and Britain’s Hoare & Co are winning new business, in part due
to their staunch adherence to the unlimited partnership owner
structure. Clients evidently feel safe in the thought that if they
suffer in financial turmoil, their bank does too.
Wegelin and Hoare both declare that employing unlimited liability
for their partners, an approach which most other banks discarded
long ago, imposes a type of discipline which is impossible with a
modern integrated bank.
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The vast leverage and speculative trading which have devastated the
balance-sheets of a number of their big bank rivals is virtually
impossible if partners carefully monitor each other’s positions and
strategies, it is contended.
It is no surprise that the two are among the private banking
industry’s oldest members: established in 1741, Wegelin is
Switzerland’s oldest private bank while Hoare dates back to 1672
and remains wholly owned by the Hoare family. Its notable clients
over the years include diarist Samuel Pepys and Lord Byron.
As clients flee several big banks perceived as potentially being
destabilising by huge subprime exposures, money has been flooding
into medium-sized and smaller banks, an influx these two have been
enjoying as well.
Hoare has taken in more deposits in the first three months of 2008
than in its first three centuries amid client nervousness sparked
by the global credit crisis.
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By GlobalDataAlexander Hoare, its chief executive says that the Hoare
balance-sheet went up by “hundreds of millions” of pounds in its
financial year to 31 March.
These inflows reflected the “flight to quality” now underway in
financial markets, he says, declaring, “Financial markets play
between fear and greed. In times of fear; people will look for
quality, including strong capital and ethical management.”
The unlimited liability ownership structure which Hoare has adhered
to since its foundation is an important factor, he adds. Hoare has
seven partners, all with unlimited liability. The effect of this is
that the bank sets a very conservative approach, including a 2:1
savings ratio.
“First of all depositors gain some reassurance that the Hoare
family have more to lose than they have. Secondly, they can gain
some confidence in the fact we don’t mess in things we don’t
understand,” he says, in reference to the type of toxic securities
that have triggered billions of dollars of write-downs at banks
like UBS, Citigroup and Merrill Lynch.
This is echoed by Christian Hafner, a Wegelin managing partner and
head of the Swiss bank’s Zurich office.
One fundamental problem remains among large banks balancing the
needs of shareholders, a board of directors and its management– how
to align and manage diverse interests, he contends.
“In a firm where the owners are at the same time the managers, the
conflict of interest is dramatically reduced and the personal
unlimited liability of the owners does the rest,” he says,
referring to the Wegelin type of partnership.
Wegelin has been performing strongly, after increasing client
assets by nearly 25 percent last year to nearly CHF21 billion
($20.2 billion). Other small- to medium-sized Swiss banks also
recorded double-digit growth last year amid what is regarded as a
client backlash after the global credit crisis which embroiled
several big global wealth managing banks.
“You may be surprised but we do not care about market growth rates,
only about the bottom line – for our clients, our employees and
finally our firm,” says Hafner.
Wegelin dates back in its modern form some 20 years ago when Dr
Konrad Hummler, a managing partner, and colleague Dr Otto Bruderer
led a management buyout of the Wegelin family bank, then a tiny
outfit in St Gallen.
It has since grown consistently to rank up there with other
hallmark Swiss names like Mirabaud in terms of client assets.
Hafner, talking to the Swiss Arvetica wealth consultancy service on
Wegelin’s success since the buyout, says, “In hindsight, it was
like kissing a sleeping beauty, as we say in the bank.” All banks
talk about being client-focused but what does that actually mean in
practice?
“Nearly all large financial organisations have product sales
targets for advisors – we don’t,” Hafner says. “I think this is
very important in order to align the interests of the clients with
the employees and the bank.”
As small- and medium-sized banks have benefited from the subprime
crisis as large banks with investment banking activities take
subprime write-downs, will the smaller institution become a
permanently resurgent private banking business model?
Says Hafner: “We should be clear that not all banks, including
those with investment banking operations, have taken hits and
players like Goldman Sachs, with strong risk management, have been
relatively unaffected.” Goldman Sachs also has a strong partnership
culture, he notes.
“None the less, we believe it is better to separate the more
volatile investment banking from low-volatility private banking,”
he adds. Describing the strengths of unlimited liability, Hafner
concludes: “Many clients feel that their money is safer with us as
we feel the pain as much as clients in any financial
downturn.”
Another reason for the success of these two institutions is the way
that they have kept to a size where they remain manageable and can
ensure high levels of client service.
“My job is about keeping the bank small,” declares Alexander Hoare.
“We’re sticking to our knitting and doing what our ancestors have
done for 11 generations.”
