Top 3 Rothschild Wealth Management Interview Questions

There are few names in finance more storied than that of Rothschild. But like many other storied names that are also familial names there’s been a bit of drama over who can use it. As Bloomberg reported in a fascinating piece a few months ago, the two firms that both still carry the Rothschild name (and have descendants of the original Rothschild family involved in them) are on a bit of a collision course.

Because for decades Edmond de Rothschild Group and the more well-known Rothschild & Co operated in different orbits: with the former focusing on traditional wealth management and private banking services, and the latter on merchant and investment banking.

However, as I’ve written before in relation to Morgan Stanley, traditional investment banks that used to look down on wealth management now see it as a stable source of revenue that comes attached with little risk (since the revenue generated from wealth management divisions is largely fee based and doesn’t require putting the bank’s own capital at risk).

So over the last five years Rothschild & Co has begun to aggressively focus on building out its wealth management business – and, as described in the Bloomberg piece above, this has led to some confusion among existing and potential clients who don’t realize that Edmond de Rothschild and Rothschild & Co are not only completely separate entities, but are now direct competitors.

Rothschild Wealth Management Interview Questions

What heightens the tension between Edmond de Rothschild and Rothschild & Co is that both are focused on the same kinds of wealth management clients: high and ultra-high net worth individuals primarily in EMEA (Europe, Middle East, and Africa).

As a result, wealth management interviews at both firms will be quite similar: focusing on your ability to express ideas clearly, and wanting to hear your thoughts on more European-focused market and economic themes. However, as in all wealth management interviews, there’ll also be questions on markets more broadly as markets are, of course, interconnected and the waves generated out of the US tend to lap onto the shores of Europe.

• There’s been a lot of talk about the ECB and BoE cutting rates soon. When do you think that’ll happen and are cuts warranted?
• What do you think led to the significant pullback in equities that occurred in April? How do you think a classic 60/40 portfolio did in April?
• What do you think have been some of the best asset classes or equity sectors to be in on a risk adjusted basis this year?

There’s been a lot of talk about the ECB and BoE cutting rates soon. When do you think that’ll happen and are cuts warranted?

For the better part of a year everyone has been patiently waiting for central banks to begin their rate cut cycles – but higher than expected inflation and stronger than expected growth in most countries has continued to push back that timeline.

Right now markets anticipate that both the ECB and BoE will begin their cut cycle in June and both Lagarde and Bailey have made comments hinting at this. However, the data is continuing to not cooperate as much as some would hope.

For example, after significant weakness over the last few quarters in the euro area, the euro area economy expanded by a healthy 0.3% QoQ (well above expectations). This raises the question of whether the economy is heating up and if rate cuts by the ECB (even if they’re modest in scope) will pour fuel on the economic growth fire and lead (unintentionally) to inflation resurging. However, most believe that even if the ECB begins cutting rates by 25bps each quarter through the rest of the year that they’re starting from such a high level that monetary policy will remain sufficiently restrictive so as to not restoke inflationary pressures.

In the euro area inflation does look relatively calm at present with HICP for April at 2.67% YoY (consensus 2.6%, last month 2.95% YoY) and headline HICP for April at 2.38% YoY (consensus 2.4%, last 2.43%). These inflation levels are still above where the ECB would like inflation to be, but are low enough and gradually declining enough that the hope is that they’ll settle down to 2-2.5% by the end of the year even if rates are cut to ensure that economic growth is supported.

Turning to the UK, the BoE is meeting this upcoming week, and no one is expecting them to change policy at this meeting. However, we will likely get some hints from the BoE as to how they’re thinking about when rate cuts will start so that markets aren’t caught offsides.

In the UK, inflation has come in slightly above expectations lately (although consumer inflation expectations continue to decline) but the labor market has also cooled significantly (which raises everyone’s alarm bells as a recessionary indicator). To this latter point, the headline unemployment rate in the UK bounced from 3.9% to 4.2% with employment falling by 156,000.

The market seems convinced that the BoE will cut in June (partly so that rates move together with those in the euro area) but there are some that have expressed some level of skepticism over just how much inflation progress the UK has really seen. For example, Huw Pill, the BoE’s Chief Economist, stated last week that there’s still a “reasonable way to go” before he’ll be convinced that inflation will return to the 2% target.

Against all this, UK GDP growth will be released this week, and most are anticipating a slight increase of 0.1% or 0.2% QoQ. Not as strong as in the euro area, but still enough to keep the economy chugging along.

And it’s because of this stronger than expected underlying economic growth that the ECB and BoE should likely be cautious about starting a rate cut cycle too quickly – because to do so could be adding fuel to a fire that these central banks thought they had already smothered.

