Structural shifts imply Swiss focus is overseas

Plans to shake up the ownership structures of two Geneva stalwarts form perhaps the most significant chapter yet in the evolving Swiss wealth management saga.

Following the collapse of the smaller Wegelin private bank, after a tax probe from US authorities, both Pictet and Lombard Odier have decided to reshape their businesses to limit partners’ liability. From the beginning of 2014, both will become corporate partnerships, limited by shares.

Until now, the old-school unlimited liability set-up at Pictet has been the bank’s key selling point to private clients.

“Management takes a longer-term perspective when they both own the business and when their homes and cufflinks are at stake,” says Adam Wethered, founder of private investment office Lord North Street, and former private banking boss at JP Morgan.

The move is a signal Swiss banks can no longer charge for tax secrecy, he says. “Untaxed money could now lead a bank from the gravy train to the graveyard.”

Raising capital

Badly needing a makeover, Switzerland must now compete more directly with other centres in a battle for investment returns rather than tax-planning supremacy. “If anything has signified the death of Swiss private banking, it’s the restructuring of Pictet and Lombard Odier,” confirms Seb Dovey, co-founder of think-tank Scorpio Partnership.

Not only will the new structure protect these banks against external attacks, it will allow them to raise capital, with the possibility of an eventual listing along the lines of Zurich-based competitor Julius Baer, catapulted into the private banking premiership after buying up three independent private banks in 2005 and acquiring Merrill Lynch’s international wealth management business last year. Baer now has 40-plus locations in more than 20 countries, with a growing Asian franchise.

“The listing of Pictet is potentially a very attractive proposition. It is a signal that Switzerland is no longer a big enough market to support a bank like Pictet or Lombard Odier,” believes Mr Dovey.

“This is not a reflection of the inadequacy of a 200-year-old model, but rather of the fact these two players have outgrown their legal form as a result of their remarkable growth in recent decades,” says Shelby du Pasquier, head of the banking practice at Geneva-based lawyers Lenz & Staehelin and understood to be close to the partners of both banks.

The new legal format of a private bank controlled by a corporate partnership has been specifically designed to enable both Pictet and Lombard Odier to boost their international development, he adds.

A statement from Pictet says that “the sense of personal responsability and prudent risk management that has characterised the Pictet Group since foundation” will remain unchanged.

Pictet added more than 100 employees in 2012 and plans to recruit another 100 this year.

While many wealth managers have struggled to understand and accommodate clients’ needs since the crisis, with their clients downgrading from high-fee discretionary portfolios to less involved, ‘advisory’ relationships, Swiss rivals have looked on enviously at Julius Baer.

Under the leadership of Boris Collardi, Baer claims to have strengthened the link between adviser and client. Although Mr Collardi says margins have come under pressure due to last year’s historically low level of client activity, customers demanding discretionary portfolios are coming back.

“Returns are much more difficult to achieve and clients are much more dependent on advice than in a straightforward bull market,” Mr Collardi told PWM, with net new money growth of 6 per cent over the last two years at the “top end of our expectations.”

The latest move from the Swiss private banks could be particularly timely, bearing in mind the trend for more disposals by international groups of non-core businesses outside their home countries, reported by Swiss M&A consultant Ray Soudah.

This could allow Lombard Odier, Picet, Julius Baer, UBP and other independent groups bent on international growth to further deepen their foreign footholds, alongside resurgent domestic players.

But the overall challenge for private banking is a much more basic one, going well beyond secrecy, services and structures, believes Mr Soudah. “The real issue in terms of profitability of private banks and wealth managers is the unjustified high cost of client-facing relationship managers,” he says.

In order to stand a longer-term chance of sustainability, the industry needs to “tone down” its front office costs by up to 30 per cent. Now that really would be a fundamental change.