The future of private banking: the best of the old and new worlds

The future of private banking: the best of the old and new worlds

The Swiss private banking industry is undergoing a process of deep-rooted transformation. Digitisation, rising IT costs and new regulations are calling traditional business models into question and weighing on margins. The client demands are also changing fundamentally. Some banks are giving up in the face of these challenges, while others – such as Maerki Baumann – perceive opportunities and are seizing them.

A conversation with Dr Stephan A. Zwahlen, CEO Maerki Baumann

3,700,000,000,000 francs – or more succinctly: CHF 3,700 billion. Such is the volume of assets of Swiss and foreign private clients managed by Swiss banks. Viewed globally, the wealth management industry in Switzerland holds a leading position. More than a quarter of the private assets managed on a cross-border basis globally are entrusted to Swiss financial institutions – more than any other financial centre. Affluent clients have for centuries been taking advantage of the benefits offered by Switzerland – including its stable political system, predictable institutions, strong currency and high advisory quality. Providers of complementary services such as fiduciaries, attorneys and tax experts who specialise in asset-related services have also flourished alongside the industry.

So is everything rosy? Not quite. With their traditional products and services, Swiss private banks were able to rely on a solid basis for their business up until the beginning of the new millennium. However, a chain of events then occurred that raised serious questions about a business that had previously been taken for granted:

  • The financial crisis undermined confidence in banks and brought a flood of new regulation in its wake.
  • Legal requirements buried beneath acronyms such as MiFID II (“Markets in Financial Instruments Directive”; EU directive on securities trading) and FinSA (“Federal Financial Services Act”; legislation, which contains comprehensive rules of conduct that financial service providers must adhere to in their dealings with clients) have increasingly complicated working processes.
  • Bank client confidentiality was significantly watered down for foreign clients, and the previous veil of secrecy was replaced by new instruments of transparency – namely the Automatic Exchange of Information (AEOI) and FATCA (“Foreign Account Tax Compliance Act”; US law to report all data relevant for tax purposes).
  • New competitors from outside the industry that can act more rapidly, cheaply, and often in a more client- oriented way than established providers are piling into the market.

This has led to upheaval in the industry: the dominant market position of the Swiss private banking industry has come under pressure from all sides. Awareness of the situation has been growing in the boardrooms of financial institutions, along with the uncomfortable realisation that action is urgently required if business is to remain profitable. The most visible expression of this changing environment is the process of consolidation unfolding within the industry. Over the last ten years, the number of institutions active in the private banking business in Switzerland has declined from 160 to 100. Dr Stephan A. Zwahlen, CEO of Maerki Baumann, believes the private client business has reached a historical turning point: “We may have experienced deep-rooted change over the last decade,” he observes, “but the coming decade is likely to prove even more challenging.” Alongside new regulation, he cites digitisation and changing client needs as the key drivers of transformation.

Banking becomes quicker and more direct
Digitisation is exerting a pressure to change that encompasses all services and processes: Banking is becoming quicker, more direct, and more multifaceted – but also more complex and technically sophisticated. While digitisation may have been exerting its influence for many years, the coronavirus crisis has now given it an enormous boost: one-to-one discussions in genteel surroundings on bank premises were replaced during lockdown by interaction via telephone, email, or video conference calls. “The switch to digital channels proved surprisingly hitch-free,” says Stephan Zwahlen, who sees this as confirmation that the bank’s investment in its IT infrastructure over the last few years has paid off. In addition, the level of awareness among both clients and employees in respect of digital processes has rapidly increased, which has in turn made a decisive contribution to their acceptance. Many banks took the opportunity presented by the crisis to make their processes even more digitally oriented. For example, Maerki Baumann teamed up with a partner company to introduce digital identification, launched its own mobile banking app, and drove forward development of a video communication system.

Nevertheless, even if client discussions are increasingly migrating to digital media, algorithms and video chats can never supplant personal exchanges. After all, entrusting one’s money to a third party requires a bond of trust: “For this trust to come about, personal contact between client and client advisor from time to time is essential,” emphasises Stephan Zwahlen. In his view, this applies above all during the getting-to-know-you phase and the build-up of a client relationship. He also perceives one-to-one discussions to be more expedient when addressing sensitive or emotional issues, or when dealing with complex situations or crises. Irrespective of the rise of digitisation, personal contact remains the key to conveying traditional values such as trust and reliability.

For trust to come about, personal contact between client and client advisor from time to time is essential.

Dr Stephan A. Zwahlen, CEO Maerki Baumann

Young clients, new values
Whether it be purchasing a new car or booking a trip – consumers are now accustomed to searching the internet at any time and making competitive comparisons with just a few mouse clicks. In keeping with this development, their demands of financial services have also increased. This is particularly true of the new generation of clients, who are internationally networked, technologically savvy, and independent. They differ from previous generations in terms not just of consumer behaviour but also of their values.

