Who Needs a Swiss Bank?

But the formerly sedate and highly secretive world of Swiss banking is in the throes of a crisis, according to Ivan Pictet, a partner at Pictet & Cie., the Geneva private bank that is Switzerland’s third-largest investment manager. Swiss banks face growing challenges to their traditional offshore banking businesses (that is, managing accounts for clients who are not Swiss), forcing them to attempt to expand their onshore, domestic private-banking efforts at home and abroad, in scores of countries, including the United States. The bankers themselves realize that this realignment is perhaps a bit overdue. Pictet, for example, concedes, “We must admit that we have neglected the Americans a little bit.”

Will this transformation make Swiss banks more or less able to serve our needs? The answer lies in the two trends that are roiling the sector: increasing competition and decreasing bank secrecy. Swiss banks were once the only choice for affluent families in many parts of the world. But now, says Jeff Salzman, head of the Credit Suisse Private Client Group in the United States, in many countries, “you can get all the private banking and asset management services you want from local, very large players.” Global institutions such as Citigroup, JP Morgan Chase and Deutsche Bank—even Swiss standard-bearers Credit Suisse and UBS—all have private banking operations tucked into their offices around the world.

Traditional Swiss private bankers sniff at the idea that an institution can provide private banking services on a mass scale. “If you want to set up a gourmet restaurant and serve 500 clients at a time, it just won’t work,” says Juerg Berger, senior vice president at Bank Julius Baer, a 144-year-old bank based in Zurich. But it is clear many of us have found this fare quite palatable. “There was a cachet a generation ago of having a Swiss bank account,” notes Thomas J. Ross, president of Wealth Management Consultants in Morristown, N.J. But now, he says, the very affluent can have special treatment at a host of domestic banks, brokerages and investment management firms.

Names, not Numbers
What none of these domestic firms can offer on par with traditional Swiss banks, however, is secrecy. The legendary numbered Swiss bank accounts allowed deposits to be made anonymously and were widely derided as the tools of lamming Nazi war criminals, third-world despots, spies, money launderers and tax cheats. The Swiss bankers defend their tight-lipped heritage. “Yes, that occasionally serves the needs of gangsters and dictators, but also many hard-working people living in troubled countries,” says one. But whatever the merits of bank secrecy, it is largely a thing of the past. Multinational efforts to curb tax avoidance, money laundering and terrorism have caused Swiss banks to adopt rigorous reporting standards. Swiss regulators abolished anonymous accounts in 1990, and a 1998 law requires Swiss bankers to determine the identity of new clients and the origins of their deposits.

Now, Pictet says, “I think our system has been recognized as a model of transparency for everything that relates to terrorism and money laundering.” Most governments would, in fact, agree, but tax avoidance is still a problem. Deutsche Bank has estimated that 70 percent of the non-Swiss money deposited in Swiss banks has not been declared to the relevant tax authorities. But the authorities are attacking this problem also. Several European countries have introduced tax amnesties to encourage their citizens to repatriate funds stashed in Switzerland. Also, Swiss banks have agreed to begin to impose a withholding tax on interest paid to EU residents starting next year.

Unrivaled Rapport
As secrecy becomes less important as a competitive advantage for Swiss banks (whether they like it or not), Berger acknowledges that these institutions face a new onshore world in which they are going to have to rely on service, investment skills and geography to attract our business.

When it comes to service, “they have a very solid pamper-the-client mentality,” says Russ Alan Prince, co-author of a dozen books on investing for the affluent. Lunch or dinner on the premises of one of the Swiss banks is a top Zagat-level, even Michelin-level experience. UBS has its own luxury hotel in Zurich; Credit Suisse owns an interest in one as well. UBS also has a staff of 18 art specialists in Basle to help clients amass and manage their art collections.

While big commercial banks may cycle staff through private banking between stints in other departments, in Switzerland this field is seen as a career, even a calling. Says Julius Baer’s Berger, who formerly headed international private banking at UBS, “Private banking is not about products or performance; it’s about personality. Private banking the Swiss way is to have a long-standing relationship with mostly one person, who knows your family for 10 or 15 years.”

