How time flies. The financial world is closing in on the first anniversary of the traumatic autumn of 2008, when Lehman Brothers went bust and when a host of banks and other financial firms were bailed out with huge sums of taxpayers’ money.

Banks that own wealth management operations, such as Royal Bank of Scotland and Commerzbank, received public aid. UBS, the Swiss wealth management giant, saw clients pull out billions of dollars in funds. And the wealth management world was rocked by the $65 billion Ponzi scheme fraud of Bernard Madoff, who this year was jailed for 150 years. His crimes, and the complaints from investors about losses to portfolios for various reasons, have triggered a flurry of lawsuits.

WealthBriefing has spoken to a number of figures in the industry to ask what lessons they hope have been learned in the last 12 months and what still needs to be done so that the wealth management industry is better placed to avoid future crises. Here are their responses:

Ausaf Abbas, managing director and head of sales & marketing for private wealth management, EMEA, at Morgan Stanley.

"One thing the crisis has reiterated is the importance of maintaining a regular dialogue with clients and keeping lines of communication open at all times. The time clients most need to hear from their advisors is when the going is really tough – reassurance and calm strategic advice are powerful commodities in such times. Those advisors who kept the dialogue going will have built trust and ultimately have strengthened relationships with their clients." 

Chris Godding, managing director and chief investment officer for private wealth management, EMEA, Morgan Stanley.

"The experience in 2008 has damaged the trust between advisor and client in our industry. Advisors based their views on traditional asset diversification frameworks which essentially failed during the crisis.”

“It was not a case of poor industry practice or negligence, it was simply the fact that the industry had become comfortable with the security blanket of the investment theory and normal distributions rather than the chaos of the real world,” he continued.

“Private clients on the other hand are, on the whole, more pragmatic and understandably frustrated by their advisors during the crisis. Asset allocation models are an essential tool for the private wealth industry. The alternative of unstructured and random advice would be a regressive step,” Mr Godding said.

“The challenge now is to learn from what happened in 2008, to invest the vast intellectual knowledge available to us to advancing the portfolio construction process and to build a better mousetrap. There are many examples in history where exceptional events were a catalyst for a major improvement and there is no reason for this to be anything but an opportunity for the industry to advance and rebuild the trust," Mr Godding added.

David Scott, founder of Vestra Wealth, the UK-based wealth management firm that was set up in the summer of 2008.

“The lesson that should be learned (and I'm not sure that it has) is that the clients want to have more transparency and clarity about underlying investments. I think that there is a  move back towards straightforward asset class investing and a move away from complex products that appear to offer solutions to all problems,” he said.

Tim Gibson-Tullberg, who runs the eponymous executive search company, Gibson Tullberg.

“The underlying issue is private banks of scale have been very ill prepared for any unexpected circumstances.  The management expertise that is in place for a protracted bull run rarely has the skills required in volatile bear markets.

“Institutions have been slow to ‘audit’ their own skill base and even slower to implement changes.  Only now do we see reorganisation reaching relevant levels and as year-end approaches banks will take stock of what their management has or hasn’t achieved. 

“It is important to note there are two halves to the situation, managing the negative impact of the credit crunch and also managing positively to take advantage of opportunities that arise. Needless to say, it is emerging that some banks have been able to run their decision action cycles quicker and more effectively than others.”

Ronnie Fox, the principal of London-based law firm focusing on employment issues in wealth management.

“The industry hasn't really learned the lesson about 'the past being no guide to future performance'. Most advisors still had their clients far too heavily invested when things went wrong,” he said.

“You must study detail and small print.  Many client advisors clearly mis-sold products to clients, carefully glossing over all the risks,” Mr Fox said.

“Also, client advisors don't focus enough on long term care and relationships, too busy giving in to management's short term sales targets for individual products,” he continued.

“The City has to be creative in this financial year in relation to contractual bonuses. Last year's contractual payout has upset shareholders, the government and the public. It is now accepted that cash payments should be deferred, possibly subject to claw-back and that when practicable bonuses should be partly in the form of shares - as recommended by the FSA,” Mr Fox said.

He added: “However, the problems in the financial services sector were not caused by bonuses. That is a myth put about by the government in a cynical attempt to divert attention from their own failure to maintain a stable financial system coupled with low levels of understanding how the City works.”

Marc Hendriks, chief investment officer, Sand Aire, the UK-based multi-family office.

His lessons:

1        Don’t trust anybody

2.       Ensure your client understands what you will do for them – don’t deliver surprises

3.       Proper due diligence of third party managers and financial instruments and insist on transparency

4.       Buy and hold doesn’t preserve wealth – a proper asset allocation framework is needed

5.       Beta is more important than alpha, but most managers spend more time on researching alpha

6.       Never ignore liquidity in a portfolio

Robert Ellis, principal, wealth management, Novarica, a consultancy in the US.