What do you think led to the significant pullback in equities that occurred in April? How do you think a classic 60/40 portfolio did in April?

The sharp rally in equities that we saw in the US and euro area through the first three months of the year was met with a sharp reversal in April. This is largely because the thesis that propelled the gains in the first three months crashed into reality as the data in April didn’t align with that thesis.

To begin the year, it was anticipated that inflation was well on track toward target and that the Fed, BoE, and ECB could undertake a significant rate cut cycle (between six and seven 25bps cuts in 2024). This optimism about a lower rates environment paired with the expectation that economic growth will remain strong (if not robust) through 2024 led to equities flying higher.

However, each month to start this year both inflation data and broader economic data almost uniformly surprised to the upside. While most brushed off these higher-than-expected data releases in the first few months of the year, when we began to get inflation, GDP growth, and labor market data for March in April it became clear that inflation was no longer coming down as quickly as most anticipated and that economic growth was significantly stronger than expected.

This led the market to begin to reprice the number of rate cuts we’d see and delay when those rate cuts would begin to occur. For the UK and euro area this delay has resulted in markets believing that their first rate cuts will occur in June with two to three to follow by the end of 2024.

Whereas in the US there’s less than two rate cuts priced in for all of 2024 right now, and the first cut could come several months after the ECB and BoE begin their cut cycle (if it comes at all).

So the significant pullback in equities was largely a case of the market recalibrating expectations around rate cuts, with the notable exception being in the UK where the stronger than anticipated growth (relative to expectations) and inflation’s continued decline (from it’s still quite elevated levels) led to significant equity gains.

This is because coming into the month of April the market was still pricing in a bit more of an expectation that the UK could see a significant recession, and the market was thus relieved when the data that came in seemed to signal that a significant recession is unlikely to occur (said differently, the relief over a significant recession looking less likely outweighed the fact that a number of rate cuts were priced out).

Given all this, April wasn’t a good month for a 60/40 portfolio – especially one comprised of US equities and US treasuries – because not only did equities fall, but because the rates market took out the rate cuts that were priced in earlier in the year, yields across the curve rose (and as yields rise, prices fall). So instead of the bond allocation within a 60/40 portfolio buffering the losses within the equities allocation, the bond allocation and equities allocation both suffered losses for the same reason (yields rising). Most of the time when equities fall significantly for a prolonged period bonds will rise in price as their yields fall, but there are exceptions to this rule and the situation we saw in April is one of them.

What do you think have been some of the best asset classes or equity sectors to be in on a risk adjusted basis this year?

In an interview it’ll never be expected that you know the exact returns of a bunch of different asset classes or equity sectors (i.e. energy, consumer staples, utilities, etc.) off hand. The point of this kind of question isn’t for the interviewee to provide the correct answer, rather it’s to show that you understand the difference between absolute and risk-adjusted returns – because one of the primary roles of a wealth manager will be determining how to maximize absolute returns based on the level of risk that is acceptable to the client and that aligns with their long-term aims.

For example, you probably know that bitcoin and oil have both gone up significantly so far this year (the former bouncing back from steep declines last year, the latter going up due to geopolitical risks rising). So, unsurprisingly, of the major asset classes and equity sectors these two have provided the first and third highest absolute returns year-to-date (YTD).

However, on a risk adjusted basis (Sharpe ratio) what we find is that bitcoin provides the sixth highest risk adjusted returns and oil the eighth highest – because both of these have been incredibly volatile, and what can go up quickly can often also go down just as quickly.

By contrast, the consumer staples sector has had just a 7% YTD return but on a risk-adjusted basis that ranks fourth (ahead of both bitcoin and oil!). This is because consumer staples (as the name suggests) is an incredibly stable sector; full of companies that do pretty well regardless of the economic conditions that are prevailing at any one time.

Ultimately, high absolute returns are fine, but the best returns are those that are high on a risk-adjusted basis and that align with the needs of clients and allow them to reach their financial goals (without too much stress along the way).

Conclusion

Rothschild is a name known the world over. However, when it comes to wealth management, there are two distinct entities that utilize the Rothschild name: Edmond de Rothschild and Rothschild & Co. As alluded to in the Bloomberg article above, both now have similar levels of AUM and both prioritize serving roughly the same set of clients (although Edmond de Rothschild has a much longer history of serving clients in a private banking and wealth management context, and Rothschild & Co, as an overall entity, is much larger and is what most people think of when they hear “Rothschild”).

Regardless of which Rothschild you’re applying to or interviewing at, the kinds of questions that will come up will be similar to the usual wealth management interview questions – and, as with Coutts that we discussed last time, because of the storied history of both Rothschild firms it’s important to spend some time familiarizing yourself with each firm’s history, values, and philosophy.