Swiss private banks face a dilemma in a drive to make fee structures more transparent while providing less volatile, more stable growth: how...

Swiss private banks face a dilemma in a drive to make fee structures more transparent while providing less volatile, more stable growth: how do you persuade clients to pay more for what appears to be the same service? Under mounting client pressure to justify their fees—already seen as high compared to some foreign competitors—the Swiss are edging away from market-reliant transaction commissions towards higher flat-rate asset-based or all-in-one fees which they say will achieve more stable income and better quality services. Some implemented this change in the last couple of years. Many are still seeking ways to do this within a broader reorganisation of fees as soon as possible, while others envisage such change at a much slower pace. "These kind of flat-fees were introduced by the big banks, UBS and Credit Suisse, as well as Julius Baer a few years ago. The trend is towards all banks charging more asset-based and less transaction fees not only for profitability but also for low volatility," said Christoph Ritschard, an analyst at Zuercher Kantonalbank. UK research group Swiss Money estimated in 2000 that Swiss private banks charge clients between 0.8 per cent and 1.06 per cent for a managed account depending on portfolio size, composition and activity, while the unmanaged or custodial equivalent ranges from 0.4 per cent to one per cent. "Price comparisons were bedevilled by the lack of uniformity," it noted. Many banks were not prepared to impart information on fees and there was a clear trend away from individual pricing to simpler, more transparent, all-in pricing. Its latest report on fees is due out later this year. During the bull markets of the 1990s, private banks in Switzerland and elsewhere were content to charge a relatively low administration fee because of plentiful transaction commissions. But electronic trading has meant banks can no longer justify high commissions when each individual transaction costs the same regardless of size and when clients are comparing their prices with those of online discount brokerages. Although Swiss banks are less reliant than their US and UK cousins on commission-based income, two years of weak markets have dented profits and growth and bankers are beginning to see other merits of raising administration fees while abolishing or dispensing altogether with transaction commissions. "You have to show the added value on the service the client receives. Proving this will allow us to reduce brokerage fees and increase the advisory fee," said Stefan-Erik von Euw at Banca del Gottardo in Lugano. Another bank that has raised management fees and expects to increase them further is Hottinger & Co, a private partnership that does not disclose its assets under management. "It's about 0.8 per cent. Ten years ago it was 0.5 per cent," said partner Rodolphe Hottinger. "Where we add value is on portfolio management. In future, the transaction cost is going to be lower and lower, while we are hoping to have a model in which the fixed fees are higher." Hottinger charges between 1.2 per cent and 1.4 per cent, 0.8 per cent for portfolio management, 0.2 per cent for custody and the rest for transactions and depending on account activity. Other banks see a similar development happening at a slower pace. "Maybe in ten years commissions will be replaced by a consulting and performance fee," said partner Christian Rahn at Rahn & Bodmer. Smaller banks, however, are not feeling the heat like larger banks. Some banks are trying to reduce the number of custodial or execution-only accounts by transforming them into advisory accounts, particularly institutions that have traditionally focused on offshore services such as Gottardo. Clients pay a minimal fee for custodial accounts but Gottardo and others believe clients should pay for additional investment advice that is often "thrown in". "We have a paradox. On the one hand we want to have at least the same amount of income, but we also want clients to pay for the services they receive. Up to now for some mandates the real added value of a private banker i.e., the investment advice is not priced accordingly," von Euw said. Half Gottardo's accounts are custodial. Now it wants to persuade clients to transform 20 per cent of these more interactive ones to a so-called advisory mandate. These are more active than purely execution-only accounts but involve less client-adviser interaction. Some banks are also considering performance-based fees, in part as a client-retention tool, such as Bank Sarasin. This works with the client and relationship manager agreeing on a benchmark and some arrangements contain a money-back clause if performance is poor. Banks are naturally wary of the risks, but some including Union Bancaire Privée, want to include this pricing structure as a future option. Although somewhat protected through difficult times by specialising in alternative investments, especially hedge funds, which constitute some 30 per cent of portfolios, UBP is reviewing its pricing. Once it has merged with Discount Bank & Trust it also plans to introduce an all-in-one system with higher administration fees and minimal brokerage, with optional performance fees. "It is also one of our projects to introduce performance-based fees on a case-by-case basis. If you have discretionary all-in-one structure with a ticket fee, we would reduce the basic fee and add a performance fee," said Ulrich Tschopp, responsible for project management. Another area private banks are reviewing is advisory accounts which tend to underperform discretionary accounts. US wealth managers are badly hit by their reliance on brokerage and advisory accounts but the Swiss are also suffering. Analysts say two-thirds of clients at larger, listed Swiss private banks tend to have advisory accounts while banks that are more focused on offshore business may have 50 per cent or fewer such mandates. "You can make an advisory client portfolio profitable by raising fees, but there are limits because of competition so on the whole banks prefer to have discretionary mandates centrally managed so the client adviser has less work," said Ritschard at Zuercher Kantonalbank.