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November 20, 2009updated 05 Jun 2017 11:39am

Sarasin fee model starts to kick in

In April, Bank Sarasin introduced a new fee structure designed to address falling margins in its private banking business The aim is to remove the conflict between portfolio turnover and revenue by charging clients an all-in fee

By Will Cain

In April, Bank Sarasin introduced a new fee structure designed to address falling margins in its private banking business. The aim is to remove the conflict between portfolio turnover and revenue by charging clients an all-in fee. Will Cain looks at the effectiveness of the strategy and gauges the reaction.

Declining margins have been a major issue for private banks this year, with clients preferring cash and vanilla securities to more sophisticated and lucrative products created by private banks.

Margins in Swiss private banks have declined from a pre-financial crisis average of around 120 basis points (bp) to around 90bp, according to industry sources.

“You can’t force clients to go from cash to hedge funds, and you can’t dramatically increase your asset base without hiring more client advisers, so you have one possibility, which is to increase fees for custody, brokerage commissions and advisory mandates,” said an industry commentator who did not want to be named.

Upping fees is a difficult decision to implement at a time when client investment portfolios are down, but one which Bank Sarasin took in spring.

The pricing strategy, according to Eric Sarasin, head of private banking at Bank Sarasin, who oversaw the project, was to price its services more uniformly across the business. It is part of a company-wide aim to increase the business’s gross margin to 90bp, from the current level of 84.3 percent.

“Where we were coming from with this was that in the past, through our growth and internationalisation, our fees were not well structured for clients,” Sarasin told Private Banker International.

“We introduced a new fee structure in order to make it more simple and transparent. By doing this we become more expensive for some of our clients, but this is justified by our performance and quality of service. For others, fees were reduced, for example charges on cash were skipped.

“Given the high liquidity holdings of clients in the current situation this has a visible impact on our margin.”

Sarasin said there had been a legacy system of rebates and discounts in place which meant some clients were being charged cheaper fees across different departments.

“If you have a $10 million client and they are paying 0.5 percent for a discretionary balanced mandate, we have to ask ourselves whether that client is profitable to us,” he added. “For top performance and our track record in asset management you do have to pay a price, and that comes back to the bottom line. If you discount too much, the bottom line doesn’t work out.”

“We think it is easier, more fair and transparent to offer an all-in fee. We have had some positive feedback and a few marginal complaints, but most appreciate the transparency. There are no hidden costs, and clients like that.”

Industry experts say it is hard to gauge the impact of the changes in the interim results recently produced by the bank. Performance in the private banking division was weaker than anticipated, mainly because of increased hiring at the unit.

PBI understands from an analyst, who did not want to be named, the new structure will deliver an improvement of between 10 and 15 percent in gross revenue to the private bank, but the effects may have been diluted by a recent reorganisation of Sarasin’s reporting segments.

The impacts are more likely to be seen when it declares full year annual results in March.

“If you look at the difference on a cost-income basis, there has not been a huge change so far,” said Sarasin.

“If you look at the first four or five months of the year, we had no turnover in the portfolios and the advisory side, which was dramatic and I have never seen that before. So by mid-year, the result in private banking was very weak, which impacted the cost-income ratio of the Sarasin Group as a whole. We have also been hiring quite quickly which has been driving up costs.

“That combination meant that it [the new pricing mechanism] did not show up so much. The second half is looking better and people are coming back into the market and are more active in their portfolios, so we should see an improvement in the cost-income ratio in the second half.”

Sarasin said he hoped the strategy would shift more of its clients on advisory mandates into discretionary portfolios with all-in fees. This is seen as more desirable for clients because it disconnects portfolio turnover from revenue, reducing a conflict of interest. Clients on the advisory side tended to have long periods of inactivity in their portfolios when market conditions were uncertain, as seen in the first six months of the year.

Managed mandates are seen as a way of steadying the income of the bank. The fees range between 0.5 percent and 1.6 percent annually, depending on size of assets and investment style. Sarasin said he was optimistic the new clients the bank has gained recently could be persuaded to take that option as they become more familiar with its advisers and culture.

“We have new clients that joined on the advisory side rather than just giving us a mandate, and that’s because they want to get to know us first, so this is an ongoing effort,” said Sarasin.

Bank Sarasin, which was named Outstanding Private Bank, Europe, in Private Banker International’s global recent awards ceremony, has proved to be one of the most popular for wealthy clients, registering inflows of 19.2 percent in 2008 across the group, and 10.7 percent in the first half of 2009. These market share gains have been achieved in part by the aggressive hiring of relationship managers, which has increased costs, furthering the need for the price restructuring programme.

Speaking to PBI, CEO Joachim Straehle said the bank had increased overall staff at the bank from 1,100 to 1,500 in his two and a half years in charge. Relationship managers had almost doubled from 250 to around 420 currently. In the first half of 2009 personnel costs increased 13 percent to CHF168 million ($165 million). Total operating costs increased to CHF230 million from CHF210 million in the first half of 2008.

This includes costs from the opening of several new private banking locations with representative offices established in central and eastern Europe (Vienna and Warsaw), and private banking branches opened in India (Delhi and Mumbai). It was granted a banking licence in Hong Kong and plans to open a representative office in China are “on the agenda”. A new office was also opened in Switzerland, in Berne, and in Germany, in Nuremberg.

