You don't know who is swimming naked until the tide goes out.” The truth of this famous Warren Buffett phrase became painfully clear during and immediately after the financial crisis in 2008. To a large extent, private banking had evolved into a sales industry. To drum up revenue, private bankers were instructed by their managers to sell. Targets and key performance indicators (KPIs) drove the business—not clients.
As long as the markets went up, nobody questioned this and it did not pose a serious issue. Almost every product seemed to perform well, so who cared whether clients were properly advised?
Then the tide went out. Most of the bankers who had sold the products were nowhere to be found and their clients were left behind.
It appeared that many of the loss-making investments in clients' portfolios should never have been recommended in the first place. The public was incensed. The assumed duty of care was sacrificed for the desire to increase revenue. The verdict: Hang those immoral and greedy bankers out to dry.
This might seem somewhat exaggerated but it was, in a nutshell, the post-crisis sentiment. Apart from the fact that the entire financial system seemed on the verge of collapse, public faith in the integrity of the industry dwindled, reaching a historic low.
That triggered regulators from all over the world into corrective action. The credibility of the financial services industry needed to be restored. The banks had created a mess and ...