Petko Bahovski is an independent consultant in Zurich, Switzerland and the author of «How to Choose a Private Bank». He has experience with various private banks as Credit Suisse, JP Morgan and Coutts in both developed and emerging market countries in Asia, Latin America, and Central and Eastern Europe.
moneyland.ch: Who needs a private bank these days?
Petko Bahovski: Most people that have bankable assets of more than a million Swiss francs generally need a private bank. The main reason is not that they necessarily need an advisor to help them with their investment portfolio, but that they need help with their overall wealth, tax and succession planning.
A good private banker would usually help their clients optimize their overall finances. They would look at the clients’ big picture and take into account not only their liquid but also illiquid assets like real estate, ownership in different businesses, collectibles, liabilities like mortgages, loans, pending legal claims as well as the clients’ current and future income and expenditures.
What are the most important criteria to choose the right private bank?
This is very individual. You are the one to decide how important the factors like service, client segmentation, location, brand name, information technology or transparent fee structure are. A more sophisticated investor would also be very picky when it comes to investment specialists, investment funds and active trading possibilities.
When it comes to client segmentation, some banks may have a dedicated client desk for entrepreneurs, others for retired people, sports professionals or Russian speakers. You have to find the segment that best matches your personal needs.
The very rich may expect that at least one of their private banks has a strong global platform providing special services like aircraft or yacht financing, private equity or investment banking. The bank could help them with an initial public offering or help them hedge their portfolio.
How important is the brand name of a private bank?
The brand name may be very important when choosing the first private bank. When foreigners come to Switzerland to open their first Swiss bank account, they would usually go to one of the top three names. However when they open a second bank account, the brand name often plays a lesser role.
Others like to be identified with a strong brand name as a symbol of status. For example, they like to be invited and seen on exclusive bank sponsored events or to use a prestigious credit card.
However, overreliance on the bank’s brand can give you a false hope in terms of what you are likely to receive in return. You may be banking with one of the top brands in the industry, but if you are served by an inexperienced banker who has sold you products that are poorly managed, the brand name won’t help you much. You may end up paying a heavy price.
What qualities should the right private banker have?
Your private banker should be trustworthy, understand your individual needs, look after your interests and be there for you both in good and bad times. Your private banker should be competent, skilled, quick in responding, experienced and a source of valuable recommendations.
Your private banker should be crafting solutions for you rather than selling you products. An experienced private banker will not only understand your current needs, but also what your needs may be in the future, and how those may change depending on the development of your personal and financial circumstances.
It is important that you have a good relationship with your banker, and that you both feel comfortable building a relationship. If, for whatever reason, there is mistrust, a tense relationship or just a lack of chemistry, you should ask to have your private banker changed.
How expensive is private banking, what are the most important fees?
The average revenue that banks generate of client assets is approximately 90 basis points, that is 0.9 percent per year. In other words, you have to pay 9,000 Swiss francs per year for every million held with the bank. You should invest time in understanding the fee structure.
There are many different types of fees. The highest fees are usually for advisory and discretionary management services as well as for investments in managed funds like investment funds, hedge funds or private equity funds.
Some banks are shifting now to flat fee models. The bank may charge you a flat fee of one percent per year on your total assets for example. This fee covers all transaction and custody costs as well as the individual advisory service that you get. However, there may still be some hidden fees that you may end up paying one way or another.
No matter how knowledgeable you are: reading through hundreds of pages of bank documents and disclaimers and trying to figure out what all your fees are can be very challenging, and some of the fees can still remain hidden.
Your trusted private banker should be able to explain all the fees that are applicable to you. At the end of the day, you should ask yourself the question: do I understand how the bank makes the 0.9 percent on my assets?
Passive investing methods via ETF are less costly and perform better than active portfolio managers. Also, automated and passive online wealth management services are now available for everyone – why should I hire a private banker any longer?
This is a very good point. If you are a sophisticated financial market professional and follow financial markets closely, you can save on the fees by investing in ETFs or using the services of online brokers directly.
As discussed before, the true added value of your private banker is when he or she is able to help you with your overall financial planning.
Also, it is very difficult for non-financial professionals to pick up the right moment to time the market, that is to buy and sell a certain stock or fund at the right moment.
If you are a bit late or early in timing the market, it may be worth to pay the bank one or two percent, rather than loose five to ten percent by either selling too early or too late.
The private banking industry is changing rapidly at the moment – what are the major new trends in the industry and why?
What drives those changes at the moment are the regulators and the clients. On the one hand, the regulators are trying to protect individual clients by introducing more product and fee transparency, while making sure that only appropriate products are sold to clients.
Let’s be realistic: A highly leveraged structured product on Asian equities with an embedded risk of US financial institutions may not be the most appropriate diversification product for a Swiss farmer or a 82 year old widow.
On the other hand, after the 2008 financial crisis, clients are becoming much more involved in the management of their portfolios. They are becoming more active, more financially educated and more demanding. They want to see transparency and results.
Clients no longer see the role of their private banker as just a point of contact who gives them their bank balance, but as a trusted advisor who understands their constantly changing needs. The right private banker can help them with their business, overall financial planning, family matters or retirement and succession planning.
What have Swiss private banks to offer after the redefinition of the Swiss bank secrecy? Are they still better than «the rest»?
The Swiss bank secrecy has been gone for a while now. We may see some outflow of funds of American and West European clients. However, those outflows will be offset by inflows from the Middle East, Russia and other CIS countries. Wealthy individuals from politically or economically unstable regions will keep on bringing part of their wealth to Switzerland.
Swiss banks will continue to benefit from the political and economic stability of the country. Foreigners will continue to want to buy real estate here, set up their companies, send their kids to boarding schools or have their prime residence here.
How do you see the future of private banking in five to ten years time – in Switzerland and worldwide?
McKinsey’s «Global Private Banking and Wealth Management Survey 2013» projects that by 2016, 16 million millionaires will control about 80 trillion dollars in personal financial assets – 30 percent above 2013 levels and nearly double the post–crisis trough.
Millionaire wealth in emerging markets is expected to grow at about 13 percent annually, but only about 4.5 percent in developed markets. This accelerates the shift in private banking growth from developed to emerging markets. Banks in Switzerland are hiring market professionals that understand the cultural background of these emerging markets clients, speak their languages and understand their needs.
Private banking is an attractive growth industry, with return on equity higher than any other financial services division. This is why banks want to be in the wealth management business and to compete with each other for market share. They will continue to search for more innovative ways to serve the constantly growing number of wealthy private banking clients.
However, the biggest changes may come from external competitors entering the wealth management space, such as Facebook, Google or Apple.
May 22, 2014