“There are no new lessons to be learned from the recent financial market debacles; however, a lot of the old tried and true rules of investing have again been proven to be, well, still tried and true."

“The rules of risk and return have not been repealed. If Bernie [Madoff] promises you an above market return with little or no risk, even the most gullible investor should have taken a step backwards. The fact that the returns rolled in no matter what the market was doing should have been yet another red flag,” he said.

“The same is true about auction rate securities, mortgage-backed securities and credit default swaps. There is a reason they pay a substantial above-market premium when compared to other investments. This anomaly is pointed out by investment bankers during the sales pitch as a 'riskless arbitrage opportunity’,” he said.

“Who’s holding your assets, and how are they valuing them? I was asked to review Madoff statements by the NY Times who was doing an article on Bernie. I took a client statement and looked at just the purchase and sale trades and the trading ranges for those dates. Half the purchases and sales fell outside the range. Did no one think to look? Or did they just trust Bernie? Or were they so relieved to be in the programme, they didn’t want to rock the boat? Or did they know, and were just hoping to get their money out before the music stopped?”

“Who was the custodian on the accounts? Bernie. Why did no one think to ask where the assets were actually being held? If you don’t have a name-brand custodian on your assets, you are in trouble; you may just not know it yet,” said Mr Ellis.

“When I reviewed Bernie’s statements for the NY Times, the first thing that hit me was they looked like nonsense – nothing like any professional statements that an investor receives from a legitimate firm. I finally figured it out; they were printed on a chain printer, a peripheral not used by mainframes in over 15 years. Statements are a point of differentiation for a firm; however, I have never heard any clamoring for 'throw back statements' from 1972 among my clients,” he said.

“Heads I win, tails you lose” is never a great compensation model. Remember the scene when Claude Raines collects his winnings in Casablanca? How he is “shocked, simply shocked” about the gambling as he is handed his winnings? That was our elected representatives’ opinion of compensation after they had received their cut in the form of campaign contributions.

“Everyone is too big to fail if you have a large-enough PAC [political action committee]. Politicians are, well, political. In the US, it is illegal to bribe politicians unless you give them campaign donations that they can keep after they retire. Feed the golden goose with tax-payer money. It will recycle back into campaign contributions,” Mr Ellis said.

“If you don’t know who the sucker is at the table, it’s you.” This old poker adage became clear yet again when Lehman Brothers was busy selling mortgage backed securities to small cities in Norway. Obviously, Norwegian mayors should have asked themselves why they were being offered this opportunity. The honest answer would be that all the cities in North America and the rest of Europe had already swallowed as much of the toxic stuff as they could. Investments like these are the result of a financial game of musical chairs; you want to trade in and out quickly, and not be holding any when the music stops,” Mr Ellis added.

Jonathan Bell, chief investment officer, Stanhope Capital, multi-family office.

“True diversification works. Investors that held a portfolio including cash, government bonds and gold found that these asset classes held up well during the crises,” he said.

Diversification between higher risk asset classes such as equities, property, private equity, high yield bonds offers limited diversification benefits during crises. Tactical allocation can make a big difference to portfolio performance, however many investors benefit little from tactical moves as they end up selling too late as markets fall and reinvesting too slowly as markets recover,” Mr Bell continued.

“Automatic rebalancing can be dangerous if undertaken too regularly. Some investors aim to automatically rebalance their portfolios to keep their exposure to asset classes at a set level. If clients adopted this approach monthly from the summer of 08 to March 09 they would have achieved a far worse fall in their portfolios than those that left their initial weightings untouched. Equally once the rally started in March they would have kept reducing exposure during the rally of the last few months,” he said.

“It can make sense to sell after a fall in markets as investors risk tolerance falls as markets fall.  For most people a small fall in the value of their investments will have no impact on their standard of living. As the value of an investor’s portfolio falls beyond a certain point the decline starts to have a real potential impact on the investors standard of living. In order to try and protect against a fall in living standards most investors will become naturally more conservative and it can be this rather than a view on markets that can lead to investors selling at the bottom,” Mr Bell said.

“Investors’ appetite for risk can return very quickly after a marker recovery. Even though we are only a few months away from the bottom of the crises, following the almost 50 per cent-plus increase in markets numerous investors now are prepared to increase their equity exposure once more.”

Mr Bell added: “Dollar cost averaging works. Investors who add a small amount to their portfolios every month over many years benefit from buying more shares at the lower market levels and less when markets are higher.”