Wealth management is a mainstay of the Swiss financial centre. The professional expertise accumulated in a banking history that goes back more than two centuries, indisputably contributes to the excellent reputation of the Swiss financial centre and its position as the financial centre of choice on an international level. By now, most banks in Switzerland offer wealth management services to their private banking clients.
Wealth management services provided to domestic and foreign clients contribute significantly to the overall Swiss economic performance and account for almost half of the total output generated by banks in Switzerland: CHF 18.2 billion or 3.3% of gross domestic product in 2008.
Definition of wealth management
Generally speaking, wealth management is a financial service with varying degrees of customization and complexity, delivered to private, corporate or institutional clients who own a certain volume of assets or wealth. Private banking categorizes private individuals by the size of their wealth. For instance, private individuals with a large economic or financial potential (commonly referred to as “high net worth individuals” or HNWI) include persons whose disposable assets exceed CHF 1 million, excluding their main residence.
Institutional asset management focuses on the group of investors with professionally managed assets, such as insurance companies, pension funds, investment funds, foundations, banks and securities traders, public companies as well as industrial and other private companies. As the case may be, institutional asset management may also include special services such as cash management for corporate clients.
The management mandate of an investment advisor is different from that of an asset manager. By signing a discretionary asset management mandate, a client authorizes the asset manager (agent) or the bank, to execute all transactions generally pertaining to asset management. An advisor, however, may only give advice to his clients, without actually carrying out any asset management transactions. The client manages his portfolio and decides on his own about the allocation of assets, based on the advice he receives from the investment advisor. In this case again, the deposit bank processes the transactions. The deposit bank’s services include crediting interest, dividends and cashing coupons and capital repayments, processing corporate actions (e.g. capital increases, share splits, renaming) and executing securities and foreign exchange transactions.
For the purposes of this chapter, the agent is defined as a bank, although fiduciary companies, solicitors, independent asset managers or insurance companies may also provide investment advice and other asset management services to clients. According to the Swiss Insurance Association, private insurance companies engaging in life and non-life insurance as well as reinsurance in Switzerland accounted together for capital investments of about CHF 580 billion in 2008. However, a significant portion of these investments are deposited with or managed by intermediary banks. This also applies to independent wealth managers that manage assets on behalf of their clients who in turn have deposited these assets with a bank.
Volume of assets managed in Switzerland
There is no standard definition of the term “assets under management” (AUM). According to the Swiss Financial Market Supervisory Authority (FINMA), assets under management comprise all invested assets held under a discretionary or advisory asset management mandate. Consequently, the following positions are deemed assets under management: securities held in client portfolios, fiduciary deposits, amounts due to clients in savings and investment accounts, as well as other amounts due to clients from time deposits. At the end of 2008, the volume of assets managed by banks in Switzerland amounted to roughly CHF 5,400 billion. This volume recorded at the end of 2008 is allocated to the above positions as follows:
The basis of consolidation of investment portfolios and fiduciary deposits relevant for the statistics spans all banks and their branches in Switzerland, excluding their branches abroad, thus relating strictly to the Swiss banking centre. This does not apply to client assets that are included in the balance sheet, which cover also the banks’ foreign branches. However, this difference is disregarded for the purposes of calculation.
Global wealth management
The potential of the wealth management business remains highly attractive. According to a study conducted by the Oliver Wyman consulting firm, only 50% of HNWI assets are entrusted to professional managers. Boston Consulting Group estimated the global volume of assets (institutional and private) at USD 92,400 billion in 2008. This reflects a decline by more than USD 17,000 billion from the prior year, primarily due to the sharp fall in markets.
This decline also affected the volume of assets owned by wealthy private individuals (HNWI) which shrank to a mere USD 32,800 billion at the end of 2008, having peaked at USD 40,700 billion in 2007. According to estimates by Merrill Lynch and Capgemini, HNWI assets should grow by an average of 8.1% per annum and reach approximately USD 48,500 billion by 2013.