Performance Issues
But can service offset poor results? While Swiss private banks certainly bring enormous experience to bear on our unique problems, “the little secret has always been that many Swiss banks don’t necessarily deliver top-notch investment performance,” one investment advisor opines. “Many have been overly cautious; they kept people in bonds long after many investors discovered equities.” Critics also claim that those Swiss private banks that are affiliated with big securities firms have been too willing to stuff their private banking clients’ accounts with whatever stocks and bonds they happen to be underwriting, although the banks themselves strongly deny this allegation.

To make themselves more competitive as investment managers, the Swiss banks have shown surprising enthusiasm for open architecture, offering clients access to a wide range of investment managers, whose work is overseen and orchestrated by the bank. For example, these days, Pictet says, “Switzerland is one of the largest centers in the world for the utilization of hedge funds.”

Pictet notes, “Our clients are very demanding; they want access to non-correlated assets.” But, he adds, “We can’t be good at every asset class in every region.” So the banks pick and choose. The firm has developed its own emerging markets team, for example, but it shies away from areas where it lacks the necessary expertise. Pictet admits, “We could never develop private equity here.”

All private banks have their strengths and weaknesses, and those that embrace open architecture are often able to outsource product development as a way to offset their shortcomings. Since this levels the playing field, we may ask: Is Swiss banking on Park Avenue or Rodeo Drive the same as on the shores of Lake Geneva? What is Swiss about a Swiss bank outside Switzerland? Advisors like Thomas Ross and market watchers like Russ Alan Prince agree that Swiss private banks in the United States are not any better—or any worse—than the other varieties of private banks. But, while the differences often come down to personalities rather than services, there are several situations in which a Swiss bank can play a special role.

Shields and Suits
Those of us who bear significant legal risk due to our chosen professions may find a Swiss bank useful. “One place where we end up in active discussion with clients is under the umbrella of asset protection,” Ross says. “Oftentimes someone of great wealth might want—within the laws of any jurisdiction—to have some assets held offshore to protect him or her from exposure to liability here in the U.S. The only time the Swiss banks really come into play for us is when they can act as trustees and investment managers in such an offshore trust.”

Ross insists that he is not recommending income or estate tax dodges. Rather, he explains, “Let’s say you’re a famous surgeon in the U.S., and you have a substantial net worth. It might be prudent to put a portion of that in an offshore trust in the event that there’s a lawsuit.” Those of us who serve on several boards of directors might want a similar arrangement, he adds. “These kinds of trusts require working with very sophisticated legal and financial advisors,” he says, and he claims that the Swiss are far more experienced at it than the bankers and lawyers in Caribbean tax havens.

Another group of prime candidates for Swiss banks are international families. Berger says, “Most of our American clients have strong family links to Europe or Switzerland.” Another Swiss banker elaborates: “The Americans who use Swiss banks should be families with U.S. and European wings. Maybe the husband is American and the wife is French, for example, and both have extended families in their respective home countries, and both families have substantial wealth, perhaps tied up in joint holdings of land or a business. Also, families who spend part of the year in the U.S. and part in Europe, and families with businesses or investments in Europe could benefit.” The internationally minded Swiss are considered more attuned to bi-continental families than the more parochial U.S. bankers.

Beyond these occasional specialties, Salzman admits, it is difficult for Swiss banks to carve out any kind of unique role in the United States. “I would say there is more investment advice here in the U.S. than anywhere else in the world,” he notes. And avoiding taxes or hiding money are looked down upon in the United States, more so than in Europe. “We don’t touch that sort of thing,” he adds.

For those of us seeking private banking services in the United States the task requires sifting and winnowing among legions of banks until we find a private banker we like and an investment approach that suits us. Swiss banks, like Swiss watches, remain the gold standard in their realm. But these days in banking, as in watches, there are may other attractive alternatives. Having a Swiss bank has become a matter of taste and style, not of necessity.

Source: Worth