It’s a jolly good time to prepare another wish-list; one for banks, wealth managers and other financial services. Although it might be a little late for Santa, I’m sure it’s not yet too late for the new year resolution call:
1) Bring about risk-aware incentive- and bonus-frameworks
While I subscribe to a liberal market stance and always have spoken out against harsh regulatory & governmental control over market matters, I do think that the timing of shareholder, client and manager thinking are not aligned. And since these time-gaps have shown to be elementary in the latest crisis origins, we certainly need better frameworks to counteract and regulate them. One of the most influential effects would be to determine the long-term effects in a rather sceptical and pessimistic way using Value-at-Risk baselines and only pay-out incentives and bonuses based on these sceptical terms. And after a 3 to 5 year proof period the real effects could be measured and compensated accordingly. This would mean a sharp decline in bonus volume during the initial years with a moderating effect in the years that follow.
2) Bring us transparency on investment products
It is true that in Europe MIFID has aided the customers in creating more transparency on the risk level and downside aspects of all complex Investment Products. To take this positive trend to the next level and to a global reach it would be helpful to demand for every product which kickbacks and provisions are paid out by the provider of the various products.
3) Demand full clarity on client- vs. 3rd party revenues
Recent studies have shown that banks often generate 25 – 30 % of their revenues with provisions and Kick-Backs. And if those hidden cost would be attributed to the clients and their portfolios an average performance increase of 8% p.a. could be achieved. While market advocates argue that pure performance oriented wealth manager could offer this model without any regulatory change – and some, like the German Quirin Bank, really do – the clients would benefit stronger from a solid governmental response. Why should the taxpayer money that has saved the financial system from total collapse not be worth enough to at least foster a more competitive marketplace.
4) Make the annual thinking cage vanish
Banks talk their clients into long-term thinking and investing and yet are ruled by quarterly reports and annual bonus payments. Just as clients like to take stock of their portfolios on an annual basis, the banks should honor their long-term responsibility and have long-term measures determining their medium-term success – these must be risk-based.
In this mind-set I whish all of our fellow readers a merry holiday season and that Santa has not overlooked your wishlist. Let’s jointly continue to change our profession and field of expertise to the better. Because not just during the Christmas spirit I’m convinced that only banks acting true and fair and dilligently serving their clients will be truely successful in the long run.
Merry x-mas
-Tom
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