Over the past few years, financial services has not just moved through a cycle. It has been reminded of the value, and the cost, of that often hard to identify skillset - judgement.

In more supportive markets, that distinction is not always obvious. Strategies appear to work, decisions feel validated, and even routine decisions can look like serious strategic moves. It is only when conditions tighten that judgement is properly exposed.

Rate rises created that moment. Asset management, private client investment management, venture capital, private equity and real estate lending have all been pressure tested in different ways. While larger banks have, in some cases, navigated the environment more comfortably and benefited from higher rates, even there the emphasis has shifted toward discipline and control.

Markets and human nature are often shaped by fear and greed, confidence and pessimism, which can often overshoot reality. These periods of optimism and pessimism rarely align neatly with underlying markets, and hiring has followed the same pattern. Many firms were not so much wrong in their thinking in the post-COVID boom, but were wrong-footed by the pace of change. Decisions that looked reasonable at the time were made for a set of conditions that rapidly changed and were not expected to persist.

COVID does tell us something about human behaviour though. At the start of COVID, many firms would have liked to reduce fixed costs quickly, particularly office space. Not all were able to move at the pace they would have liked. Yet when conditions quickly stabilised, that caution faded faster than might have been expected. Confidence returned, and many businesses moved decisively in the opposite direction, expanding headcount, increasing salaries and rebuilding cost bases in an environment that felt, for a period, like it would remain accommodating.

That expansion was not always matched by underlying workload. In some cases, it reflected a temporary spike or anticipated revenue growth that did not endure. As markets shifted, firms found themselves with structures built for different conditions. The resulting adjustment has been gradual and, at times, painful, with headcount brought back into line with activity. Inflation and the speed of salary growth have created sustained pressure on cost bases that have proven difficult to carry.

Unfortunately, compensation and hiring decisions made at the peak of a cycle rarely survive contact with a different environment. Exuberance in good markets and excessive caution in difficult ones tend to produce the same outcome, decisions that need to be reversed at cost. In a perfect world, remuneration that is calibrated to a sustainable midpoint across the cycle, rather than to a particular moment within it, tends to serve both firms and individuals better over time. Unfortunately, we do not live in a perfect world.

When to hire, when to cut, when to invest in more office space, and when to launch a new product are all situations where judgement becomes more than a theoretical concept. Decisions around hiring, cost and capital allocation at scale can have enormous consequences for P&L and share prices. Deciding what to reduce, what to protect and where to continue investing is rarely straightforward, particularly when decisions must be made without complete information. Shareholders expect discipline, as they should, though the path to achieving it is not always obvious from the inside.

Those who navigate these periods well tend to have seen something similar before. Experience matters. There is a form of pattern recognition that develops over time, an understanding of when to lean in and when to hold back, that is genuinely difficult to acquire in a sustained strong market.

Alongside the cycle question sits a structural one. Across wealth management, asset management, venture capital and private equity, business models have had to change quickly, and in some cases are still catching up with the market. In venture capital and private equity, teams in the boom were staffed for origination and exits; now portfolio companies need more support with value creation. In wealth management, many firms have had real success with MPS offerings and through acquisition. All of these pivots have meant skillsets internally have had to change at pace. With rates likely to remain higher for longer, hoarding skills for a workload and market that is unlikely to return for the foreseeable future makes little sense when value is being created in different ways. Recognising which skills belong to the old model and which are needed for the new one is a difficult assessment to make.

Much of this change is unfolding within now very lean teams. Efficiency has improved in many areas and headcounts reduced, and the reliance on a smaller number of individuals has increased in parallel. Maintaining clarity of direction in that environment places a premium on consistent, considered leadership at every level.

Regulation is also moving in the same direction. The gradual shift toward outcome-based approaches places greater emphasis on interpretation and contextual judgement rather than process compliance alone. That raises the bar for what good governance requires of senior teams and increases the value of individuals who can apply rules intelligently rather than simply follow them.

Looking ahead, consolidation across financial services is likely to continue. That will introduce further complexity, particularly around integration and the alignment of different operating models and leadership cultures. For experienced professionals with the right background, this will create genuine opportunity. For firms, it reinforces how much depends on having the right leadership capability already in place when the moment arrives.

This all raises a question worth reflecting on. Can judgement be developed more deliberately within organisations, rather than leaving firms dependent on a small number of individuals in whom it happens to reside?

Many firms still rely on a relatively concentrated group of senior leaders for the critical commercial calls. In leaner organisations that creates a specific kind of vulnerability. If responsibility is too narrowly held, the business carries more exposure than it needs to, and often more than it realises until the moment it matters. In larger firms, decisions need to be made within guardrails, but they cannot be concentrated in a small number of people.

Building judgement at the next level down is therefore becoming a more pressing priority. Not replicating senior experience overnight, but giving future leaders genuine exposure to consequential decisions, involving them earlier in trade-offs that would previously have sat at the top of the organisation, and allowing them to see the consequences of those decisions play out over time. In practice, that often means widening the group involved in planning cycles, sharing more context around difficult decisions, and being deliberate about how commercial responsibility is distributed.

Judgement is one of the hardest things to measure directly, though its absence tends to become apparent quickly and at a point when it is costly to address.

In more challenging markets, the cost of poor judgement is easier to see. So is the value of getting it right.

The past few years have been instructive in that respect. The firms and individuals who have come through them well are, in most cases, the ones who understood that judgement is not a fixed quantity that either exists or does not. It is something that can be built, tested and deepened, and the firms that treat it that way tend to be better prepared when conditions change again.