The global financial services industry is facing an extraordinary crisis. Surviving this maelstrom will take more than government support: the industry must recover its raison d’être.
At a recent industry conference, Toronto-Dominion Bank CEO Ed Clark recalled the good old days when the brokerage business was a productive member of society. Brokers helped make the world work by supplying companies with financing, enabling genuine economic growth.
In recent years, however, among other sins, the business has become overly geared toward pure trading. The reason why is not a mystery — trading generates huge profits. Moreover, successful traders are richly rewarded for the risks they take. But if their bets go bad, the losses tend to fall on the firm and its shareholders and, more recently, taxpayers.
Now, the trading days of many firms appear to be over. Clark predicts that governments that have ridden to the rescue of some of the world’s biggest banks will not be willing to allow them to go on as little more than large, risky trading operations.
A group of world leaders met recently in Paris and came to a similar conclusion. As former British prime minister Tony Blair told that conference, to restore confidence in the financial system, the financial services industry must be built on values other than simple speculation in search of short-term profits. Rather, he emphasized, it must be about investing and building.
There is a lesson here for the retail business, too: to ensure sustainability, it must provide service that adds value. There is tremendous social utility to genuine financial advice; the payoff is a more secure, financially independent citizenry.
While the retail space hasn’t strayed nearly as far from its productive purpose as the wholesale side, it does have its share of sins with a similar source. Churning accounts, hawking investments with the heftiest commissions or selling clients overly complex, expensive products when cheaper, simpler alternatives are available, are all forms of the same instinct to put revenue generation ahead of genuine, value-added service.
Amid all the other lessons this crisis teaches, perhaps the most important is that the financial services industry must first salvage its purpose if it hopes to sustain its future.
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