“The aim for Bank Sarasin back in 2006 was to build a client centric, focused private bank with a certain amount of asset management and product expertise,” said Straehle.

“We are solution providers and concentrate our product range to three investment styles. We want to be able to show clients we have a good understanding of asset management in our specialist areas – and those funds or mandates have performed extremely well.”

A key part of this focused offering is around the theme of sustainability, and the bank recently rebranded its tagline to include the concept: ‘Sustainable Swiss private banking since 1841’.

It is a natural niche for the bank, owned by the Dutch co-operative Rabobank, which has a strong food and agricultural focus. Sarasin has CHF2.1 billion invested in its sustainable investment funds, or 17.1 percent of the total CHF12.3 billion in its asset management division. The total assets managed according to sustainable principles (including discretionary mandates) amount to CHF 10.1 billion.

Investments are made on financial, environmental and social criteria, which are established by an in-house research team which provides sustainability ratings on governments which it also shares with governments and supranational organisations.

The other two investment styles it pursues are thematic (funds: CHF4.4 billion), which focuses on ‘mega-trends’ in the global economy, and a quantitative investment style (funds: CHF2 billion) used in emerging markets, commodities or currencies. There is a further CHF3.8 billion invested in other Sarasin funds.

Upping stake in NZB

As well as the pricing strategy, Bank Sarasin has also recently been presented with another strategic decision to make. Its recently announced plan to increase its stake in Neue Zuercher Bank (NZB), a brokerage business Sarasin spun off in 2007, was an effort to calm client worries over the bank but also raised concerns over the bank’s commitment to being a pure-play private bank. NZB is under scrutiny from Swiss and US authorities after a senior banker was forced to step down for allegedly urging wealthy US clients to hide money in Switzerland.

Its CEO was forced to stand down by FINMA, the Swiss regulator, which said NZB, along with Zeurcher Kantonalbank and the Zurich branch of Deutsche Bank breached its duties

Sarasin owned 40 percent of the business, and is conducting due diligence on acquiring a total stake of between 51 percent and 60 percent, giving it majority ownership. Straehle said he remained committed to keeping Sarasin focused on private banking and that brokerage was not a core part of its strategy. The investment was made to secure the future of the business, its clients and Sarasin’s investment in it, he said, rather than out of a strategic push to bring brokerage and private banking activities closer together.

“The brokerage business is a good business but does not belong as part of our strategy focused on private banking,” said CEO Straehle.

“There is no change in this respect, but to protect your investment it would be stupid not to take on the ownership of NZB. Even if you want to sell it later, it’s easier when you have the majority ownership. It also means we’ll have access to the income stream, which is quite healthy.”

Following the announcement, NZB announced it would stop all private banking activities – one of its main business lines outside of brokerage.

Straehle said he was confident Bank Sarasin had no issues to deal with regarding US regulators from his time in charge. But he said it difficult to say with any certainty whether breaches had occurred in the distant past.

“You can’t gauge what happened more than 10 years ago,” he said.

“There are certainly no indications or signs anything did, but from time to time the past comes back and gets you.”

He said Sarasin had operated a small cross-border business from Switzerland to US clients, but the decision was taken to close it down at the start of 2008. The business is now no longer operational. It is also has a London-based asset management company which is SEC registered. It offers tax-compliant services to US persons.

“We have no problems on the Qualified Intermediary regulations, we are compliant, and from the US tax payer side, there’s nothing which could bother us,” Straehle added.

While many have been focusing on the impact of tightened tax regulation on US clients, it is becoming clear that European offshore clients are also under more pressure to disclose undeclared tax positions.

Switzerland has signed the 12 tax agreements it needed to feature on the Organisation for Economic Co-operation and Development list of white-listed jurisdictions. This means the country’s government and its banks are more susceptible to being forced to disclose client tax details when approached by another country, and indicates that Swiss banking secrecy, if not dead, is starting to fade away.

Consultancy KPMG estimates as much as 80 percent of Europeans’ money in Switzerland is undeclared, representing 25 percent of the country’s private banking revenue.

Bank Sarasin spokesman Benedikt Gratzl said those figures were not representative of its own position.

Asked if he had seen a movement of clients and assets out of Switzerland to other jurisdictions, notably Singapore, Eric Sarasin said there had not been a “significant shift”.

“We have a small number of cases where typically the clients are looking for alternatives in terms of diversification or perhaps preferring to have a trust in Singapore,” Sarasin said.

“Our offshore business with European clients in Switzerland is continuing to grow and in fact we had a good month in October in this respect. The clients in Europe appreciate proactive banks. They want them to be proactive in terms of counselling them in terms of their personal financial and investment situations, succession and giving good advice. On top of that, it’s about know-how and excellent performance in portfolio management.

“Even clients that had not declared their assets and are currently making self declarations in their respective countries are often choosing to keep their assets in Switzerland. If you treat them properly, they stay with you.

“We are not seeing assets move back to domestic countries in Europe in a big way.”

Straehle added that the two distinct strategies being employed by the bank in its domestic and international businesses will be pursued further. Emerging markets are seen as an opportunity to benefit from wealth creation, while in Switzerland the bank was concentrating more on gaining market share.

“Emerging markets are clearly booming at the moment,” he said.

“We will wait and see how sustainable that is, but it is where most of the wealth creation is happening currently.”

 

 

 

Eric Sarasin, head of private banking.

Joachim Straehle, CEO of Bank Sarasin

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