Secrecy served Switzerland well for centuries, but now transparency is the basis of its attractive new boutique-banking model, says Freddy Barker
IS IT ANY wonder that new boutique banks are springing up all over Switzerland, like edelweiss in the valleys? After the desperate three years they’ve just had, the big banks are running out of favour and out of assets; UBS has lost billions in wealth-management outflows, and it is in perpetual danger of a vicious US prosecution. Worse than this, the big banks’ model — profit from product, pray for clients — has been laid bare.
With clients frothing at the mouth, the Swiss bankers should have taken drastic action. They should have slashed their fees and changed their models, but they did neither. A PricewaterhouseCoopers report in July 2009 showed that only 13 per cent of firms cut fees. And even fewer changed their models. The rigid nature of the Swiss giants threw up two interesting developments, however.
The first was the advent of wealth consultants — specialists to ensure that, for example, asset managers diversify risk rather than duplicate it. In an age when, as Keynes joked, ‘It is better for reputation to fail conventionally than succeed unconventionally,’ this is unusually helpful. The second and wider-ranging development was the birth of a new generation of boutique models. Born out of the fires of the crunch, the fledgling wealth managers learnt the lessons of the crisis. They understood that excessive regulation and fee transparency were to be the new norm.
At B Capital, a Geneva-based operation offering asset management, trusts, credit, banking and FX trading from a multi-family-office platform, they went back to the drawing board completely. They thought long and hard about how to run a profitable business without falling back on pricey in-house funds, sporadic service and stealth fees. They found the solution to the age-old question of how to marry client needs with shareholder demands in the active management of passive products.
Lorne Baring and his team now invest solely in indices, not in individual securities. This might look strange, as indices move less than their constituents. But academics have proven that it has a limited effect on returns, as asset allocation accounts for virtually 100 per cent of price fluctuations. In other words, your portfolio performance is decided by whether you catch the prevailing wind, not by what type of feather you throw into it.
For over 300 years, the Swiss have made banking secrecy their USP. It started in 1685, when Louis XIV chased the Protestant bankers out of France and into Geneva following the Revocation of the Edict of Nantes. The Catholic king realised, however, that although this move was politically popular, it was economic folly. Thus he continued to use
the exiled bankers, but on the strict proviso of total secrecy, as the builder of Versailles could clearly not be seen to be funded by heretics.
The modern era of Swiss secrecy began in 1934, after a police raid on the Parisian offices of a Swiss bank (in 1932) had revealed that everyone from industrialists to politicians to clergy was stashing cash. The numbered system of accounts was then invented to anonymise the launderers, concealing their figures in figures. With de facto banking secrecy, life continued in Switzerland. The landlocked nation grew fat on the profits of managing other people’s money; so wealthy, in fact, that today it is one of the richest countries in the world by GDP per capita.
THE PRESSURE STARTED in 2009. First, Switzerland’s neighbours joined a US-led attack on UBS. Then they laid down individual precedents. The Italians repatriated £86 billion in a tax amnesty. The French dithered in returning stolen account data. And the Germans bought information from a rogue employee in order to pursue alleged tax evaders.
Together, the developments represented an unprecedented challenge to Swiss banking. As Simon Airey, director of national tax investigations at law firm DLA Piper, says, ‘More has been done to undermine banking secrecy over the past six months than over the last 60 years.’
The pressure for change was supported by HNWs worldwide. Let down by their wealth managers in the credit crunch, they called for fundamental changes to the system; recognising that during the crisis they were sold products, not solutions. There was certainly dishonesty in the system — both the lies of bankers knowingly laundering money and the inherent bias of an industry which promotes products over clients’ interests. The riskiest products for clients were also the highest-earning products for wealth managers.
The unsightly practices might not have mattered to HNWs in the bull market, but they certainly did in the bear. Fees rocketed — and so did anger levels. Clients of the Swiss banks were particularly annoyed at ‘double dipping’, the practice by which the banks charge multiple fees on a single product (for example, a 3 per cent fund entry fee, a 2 per cent annual management fee, a 20 per cent performance fee and a 2 per cent exit fee). But the headline charges were nothing compared to the moral bankruptcy of stealth costs — the hidden fees that banks charge HNWs such as FX kickbacks, research costs, and spreads on trading costs and cash.
Private clients saw the shocking truth of the deception in their quarterly statements. For example, a £10 million account opened in 2000 which grew at the rate of the MSCI World Index and was charged 2.5 per cent per annum would in 2010 be worth a mere 70 per cent of its original value. For that horrendous performance — effectively destroying one’s pension, one’s children’s education and more — the bank would have charged over £2 million.
This is where firms like B Capital fit in. The passive instruments that they use also have a positive effect on portfolio risk. If, for example, the oil price falls, it is less risky to hold the FTSE 100 than BP, because the oil price doesn’t affect the majority of FTSE 100 companies as violently as it does BP. Most importantly, these passive products dramatically reduce fees. ETFs don’t require expensive teams of Oxbridge brainiacs to select stocks. Instead they mirror baskets of goods and trade like single stocks. They are cheap, transparent and liquid — a winning combination post-credit crunch.
‘Operating like a macro-style hedge fund,’ says Baring, the Eton and Sandhurst-educated founder of B Capital, ‘allows us to stay away from two-and-twenty-style fees and be lower cost and more transparent than our peers.’
He continues: ‘I work with clients who want to exercise a lot of control. They want to be able to see and feel what we’re doing.
‘Thus they like the transparency of ETFs in that they can see the contents of their portfolio at the click of a button.’ The success of his model can be judged not only by its theory, but also by the tone with which Baring talks about it. ‘It’s private banker heaven,’ says the man who was once the top revenue-producing private banker at Barclays Wealth.
HNWs considering changing wealth managers will find further advantages in the new generation of Swiss boutiques. Run by top-decile managers — as the standard career path in private banking is to work for a brand-name bank until your forties and then start your own operation — the boutiques allow access to top figures at the big banks and preferable dealing rates, as well as the obvious top-drawer day-to-day money management.
What makes Switzerland the world’s leading asset manager is efficiency and a stable currency. Combine this with strong performance, minimal risk and low fees that are now available from the new boutiques, and who knows — the Swiss may just have found their USP for the next 300 years.
Illustration by Vince Fraser