In April, Bank Sarasin introduced a new fee structure
designed to address falling margins in its private banking
business. The aim is to remove the conflict between portfolio
turnover and revenue by charging clients an all-in fee.
Will Cain looks at the
effectiveness of the strategy and gauges the reaction.
Declining margins have been a major issue for
private banks this year, with clients preferring cash and vanilla
securities to more sophisticated and lucrative products created by
private banks.
Go deeper with GlobalData
Margins in Swiss private banks have declined
from a pre-financial crisis average of around 120 basis points (bp)
to around 90bp, according to industry sources.
“You can’t force clients to go from cash to
hedge funds, and you can’t dramatically increase your asset base
without hiring more client advisers, so you have one possibility,
which is to increase fees for custody, brokerage commissions and
advisory mandates,” said an industry commentator who did not want
to be named.
Upping fees is a difficult decision to
implement at a time when client investment portfolios are down, but
one which Bank Sarasin took in spring.
The pricing strategy, according to Eric
Sarasin, head of private banking at Bank Sarasin, who oversaw the
project, was to price its services more uniformly across the
business. It is part of a company-wide aim to increase the
business’s gross margin to 90bp, from the current level of 84.3
percent.
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By GlobalData“Where we were coming from with this was that
in the past, through our growth and internationalisation, our fees
were not well structured for clients,” Sarasin told Private Banker
International.
“We introduced a new fee structure in order to
make it more simple and transparent. By doing this we become more
expensive for some of our clients, but this is justified by our
performance and quality of service. For others, fees were reduced,
for example charges on cash were skipped.
“Given the high liquidity holdings of clients
in the current situation this has a visible impact on our
margin.”
Sarasin said there had been a legacy system of
rebates and discounts in place which meant some clients were being
charged cheaper fees across different departments.
“If you have a $10 million client and they are
paying 0.5 percent for a discretionary balanced mandate, we have to
ask ourselves whether that client is profitable to us,” he added.
“For top performance and our track record in asset management you
do have to pay a price, and that comes back to the bottom line. If
you discount too much, the bottom line doesn’t work out.”
“We think it is easier, more fair and
transparent to offer an all-in fee. We have had some positive
feedback and a few marginal complaints, but most appreciate the
transparency. There are no hidden costs, and clients like
that.”
Industry experts say it is hard to gauge the
impact of the changes in the interim results recently produced by
the bank. Performance in the private banking division was weaker
than anticipated, mainly because of increased hiring at the
unit.
PBI understands from an analyst, who did not
want to be named, the new structure will deliver an improvement of
between 10 and 15 percent in gross revenue to the private bank, but
the effects may have been diluted by a recent reorganisation of
Sarasin’s reporting segments.
The impacts are more likely to be seen when it
declares full year annual results in March.
“If you look at the difference on a
cost-income basis, there has not been a huge change so far,” said
Sarasin.
“If you look at the first four or five months
of the year, we had no turnover in the portfolios and the advisory
side, which was dramatic and I have never seen that before. So by
mid-year, the result in private banking was very weak, which
impacted the cost-income ratio of the Sarasin Group as a whole. We
have also been hiring quite quickly which has been driving up
costs.
“That combination meant that it [the new
pricing mechanism] did not show up so much. The second half is
looking better and people are coming back into the market and are
more active in their portfolios, so we should see an improvement in
the cost-income ratio in the second half.”
Sarasin said he hoped the strategy would shift
more of its clients on advisory mandates into discretionary
portfolios with all-in fees. This is seen as more desirable for
clients because it disconnects portfolio turnover from revenue,
reducing a conflict of interest. Clients on the advisory side
tended to have long periods of inactivity in their portfolios when
market conditions were uncertain, as seen in the first six months
of the year.
Managed mandates are seen as a way of
steadying the income of the bank. The fees range between 0.5
percent and 1.6 percent annually, depending on size of assets and
investment style. Sarasin said he was optimistic the new clients
the bank has gained recently could be persuaded to take that option
as they become more familiar with its advisers and culture.
“We have new clients that joined on the
advisory side rather than just giving us a mandate, and that’s
because they want to get to know us first, so this is an ongoing
effort,” said Sarasin.
Bank Sarasin, which was named Outstanding
Private Bank, Europe, in Private Banker International’s global
recent awards ceremony, has proved to be one of the most popular
for wealthy clients, registering inflows of 19.2 percent in 2008
across the group, and 10.7 percent in the first half of 2009. These
market share gains have been achieved in part by the aggressive
hiring of relationship managers, which has increased costs,
furthering the need for the price restructuring programme.
Speaking to PBI, CEO Joachim Straehle said the
bank had increased overall staff at the bank from 1,100 to 1,500 in
his two and a half years in charge. Relationship managers had
almost doubled from 250 to around 420 currently. In the first half
of 2009 personnel costs increased 13 percent to CHF168 million
($165 million). Total operating costs increased to CHF230 million
from CHF210 million in the first half of 2008.
This includes costs from the opening of
several new private banking locations with representative offices
established in central and eastern Europe (Vienna and Warsaw), and
private banking branches opened in India (Delhi and Mumbai). It was
granted a banking licence in Hong Kong and plans to open a
representative office in China are “on the agenda”. A new office
was also opened in Switzerland, in Berne, and in Germany, in
Nuremberg.
“The aim for Bank Sarasin back in 2006 was to
build a client centric, focused private bank with a certain amount
of asset management and product expertise,” said Straehle.
