Future of private bankers under the microscope

Wegelin was Switzerland's oldest private banker - before being dismantled by the US legal system Keystone

With the demise of Wegelin and planned ownership changes at Pictet and Lombard Odier, the number of traditional, family-run private bankers in Switzerland is shrinking from a Second World War rate of around 60 to just nine.

The world of private banking faces an evolving landscape. The rate of new wealth creation in emerging economies eclipses that of Europe, volatile markets offer less returns and the global crusade against tax evasion has eroded banking secrecy.

Many observers fear that the rarified atmosphere of the small, discreet family boutique in Switzerland has become too noxious for the breed to survive.

There are no ostentatious displays of wealth at Switzerland oldest private bankers, Rahn & Bodmer. Clients do not wade through plush carpets under the gaze of gilded oil portraits when they enter the Zurich premises.

Instead, the bank exudes an aura of calm, understated efficiency that conceals the drama and volatility of the 263 years of history that the family firm – and generations of its clients – has lived through.

Safety first approach

One of the bank’s most successful calling cards is that its five partners accept unlimited personal liability for losses. This is a condition for earning the title of “private banker” (as opposed to private bank) in Switzerland – a distinction so valuable that the term was copyrighted by the Swiss Private Bankers Association (SPBA) in 1997.

“Clients appreciate that the partners will take the upmost care to ensure that the business model can bring no possible harm to the bank,” Christian Rahn told swissinfo.ch. “This leads to a more risk adverse, conservative strategy than other banks.”

Until last year, Rahn & Bodmer was Switzerland’s second oldest private banker. That all changed when the previous record holder, Wegelin, fell victim to modern times – savaged into oblivion by United States lawyers for helping clients evade taxes.

While the rump of Wegelin will still exist until the legal process has been completed, the once proud St Gallen business – founded in 1741 – has ceased to function as a bank.

The fate of Wegelin’s partners – who could lose their shirts in US fines – might have prompted two other Swiss private banking heavyweights – Pictet and Lombard Odier – to turn their backs on the unlimited liability private banker model, according to many observers.

Private banking in Switzerland

There are broadly three categories of private banking activities in Switzerland.

The unlimited liability partnership model – or “private bankers” – currently number 11, but this number is expected to fall by two when Pictet and Lombard Odier complete their ownership model.

Credit Suisse and particularly UBS jostle with other international heavyweight universal banks for a slice of the mass market wealth management business all over the world.

For these players, wealth management is a significant component in a business model that also encompasses investment banking and asset management.

UBS for many years enjoyed the status of the world’s largest wealth management operation until it was challenged by Bank of America/Merrill Lynch since the financial crisis and accompanying tax evasion crackdowns.

Sandwiched in between are a raft of share issuing banks – the larger of which are Julius Bär, Vontobel and Sarasin.

Some smaller niche players have also recently entered the fray, including sustainable private bank Globalance (started by Sustainable Asset Management SAM founder Reto Ringger).

According to the latest official data from the Swiss National bank and the Swiss Bankers Association, some SFr5.3 trillion ($5.8 trillion) in assets of the world’s wealthy was deposited in Switzerland at the end of 2011.

Change of style

The two banks recently announced their intention to change their ownership structure into that of a share-based company, with limited liability for losses – in keeping with the majority of private banks. Both have strenuously denied running scared of the Wegelin experience, saying their current size prohibits partners from financing future growth, particularly in multiple jurisdictions.

“They can deny it all they like, but I am convinced that Wegelin played a part in their decisions,” Martin Schilling, a banking expert at PricewaterhouseCoopers (PwC) Switzerland told swissinfo.ch.

For whatever motive, Pictet and Lombard Odier plan to join the likes of Julius Bär and Vontobel in ditching the family-owned model for a more modern share-based structure. Landolt and Hottinger banks also opted for this approach in the last two years.

While both banks will issue shares, the families will retain the majority, placing them between the few remaining boutiques and the universal banks – UBS and Credit Suisse – that have huge international wealth management operations.

Size matters

Size will be crucial for future success, according to a recent PwC study of Switzerland’s private banking environment.

A small domestic market, reduced access to European and US wealth in the new tax environment, shrinking revenues in poorly performing financial markets and increasing costs to meet new regulatory requirements have been cited as reasons for this conclusion.

The PwC study echoed another released by KPMG and the University of St Gallen which revealed smaller players to be the worst sufferers under the changing circumstances.

“Lots of players think they can exist in future if they bring down their cost bases, by outsourcing IT and back office services,” Schilling told swissinfo.ch. “But I cannot see how they can decrease their cost base sufficiently with this strategy.”

“Concentrating solely on the cost side just will not work. Banks have to expand on the revenue side and small players do not have the financial power to expand their presence in new markets.”

Small is beautiful

The University of St Gallen/KMPG report states that the number of private banks in Switzerland shrank by 169 in 2008 to 148 last year. Further consolidation is expected as small banks either fold or are taken over.

But Christian Rahn dismissed the notion that small banks are running on borrowed time. “There is no extra pressure whatsoever based on size,” he told swissinfo.ch. “Big and medium-sized banks face the same increased costs as small banks.”

While longevity is no guarantee of success, Rahn & Bodmer’s experience comes with certain advantages, he added.

“We have faced more difficult times in the last 263 years that we are facing at the moment,” he said. “The current problems pale into comparison with the Second World War.”