musician by night.
On the world's stock markets, companies with a single vision and mission tend to command a premium rating over diverse and diffuse conglomerates. Yet in financial services the boom years saw a proliferation of large, multi-disciplinary banks. As regulatory barriers fell, firms spread out, bolting on acquisitions to create enormous "one-stop shops".
The philosophical and economic impetus behind the mega-banks came from Wall Street and the City of London. These were volume businesses, chasing profits and pursuing remuneration schemes that, as it turned out, encouraged short-term risk-taking over long-term value creation. The casualty was client service.
Fortunately there is another, proven, way: the "European" tradition of wealth management, based on long-term investment horizons and a close relationship between manager and client. It's not just a growing number of clients (many of them seeking refuge from turmoil in other banks) that are calling for a return to this way of doing things. Talented wealth managers too, disenchanted with large organisations, are now migrating to smaller, more client-focussed businesses.
You can't turn back the clock
A move back towards this older ideal of client service doesn't mean a return to frock coats and carriages, nor does it require a narrow or insular approach. At Lombard Odier we made our first move abroad in 1815 during the Napoleonic wars, looking to diversify the business and spread risk. This principle – of constant evolution and spreading risk – is just as important today when we have 23 offices in 17 countries.
Also crucial is using the most advanced investment techniques and strategies. During the boom there was a divide between traditional investment, as practised by wealth managers and alternative investments, personified by the hedge funds.
This, we believe, was an artificial divide. There is, finally, only wealth management, good or bad. That doesn't mean you have to rely on complicated instruments. We did not invest in exotic, leveraged instruments when they were in vogue and we are not going to begin now. Instead we are talking about a consolidated approach to wealth management, one that looks at the whole picture of the client's needs before designing portfolios, using all available tools, that can deliver superior wealth protection and investment performance.
To repeat – the crisis is far from over. But it will end and, and when it does, there will be real opportunities for those who come out of it stronger, as competitors disappear and rival forms of business are discredited and abandoned.
With no debt or toxic assets, no need to raise funds and with capital well in excess of statutory requirements, the banks and wealth managers that ride out this storm will stay in control of their own destinies – and of those of their clients. That is the true value of the long-term perspective.
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