Beset by unrelenting regulatory assault and the global drive against tax evasion, Swiss private banking is undergoing a paradigm shift on a scale which is still not fully appreciated and not all players have understood the extent of the implications, according to Veit de Maddelena, CEO of Rothschild Wealth Management & Trust in Zurich.
Those clients who have still not regularised their tax affairs are in a difficult position from which it will be hard to extricate themselves, he tells PBI in an interview.
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Globalisation has undermined privacy and, with data management techniques becoming so sophisticated, privacy is difficult to maintain, de Maddelena observes. The ongoing digitalisation of the world has made it possible to store data on small portable devices and the industry as a whole faces a huge challenge with regards how to protect privacy, despite significant IT investment on this issue by firms. In turn, wealth clients are becoming more sophisticated as regards their domicile and won’t necessarily still rely on traditional Swiss private banking as the pressure on the Swiss offshore market builds, de Maddelena contends, giving a rare public interview. That means "a premium is being placed on investment management expertise."
Among other game-changers is the fact that many wealthy families and individuals are shifting their domicile, a reflection of tougher tax regimes, as well as the increasingly international nature of rich dynasties, with members in a range of different countries.
"Massive" contraction
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By GlobalDataHe forecasts that a number of these megarich will take advantage of "territorial" tax systems available in Hong Kong and Singapore, which are very much like London’s well-known non-dom regime, where investors applying this status only pay tax on money brought in or generated locally – not on assets held abroad.
Alternatively, they will use the personal tax-free jurisdictions offered by Dubai and Monaco or the preferential tax arrangements available to foreigners in Switzerland.
Among such "profound structural changes" for Swiss – and global private banking – de Maddelena expects to see the number of Swiss banks (foreign and home-grown) contract significantly. A consolidation also driven by increased overheads, particularly in "massive" compliance costs.
In Switzerland, this is already been seen in dwindling numbers of foreign banks operating private banking units locally.
The number of foreign-owned Swiss banks fell to 129 by the end of May from 145 at the start of 2012, according to the Association of Foreign Banks in Switzerland. Assets under management slid by a quarter to CHF870.7bn ($900bn) in the five years to 2012 as clients withdrew money or paid taxes on undeclared accounts.
The latest withdrawal is by Lloyds Banking Group, which has agreed to sell its international private banking operations to Union Bancaire Privee. The deal will give the Swiss bank £7.2bn ($10.8bn) in assets and 500 staff in branches in Geneva, Zurich, Monaco and Gibraltar.
The bigger Swiss institutions will survive but will have to accept that net margins will look different, de Maddelena says. The profitability which private banking experienced back in 2007, before the financial crisis, "will not come back due to regulation as well as developments like MiFiD, which is bringing a welcome transparency to private banking".
De Maddelena joined Rothschild in 2006 after previously working for Credit Suisse, and quickly started to build, in his words, "a business which would be sustainable for the future."
Not a taxing issue
Since his arrival, Rothschild has continued to invest heavily into the onshore businesses including building up a Swiss onshore business, which it didn’t previously have, as well as moving into Germany. It also repositioned the UK business.
"I felt that Swiss banking really had to get serious about handling the past. At our bank, we sent out a research note to our clients, informing them of the significance of the OECD tax transparency move, and basically declaring that this was irreversible as regards tax issues."
Another key development was the launch of tax initiatives by Italy, France and Germany which gave clients the ability to "regularise" their past tax affairs, he says. The bank encouraged and helped clients to use these "tax forgiveness" programmes.
The Rothschild onshore strategy centres on jurisdiction where the Rothschild brand is recognised and well-known – primarily the UK, Germany, Switzerland and France. In those countries, Rothschild has "good inflows" from clients.
Despite the shocks to Swiss private banking and barring clients who do not maintain bona fide onshore tax status, Rothschild Wealth Management has built up assets under management to EUR15.5bn at the end of 2012, up from EUR13.2bn in 2011. It is investing in the business, having recently implemented a new IT platform and a number of key hires.
As a business, it posted growth across the board last year, in people, new money and overall assets.
Apart from Europe, Rothschild has been building its international business, particularly in Asia.
"We find Asian clients from Hong Kong, Singapore, Malaysia and elsewhere often have a "nest egg" strategy and like to put, say 10 percent of their wealth in Europe, for instance London and Switzerland, to diversify investments," the Rothschild Wealth Management & Trust chief says.
Meanwhile, the bank does continue to offer a full international service, via centres like the Channel Islands, Zurich and Geneva, handling the business of prominent European families who are totally tax compliant, for example. One of the strongest cards in the Rothschild suite is portfolio management. As the market changes in Switzerland, the business has been changing the way it thinks about investments.
De Maddelena also set up a flagship investment committee to think more rigorously about portfolio management requirements. This is headed by CIO Dirk Wiedmann, a former Julius Baer g lobal head of research. Steffen Mack, head of portfolio management, is part of the team charged with overhauling the investment approach and techniques.
To create much more cooperation between those who advise on and those who manage the portfolios, the investment team, which was located in a different Zurich building, was moved back into the same building where the client advisers are located. The bank’s portfolios have performed well over 12 months and its track record is termed excellent over five years. However, its euro and Swiss franc denominated multi-asset portfolios in the overall investment management offering have recently been the focus of attention.
While performance has by no means been disastrous -returning around 6% during 2012, in what was a difficult year, as investment performance wasn’t meeting the bank’s own expectations, this triggered corrective action.
Exposure to gold, commodities and the overweighting of emerging markets were trimmed, and equity exposure expanded, at the same time as reducing overall portfolio risk. The firm began to reduce exposure to gold in late March/early April, before the worst of the correction.
De Maddelena says: "As a firm, we are not satisfied with average performance and we work hard on behalf of our clients. If we do not meet our own expectations with regards to performance, we aim to take corrective action quickly."
He concludes, "Most of our clients are entrepreneurs and large families who have worked hard to build their wealth – they are not looking to us to create a second fortune. Rothschild pursues a strategy focused on real wealth preservation."