Private banks will have to adapt not only their services but also their language to the needs of younger investors if they want to add them to their client base. A key point is when these potential clients are between 30 and 40, i.e. the time of life when people with a certain asset base often approach a private bank for the first time. Maerki Baumann aspires to look after its clients on a cross-generational basis. For example, the bank offers the children and grandchildren of its clients one-day induction days at the bank in which they can gain not just an insight into the company, but also an idea of the unique nature of upmarket financial services. The acquisition of young clients who do not yet have any relationship with a private bank is particularly challenging, as the offerings of the big retail and universal banks make them an obvious choice for younger client segments in many respects.

Over the last few years, the average age of a Maerki Baumann client has decreased substantially. It has also become clear that the younger generation sets particular goals concerning sustainability in money matters: Against the backdrop of climate debate and greater environmental protection, they want to invest their assets not just profitably, but also ethically. The repercussions of this mindset are very apparent: The volume of assets invested sustainably in Switzerland already amounts to some CHF 1,200 billion – and continues to rise. This topic has been very high on the agenda of the Swiss financial centre for some time now, and not just since the Federal Council formulated the goal of positioning Switzerland as a leading global centre for sustainable financial services.

The volume of assets invested sustainably in Switzerland amounts to some CHF 1,200 billion – and continues to rise.

Maerki Baumann has also responded to the sustainability trend: together with Globalance, a pioneer in the sphere of sustainable asset management, the bank launched its new focus module “Equities Global Impact” in summer 2020, incorporating this sustainability-based theme into its Modular Investment Solution. Thanks to this modular approach, clients of the bank can combine all sorts of different modules in keeping with their wishes and needs, thereby creating their own customised portfolio and asset allocation. In an era of ever-greater individualisation, this solution has set an impressive benchmark, and was even recently copied by a big Swiss bank.

Nachhaltiges Akzentmodul

Investing responsibly and sustainably

A growing number of investors feel that their investments should not just generate a financial return but also make a positive contribution to the environment and society. With our focus module “Equities Global Impact”, which forms part of our innovative Modular Investment Solution, we are meeting the increasing client demand for sustainable investments.

New opportunities with digital assets
The joint venture with Globalance is a good example of the networking strategy that Maerki Baumann has been pursuing for more than ten years now. Back in 2007, Maerki Baumann outsourced all processes with low proprietary value creation and limited differentiation potential to a transaction bank, InCore, which had been specially set up for this purpose. For smaller banks in particular, collaboration with specialists is an essential way of reducing costs and risks, generating growth, and ensuring high quality. “The classic model of a bank doing everything for itself has long become obsolete for the great majority of banks – it’s simply too costly,” points out Stephan Zwahlen. He observes that agile cooperation in so-called value creation networks is simply indispensable if a bank wants to tap into the new technology solutions that harbour such huge innovation potential – and therefore open up new growth opportunities – in the areas of asset management and investment advice.

Whether for reasons of uncertainty or a lack of comprehension, many Swiss private banks give the impression that they are unfazed by the new competition from the technology industry, or so-called fintechs (“financial technology”; this is a collective term for technologically sophisticated financial innovations). This nonchalant attitude could come back to bite them, as the blockchain industry in particular offers not just technological expertise but also a whole new client segment, which means access to alternative sources of income. Switzerland offers first-rate locational parameters for companies of this kind; a “Crypto Valley” echoing California’s legendary “Silicon Valley” has now established itself in and around the Swiss city of Zug. This region is now home to hundreds of start-ups specialising in blockchain/crypto themes, and all of these companies require a banking relationship. Maerki Baumann was one of the very first Swiss banks to offer business accounts in fiat currencies for these companies, and has now become an important point of call for the crypto community.

We are in no doubt that digital assets will be a fixed element of any professional investment advisory and asset management service in the future.

Dr Stephan A. Zwahlen, CEO Maerki Baumann

From these early beginnings, the bank has developed its own multi-stage crypto strategy with the ultimate goal of becoming the preferred partner for financial services in the crypto industry. Since mid-2020, Maerki Baumann has also targeted private and institutional clients looking for alternative sources of income and diversification potential. By offering a reliable trading service and secure custody of digital assets, the bank reached another mile-stone in the development of its private banking offering.

Maerki Baumann is in no doubt that digital assets will be a fixed element of professional investment advice and asset management in the future. Based on this conviction, it augmented its established crypto offering further at the start of 2021: ever since, the investment advisory service provided by the bank has encompassed – if the client so wishes – not just traditional but also digital assets. This makes Maerki Baumann one of the first Swiss private banks to address the growing need for advice in connection with crypto services.

