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A Genevan model of success for Zurich's banking centre
Article published in the Finanz und Wirtschaft « Private Banking ‘20 » supplement in April 2020
Developments in recent years have put Zurich's financial centre under pressure and changed its appearance. Margins have fallen, some foreign clients and banks have left the country; and, as a result, the number of financial institutions has declined sharply. What does the future hold?
The search is on for new business models in banking that offer clients genuine added value and will ensure the banking centre's continued existence in the future. Fortunately, many fintechs have been founded in recent years, which are now diversifying the market with different models. However, they have yet to demonstrate sustainable success. By contrast, Geneva's banking centre has developed in a completely different direction. Comparatively few fintech companies have emerged, but the traditional "pure-play" private banks have focused on their core competencies and grown successfully in recent years.
A tried-and-tested entrepreneurial model
In Zurich, on the other hand, globally active, owner-managed private banks have become rare. Due to upheavals in recent years, the city can no longer lay claim to a single globally active private bank with Zurich roots and owner-run operations. By comparison, the large Genevan private banks in Zurich can be considered specialists in this field. Bank Lombard Odier & Co Ltd, for example, is managed by its seventh generation of owners. A special successor model has kept it going for over 220 years. Could this tried-and-tested, entrepreneurial banking model lead the way forward for the Zurich?
What is different about an owner-managed private bank?
At an owner-managed bank, top managers always bear the financial and reputational consequences of their decisions. Hence, the bank is managed in an entrepreneurial manner, which means that decisions can be taken and implemented quickly and plans can be made over a much longer term, because the bank is not bound by the need to make quarterly disclosures in order to satisfy its investors. Consequently, such banks are in a position to deal with changes in the economic environment quickly and adapt accordingly.
A three-way approach
How are entrepreneurially managed banks reacting to the current challenges facing the Swiss financial centre? We do this in three ways: technological leadership, innovation and values.
Due to technical developments in the field of digitalisation, banks are now forced to make enormous IT (Information Technology) investments. Unfortunately, this often leads to costly misinvestments, which can have a considerable negative impact on their financial success. We, at Lombard Odier, recognised this early on and focused on developing a proprietary banking platform. Nonetheless, we realised years ago that the level of the necessary technology investments greatly called into question the return on investment from an entrepreneurial perspective. So we decided to make the proprietary platform available to third-party banks and asset managers. This has enabled the bank to exploit synergies and make ongoing investments to align its technology more closely with client needs.
An entrepreneurially managed bank can also respond very quickly to changing client needs in the area of product and service innovation. For example, when the automatic exchange of information was introduced, it was quickly recognised that clients would increasingly focus on the after-tax returns on their assets. This means that clients want to know how much of their returns is left once all relevant taxes and costs have been deducted. Thus, we developed a dedicated approach to managing clients' assets in a tax-optimised manner – with the result that a balanced portfolio generates an average excess return of up to one percent per year, regardless of market trends. For professionally active clients, this return can even be significantly higher. The bank also recognised very early on the extent to which pension assets play a central role in the asset accumulation of entrepreneurs and managers. For this reason, the bank has launched solutions that enable clients to combine tax-efficient retirement savings with individual asset investments.
The sustainability opportunity
An entrepreneurially managed bank embodies, to a marked degree, the values of its founders. This means that sustainable investment is in the foreground. The topic of climate change and sustainable investment will become much more important in the coming years as governments around the world increasingly enforce CO2 emission standards. As a consequence, economies will have to gradually move away from fossil fuels. This change will threaten traditional business models and open up new opportunities.
To take account of this development, investors will have to realign their portfolios. Lombard Odier has developed specific expertise in analysing companies' emission efficiency. Building on this, it has set up various solutions, such as the recently launched Climate Transition Strategy, which is very much in demand among private and institutional investors.
Geneva's success model must also face up to the challenges of the future. The fact that a business model has successfully survived two world wars, various economic crises and the de facto abolition of Swiss bank-client confidentiality, however, suggests that an entrepreneurially managed bank is very adaptable and ideally positioned to cope with changing conditions. A little more adaptability would certainly not harm Zurich's financial centre – it could perhaps even learn something from the Genevan institutions in this respect.
But without letting on that it is emulating Geneva…of course.
Important information
This is a marketing communication issued by Bank Lombard Odier & Co Ltd (hereinafter “Lombard Odier”).
It is not intended for distribution, publication, or use in any jurisdiction where such distribution, publication, or use would be unlawful, nor is it aimed at any person or entity to whom it would be unlawful to address such a marketing communication.
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