According to the same study by Merrill Lynch/Capgemini, there were 8.6 million HNWI in 2008, compared to 10.1 million in 2007, reflecting a decline by 15% from 2007. North America has the highest number of HNWI – by a narrow margin – with 2.7 million, followed by Europe with 2.6 million. Asia-Pacific saw the strongest decline in the number of HNWI (–22.3%), as did North America (–22.8%), whereas Latin America experienced the smallest decline by far (–6%). The emerging markets of China and Brazil still seem to have much potential. For instance, China surpassed the UK and is now ranking fourth among countries with the highest number of billionaires. Russia, on the other hand, suffered more severely from the financial crisis and lost a disproportionate amount of wealth in 2008.
The institutional asset management market was also affected by the crisis in 2008. The Boston Consulting Group estimates its total worldwide volume at USD 48,600 billion, reflecting a decline of some 18% from the prior year. According to a study conducted by Towers Watson, pension fund assets accounted for nearly USD 20,000 billion of total institutional assets under management. Swiss banks are among the world’s major wealth managers. According to the Boston Consulting Group, they are global leaders in cross-border (offshore) private banking with a market share of nearly one-third (28%).
Products and services
The segmentation of wealth management clients determines the range of products and services offered. The standard investment process normally consists of analyzing the client’s financial situation, determining the strategy and asset allocation and monitoring the portfolio. Depending on a private client’s particular wealth situation and financial requirements, the investment advice or portfolio management mandates typically also include financial and succession planning services, private and occupational retirement provisions, as well as the management of non-financial assets such as real estate. Asset management services for institutional investors include – apart from customized management mandates and fund management – other specialist consulting services such as asset liability management. Following a temporary slump due to the financial crisis, demand for structured products is again rising. However, the trend goes towards transparent products that clients can readily understand. Clients are also increasingly interested in creating their own structured products. Special electronic platforms offer clients the possibility to compose products tailored to their own needs.
At the same time, investment preferences of private as well as institutional clients have changed. This was due to the emergence and success of passive management strategies based on index tracking. The handling of such investment instruments has become more flexible since the launch of Exchange Traded Funds (ETF) a few years ago. Index tracking yields returns consistent with the market at lower cost, because of minimal asset reallocation within the portfolio and lower cost of financial analysis.
Business models
The tradition of wealth management is firmly ingrained in Switzerland due, to a large extent, to the country’s favorable political environment and monetary conditions. Moreover, Switzerland boasts a highly skilled workforce, which is well equipped to meet the growing demand for specialist knowledge in this field. Swiss banks have adopted a variety of business models and the Swiss world of banking is very diverse: A small number of global financial services providers exist side-by side with a large number of niche players. Against this background, the business models upon which institutions base their growth plans (source and method of creating business volume, ways for generating revenues, etc.) – vary considerably depending in particular on the size of the respective player. The integrated business model is generally common to the biggest banks that engage in the full range of banking activities – from wealth management to business and retail banking.
Small banks adopt a business model specializing on a niche. Such a niche strategy involves a strong focus on the core business and the outsourcing of non-core activities, such as research or information technology. Interestingly, a new business model somewhere between the big banks and the niche players has emerged. This category of medium-sized banks has thus been added to the traditional classification into global financial services providers and niche players. The business model of medium-sized banks has established itself quite firmly over the past years. There is a clear trend towards on shoring new assets, i.e. an increasing relocation of services to the clients’ domiciles, notably in Asian emerging markets. Nevertheless, cross-border banking will remain in place, monetary and political stability being key aspects in this type of business.
Wealth management finds itself in a perpetual process of change. As a major player in this sector, the Swiss financial centre is no exception. Institutional asset management is becoming increasingly competitive, as investors’ performance expectations and nimble mobility if these expectations are not met, fuel the competitive pressure on fee margins. Moreover, private banking has been subject to similar pressure as private clients have been becoming ever more sophisticated. Given that all major financial centers as well as Switzerland have adopted article 26 of the OECD model agreement on double taxation (see chapter 9.2), the Swiss financial centre is not likely to suffer major adverse effects. The competitive parameters having been thus harmonized, Swiss success factors such as the stability of the Swiss currency will gain in importance. In future, the concept of tax compliant asset management will prevail.