Thanks to this comprehensive crypto offering, clients now benefit from a win-win situation that has arisen from combining the strengths of the traditional and new bank-ing worlds. Interesting synergies between the worlds of private banking and the crypto business can also be exploited; many affluent clients are looking for alternative investment opportunities, while blockchain and crypto companies are in need of capital. What’s more, fintechs – or start-ups that use blockchain technology – offer a perfect framework for the development and rapid implementation of new business ideas. For their part, traditional financial institutions possess the necessary expertise in the area of regulation and the secure custody of assets and data. Thanks to their decades of experience, they enjoy a high level of trust and can offer key advantages when it comes to client acquisition. For Stephan Zwahlen, “the wealth management business also benefits from the competition between ideas that have the potential to further develop services on an ongoing basis.” It is only a question of time until additional joint ventures with fintech companies become a viable proposition for Maerki Baumann.

Digitale Vermögenswerte – alles aus einer Hand

Digital assets – everything from a single source

Maerki Baumann is one of the very first Swiss private banks to offer access to the emerging digital asset class. In this area, we offer trading and custody services, invest-ment advice – all from a single source. We have proven processes and innovative security solutions in place to guarantee that all the relevant legal and regulatory requirements are consistently complied with, even in this relatively new business area.

Client advisor as sparring partner
Digital technologies make an impact not just on business models but also on job profiles in the banking sector. One in every four bank employees in Switzerland works in wealth management, and the great majority of these work on the client advisory side. Competent client advisors form the backbone of any successful bank. In the past, everyday office life consisted mainly of specialist financial themes that would often be tackled by individuals working in isolation. The emphasis now is not just on specialist knowledge, but also increasingly on communication skills and highly team-based work. Client advisors are becoming the “sparring partners” of their clients, and supporting them in personal matters as well as complex financial topics. Ideally, client advisors should develop a feel for their counterparts, gain a nuanced understanding of different lifestyles and phases of life, and bring in the right experts for specific issues.

One in every four bank employees in Switzerland works in wealth management.

As long as they can deploy their empathetic skills, client advisors therefore do not need to fear the emergence of robo-advisors. To put it bluntly, benefit for the client arises when the human client advisor can explain and convey what the robo-advisor is actually recommending. The task of the client advisor is to place events in the right client context: for example, it is not the level of interest rates per se that is relevant, but what this means for the client at the family and retirement planning level. By highlighting solutions for specific themes, client advisors can make themselves the indispensable partners of their clients as the latter design the various phases of their life.

Vertrauen ist das Fundament

Trust is the foundation

We cultivate honest and partnership-based collaboration with our clients. A focus on client needs is firmly enshrined in our corporate culture. Our committed employees consistently apply this. The long-term outlook of the owner family Syz underscores our independence and creates security.

Agility and flexibility matter more than size
Size is not a recipe for success in private banking. Indeed, in today’s dynamic financial environment, the agility and flexibility of small and medium-sized private banks can give these protagonists a decisive competitive advantage: the ability to rapidly adapt to new client needs, adjust business models on an ongoing basis, and tap into the technological innovations of other companies can more than make up for less impressive economies of scale. “To my mind, the modest size of our company gives us a clear competitive advantage,” says Stephan Zwahlen, who also passes on his knowledge in lectures on private banking and wealth management at the University of St. Gallen.

If the Swiss private banking industry can combine its strengths of high advisory and service quality with a focus on new client groups and business areas, its future will be no less rosy than its past. Particularly in a more decentralised financial system, private banks can take over the role of independent, trustworthy advisors. At the same time, they should not close themselves off from innovative technologies and competitors – as these present interesting new business opportunities.

In the spotlight

Stephan A. Zwahlen (born 1978) has been Chief Executive Officer of Maerki Baumann since February 2016. He joined the bank’s Executive Board as Head of Investment Solutions & Services in April 2009. From September 2010 he held the additional role of Deputy Chief Executive Officer before being appointed Chief Executive Officer. Stephan Zwahlen studied Business Administration with a specialisation in banking and finance at the University of St. Gallen, obtained a doctorate from the same institution, and studied at the Richard Ivey School of Business in London, Ontario (Canada).

Dr. Stephan A. Zwahlen, CEO

Important legal information

This publication is intended for information and marketing purposes only, and is not geared to the conclusion of a contract. It only contains the market and investment commentaries of Maerki Baumann & Co. AG and an assessment of selected financial instruments. Consequently, this publication does not constitute investment advice or a specific individual investment recommendation, and is not an offer for the purchase or sale of investment instruments. The future performance of investments cannot be inferred from past price performance. In other words, the value of investments may increase but may also decrease, and the investor may be required to make additional payments for certain products. In certain circumstances, figures may refer to reporting periods of less than five years, which could reduce their validity. Predictions for the future are always non-binding assumptions. Figures presented in foreign currencies are also subject to exchange rate fluctuations, which can affect their performance. The information in this publication is in no way to be understood as an assurance of future performance. Maerki Baumann & Co. AG does not provide legal or tax advice. In addition, Maerki Baumann & Co. AG accepts no liability for losses of any kind, whether direct, indirect or incidental, which may be incurred as a result of using the information contained in this document and/or arising from the risks inherent in the financial markets. Maerki Baumann & Co. AG holds a Swiss banking license issued by the Financial Market Supervisory Authority (FINMA).

Editorial deadline: April 2021