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Swissness : Swiss private banking’s competitive advantages

September, 11 2013
Swiss-US Tax Deal

The US and Switzerland have signed an agreement to put a stop to the flow of money from the US into the Swiss banks for three years and have just found some common ground. Although it is hard to see just what advantage the Swiss state has got out of the whole affair. Swiss banks will end up being punished if they have aided and abetted wealthy US citizens in their attempts to hide money from the tax authorities.

Under the agreement (not communicated) banks will pay fines of between 20 and 50 per cent of the assets they helped clients hide from the US tax authorities under the agreement. Penalties will increase for accounts opened after 2009, when the bank UBS reached a $780 million prosecution agreement with the US for having assisted tax evaders. The deal will mainly affect around 100 banks that are under suspicion, but not investigation, by the US Department of Justice, several media outlets reported.

It also seems that the US authorities are under the greatest delusion believing that because the Swiss bankers refuse to open bank accounts that the US citizens that wish to place their wealth in other tax havens won’t be doing so. The Swiss banks are just a few amongst many world tax havens. The latter will naturally be opening the doors with welcome arms.

See our blog : FATCA

The only thing that the Swiss will get out of it is that they will be able to write off all disputes with the US regarding taxation that has been voided due to money being placed in their banks. But, the future? The Swiss Finance Minister Eveline Widmer-Schlumpf stated that the reputation of Switzerland’s banking sector and financial services depended on the agreement going through so that people might have confidence in the banking system.

It ultimately will be  a heavy burden for the Swiss institutions in fines, increased administrative costs and jobs. It then will force private banks to change their business models and raise their service levels, and is likely to force consolidation in the industry. Though in my view several Swiss major banks have already adapted their business model by leveraging their competitiveness on security and stability and by refocusing on high growth area like Asia but with a very fierce competition the loss of secrecy might have a negative impact to business.

  • Since the global financial crisis, investors are struggling to model risk and calculate the value of assets. For investors, the new economic landscape is challenging and confusing. Core assumptions that were used to manage wealth in the past, such as what constitutes a risk-free asset, have been turned upside down. Thoughts around financial risk and political risk are being comprehensively re-examined.
  • Amidst uncertainty, risk aversion is running high. Investors are prioritising capital preservation, and private bankers are advising their clients to be overweight in asset classes that are relatively low risk.
The two pillars of Swiss private banking’s competitive advantages

Private banking is defined as providing personalized financial services, especially with respect to managing wealth, to high net worth private individuals.  This success is essentially built on two areas of competitive advantage:

  • With a long tradition, Swiss private banks, offer services that are perceived of high quality by high net worth individuals and thus offer a feeling of trust.
  • Swiss banks were able to attract wealthy clients because of political and regulatory differences between Switzerland and the client’s home country, notably with respect to neutrality and tax handling.
Recent events questioning competitive advantages

Recent events in regulations have started questioning these two competitive advantages. Although service quality is still very high in Swiss private banks, investment performance has been deteriorating, especially with respect to achieving absolute positive return. But this is not a Swiss specific issue. It has nevertheless shown up predominantly because of the importance and size of Switzerland’s private banking market.

But what is more critical is that Switzerland permanently loses its competitive advantage with respect to regulatory differences. Indeed, many countries are no longer willing to accept these differences, especially for their own citizens. The most notable case is certainly the United States suing Swiss private bankers and their employers for helping American citizens to evade tax paying. In addition, new regulatory frameworks like MiFID, FACTA, AML, Basel III, etc. have increased the cost of doing business.

Responsible Finance

We are strong advocate for a full transparency respecting the LAWS and regulations agreed among ALL the partners, BY ALL the partners. It these conditions, because of general legal framework, of ethics and of cultural and education reasons,  Swiss financial institutions will keep their comparative advantage particularly focusing on the emerging economies and offering a premium service focusing on products of quality -precision and luxurious- for a high price which is what Switzerland has always done, especially versus its competitors focusing on short term profits.

Concern about ethical business practices has yet to translate into wholesale demand for ethical portfolio allocations. This a activity where Swiss institutions can definitely imposed a comparative advantage.

Much has been written about the unethical practices that gave rise to the recent financial crisis. Only 26% of HNWIs around the world are currently allocating capital to ethical or sharia-compliant investment classes. But bankers report that demand for these types of investments is rising, albeit from a relatively low base. Some 31% of private bankers expect a double-digit annual percentage increase in ethical investments over the next five years. Meanwhile, 22% expect a double-digit annual percentage increase in social venture capital investments.

Swiss Touch

It is highly unlikely that the existing business model build on the Swiss banking secrecy will prevail in the future. Therefore it is important that private banks adjust their business model. This means they have to answer the question how to differentiate themselves from their international competition.

Although private banking builds on stability and trust, innovative approaches satisfying client needs which are aligned with international regulations must be developed. Implementing regulatory requirements should be turned into competitive advantages. I have addressed one such an approach below.

Successfully servicing wealth management clients requires an in-depth understanding of their needs with respect to return expectations but also with respect to their risk perception. The process of determining the client’s risk tolerance is a key component of successfully advising clients. Best practice in determining the client’s risk tolerance is using a psychometric questionnaire. The risk profiling spider model assesses the client’s risk tolerance along the five dimensions, i) expectation bias, ii) anchoring, iii) loss frequency, iv) loss magnitude, and v) reactivity. The process of risk profiling can be turned into a competitive advantage by advising on solutions that match the client’s risk profiling spider and  to gain trust with the client by showing that the advisor actively manages the client’s understanding of risk.

Despite competition increasing, private banking will remain a quality driven business rather than a price driven one. This is especially true as the foundation of most private banking products and services is trust. Therefore, to excel in quality at a reasonable price, private banks need to focus their business model on client segments and products for which they own the necessary skills (both on the production as well as on the servicing side) and are able to leverage the required investments (taking advantage of economies of scale).

In addition it is important that private banks continue to manage and increase the perceived produce and service quality, expressed by the trust of clients.

Wealth management is about trust and delivering on promises. Successful wealth management products and solutions focus on managing the trust bank accounts of their clients. Forecasting markets and constructing risk optimized portfolios is no longer the only area of innovation. Wealth managers need to focus on all components of the investment management value chain to (re-)gain trust. Innovation is about teamwork putting the client to the forefront and transforming ideas into innovative products in which the client trusts and this is willing to pay an above market fee.

Swiss private banks should take advantage of the edge they have gained throughout the last century with respect to servicing high net worth clients. Standing still, will allow private banks in foreign countries to close the gap. Therefore it is important to invest in quality of products and services through

  • solving clients’ issues and satisfying their needs rather than selling products,
  • hiring bright people that foster innovation and change rather than being afraid of, and
  • increasing efficiency through focusing on specific client segments and business areas and relying on availability and service, typical Swiss qualities.
Lessons learned
  • Discretionary wealth management is about trust. Trust factors can be classified in three categories, that is, reliability, intimacy, and credibility
  • Although forecasting markets and taking risk is a key component of a discretionary mandate, it is not the only area of innovation. Clients demand more.
  • The investment management value chain concept brings structure into the innovation process.
  • Innovation management is teamwork and requires free flow of information. It results in changing the organization in being more customer focused.

The Swiss Parliament approves strikes against their banks !
See Also Bilan (French) Dix idées pour la Suisse