“We are solution providers and concentrate our
product range to three investment styles. We want to be able to
show clients we have a good understanding of asset management in
our specialist areas – and those funds or mandates have performed
extremely well.”
A key part of this focused offering is around
the theme of sustainability, and the bank recently rebranded its
tagline to include the concept: ‘Sustainable Swiss private banking
since 1841’.
It is a natural niche for the bank, owned by
the Dutch co-operative Rabobank, which has a strong food and
agricultural focus. Sarasin has CHF2.1 billion invested in its
sustainable investment funds, or 17.1 percent of the total CHF12.3
billion in its asset management division. The total assets managed
according to sustainable principles (including discretionary
mandates) amount to CHF 10.1 billion.
Investments are made on financial,
environmental and social criteria, which are established by an
in-house research team which provides sustainability ratings on
governments which it also shares with governments and supranational
organisations.
The other two investment styles it pursues are
thematic (funds: CHF4.4 billion), which focuses on ‘mega-trends’ in
the global economy, and a quantitative investment style (funds:
CHF2 billion) used in emerging markets, commodities or currencies.
There is a further CHF3.8 billion invested in other Sarasin
funds.
Upping stake in NZB
As well as the pricing strategy,
Bank Sarasin has also recently been presented with another
strategic decision to make. Its recently announced plan to increase
its stake in Neue Zuercher Bank (NZB), a brokerage business Sarasin
spun off in 2007, was an effort to calm client worries over the
bank but also raised concerns over the bank’s commitment to being a
pure-play private bank. NZB is under scrutiny from Swiss and US
authorities after a senior banker was forced to step down for
allegedly urging wealthy US clients to hide money in
Switzerland.
Its CEO was forced to stand down by FINMA, the
Swiss regulator, which said NZB, along with Zeurcher Kantonalbank
and the Zurich branch of Deutsche Bank breached its duties
Sarasin owned 40 percent of the business, and
is conducting due diligence on acquiring a total stake of between
51 percent and 60 percent, giving it majority ownership. Straehle
said he remained committed to keeping Sarasin focused on private
banking and that brokerage was not a core part of its strategy. The
investment was made to secure the future of the business, its
clients and Sarasin’s investment in it, he said, rather than out of
a strategic push to bring brokerage and private banking activities
closer together.
“The brokerage business is a good business but
does not belong as part of our strategy focused on private
banking,” said CEO Straehle.
“There is no change in this respect, but to
protect your investment it would be stupid not to take on the
ownership of NZB. Even if you want to sell it later, it’s easier
when you have the majority ownership. It also means we’ll have
access to the income stream, which is quite healthy.”
Following the announcement, NZB announced it
would stop all private banking activities – one of its main
business lines outside of brokerage.
Straehle said he was confident Bank Sarasin
had no issues to deal with regarding US regulators from his time in
charge. But he said it difficult to say with any certainty whether
breaches had occurred in the distant past.
“You can’t gauge what happened more than 10
years ago,” he said.
“There are certainly no indications or signs
anything did, but from time to time the past comes back and gets
you.”
He said Sarasin had operated a small
cross-border business from Switzerland to US clients, but the
decision was taken to close it down at the start of 2008. The
business is now no longer operational. It is also has a
London-based asset management company which is SEC registered. It
offers tax-compliant services to US persons.
“We have no problems on the Qualified
Intermediary regulations, we are compliant, and from the US tax
payer side, there’s nothing which could bother us,” Straehle
added.
While many have been focusing on the impact of
tightened tax regulation on US clients, it is becoming clear that
European offshore clients are also under more pressure to disclose
undeclared tax positions.
Switzerland has signed the 12 tax agreements
it needed to feature on the Organisation for Economic Co-operation
and Development list of white-listed jurisdictions. This means the
country’s government and its banks are more susceptible to being
forced to disclose client tax details when approached by another
country, and indicates that Swiss banking secrecy, if not dead, is
starting to fade away.
Consultancy KPMG estimates as much as 80
percent of Europeans’ money in Switzerland is undeclared,
representing 25 percent of the country’s private banking
revenue.
Bank Sarasin spokesman Benedikt Gratzl said
those figures were not representative of its own position.
Asked if he had seen a movement of clients and
assets out of Switzerland to other jurisdictions, notably
Singapore, Eric Sarasin said there had not been a “significant
shift”.
“We have a small number of cases where
typically the clients are looking for alternatives in terms of
diversification or perhaps preferring to have a trust in
Singapore,” Sarasin said.
“Our offshore business with European clients
in Switzerland is continuing to grow and in fact we had a good
month in October in this respect. The clients in Europe appreciate
proactive banks. They want them to be proactive in terms of
counselling them in terms of their personal financial and
investment situations, succession and giving good advice. On top of
that, it’s about know-how and excellent performance in portfolio
management.
“Even clients that had not declared their
assets and are currently making self declarations in their
respective countries are often choosing to keep their assets in
Switzerland. If you treat them properly, they stay with you.
“We are not seeing assets move back to
domestic countries in Europe in a big way.”
Straehle added that the two distinct
strategies being employed by the bank in its domestic and
international businesses will be pursued further. Emerging markets
are seen as an opportunity to benefit from wealth creation, while
in Switzerland the bank was concentrating more on gaining market
share.
“Emerging markets are clearly booming at the
moment,” he said.
“We will wait and see how sustainable that is,
but it is where most of the wealth creation is happening
currently.”
Eric Sarasin, head of private banking.
Joachim Straehle, CEO of Bank Sarasin
