Banks learn importance of being earnest

“An idea that is not dangerous is unworthy of being called an idea at all,” wrote Oscar Wilde. This hypothesis from the flamboyant Irish writer and poet stands up just as well today as it did at the tail-end of the 19th century. Its echo has particular relevance across the wealth and asset management market.

Recent innovations which have been most beneficial to private and institutional clients, according to the latest report from Amin Rajan, CEO of the Create Research consultancy, include emerging market equities and bonds, high yield bonds, liability driven investing and exchange traded funds (ETFs). Those that have failed to deliver include leverage, structured products, portable alpha and currency funds.

From the late 1990s and beyond, the concept of ‘portable alpha’ – a bizarre system of managing money in a totally different asset class than the one requested by the client and eventually swapping the assets, adding extra risk in the process, for the required ones – became a mainstay of institutional investment.

What Bob Parker, founding father of asset management at Credit Suisse, calls a “failed gimmick”, really did reflect mainstream thinking. Structured products, which powered the profits of many private banks, particularly Swiss and global giants since the turn of the millennium, are rubbished not just by the Create report, but also by independent wealth managers and back office providers who witnessed end-clients suffering from complexity, lack of transparency and illiquidity.

“Innovation has often been the key word for the aggressive placement of fee generating products in clients’ portfolios,” says Shelby du Pasquier, a leading Swiss lawyer, who runs the banking and finance practice at Lenz & Staehlin in Geneva. “It is not obvious that this has generally been for the investors’ benefit.”

The very term ‘innovation’ is synonymous with complex financial products that many sponsors barely understand and their private clients certainly do not, says Mr du Pasquier, leading to families suffering massive losses in recent years. Regulators need to adopt a new approach. Switzerland’s latest tax agreement with UK authorities may also improve the industry’s image.

Most agree ETFs have been one of the major investment game-changers. But they are also controversial, particularly so-called synthetic ETFs and those derived from illiquid instruments. At the recent Fund Forum in Monaco, synthetic ETFs became the principle target of concern.

ETFs aside, the appetite for innovation has dried up, with investor confidence at levels last experienced during the Lehman collapse, contends Mr Parker, and few asset classes holding up.

Instead, the big boys talk about innovating in new markets and business models, by signing broader co-operation agreements with banks in China, Russia and India. At Dexia Asset Management, the word is about innovating and improving quality right through the value chain, in terms of relationships, reporting and research, not just in product development.

At a time when trust has collapsed in the media, the police, in governments and economic policy makers, perhaps it is time for the private bankers and fund houses to grasp the nettle and take some of the sting out of their still raw reputations. This could mean private banks concentrating on wealth preservation, rather than fee generating products. But then again, they might take their advice from another of Mr Wilde’s quotations: “A little sincerity is a dangerous thing, and a great deal of it is absolutely fatal.”

See The Great Debate; Cover Story