Swiss industry rethink follows Julius Baer loan write-off

Concerns about leadership, risk-taking and dealing with celebrity clients are once more focusing Swiss private bankers’ minds after recent events at Julius Baer.

Following the long-running demise of Credit Suisse, the latest events at Julius Baer, another leading Swiss wealth manager, are shining a critical and unwelcome spotlight on Zurich’s troubled, close-knit private banking community.

The resignation of chief executive Philipp Rickenbacher in early February, following a massive loan write-off to Austrian luxury property developer Signa that halved Baer’s profits, once more raises several fundamental Swiss banking questions.

Does the future belong to the ‘pure play’ wealth managers, among whom Julius Baer held pride of place? Is there scope for return to the ‘one bank’ model, pioneered by Citi, Credit Suisse and UBS, where higher-risk investment banking is entwined together with asset and wealth management under the same roof? Or is there room for a third way, featuring a new breed of boutique houses, prioritising people ahead of products?

First and foremost, Swiss commentators say the latest events are a stark lesson that wealth managers should stick to core competencies, rather than branching out into areas where they have limited expertise, such as lending money to unlisted companies in Julius Baer’s. After all, one of Mr Rickenbacher’s key tasks was de-risking the existing business and steadying the ship after a previous era of breakneck expansion under Boris Collardi.

“The Signa debacle is a perfect illustration of a private banking institution embarking into a new area of business without having the right level of experience, organisation and risk monitoring processes in place,” says Shelby du Pasquier, head of the banking and finance group at Geneva-based law firm Lenz & Staehelin.

Regulatory intervention

The latest events, he believes, will trigger increased action from Swiss regulator Finma, already embarrassed by the series of scandals that led to the collapse of Credit Suisse. Critics say the regulator must now step up. “This is the time for Finma to show its teeth, rather than finding a Micky Mouse bank to clamp down on,” says one well-placed consultant. “How can you let this one go? They don’t want to be on the sidelines again.”

A regulatory investigation and enforcement proceedings are now expected as the events leading to what is seen in the industry as a “bloodbath” are forensically dissected, with remediation measures and additional resignations likely. While Mr Rickenbacher’s temporary successor, Nic Dreckmann, has apologised to shareholder, clients and employees for misreading the risks associated with a fledgling private debt business, the question remains whether the bank’s board should also assume responsibility for the losses.

Julius Baer appeared to be in privileged position, garnering $10.6bn of new money in the four months after the rescue of Credit Suisse by UBS in March 2023. But despite recruiting many advisers in a newly fluid recruitment environment, it failed to attract the best talent from its troubled Zurich rivals.

“Julius Baer should have been in a prime position to be a key beneficiary of the situation at Credit Suisse,” says a headhunter with key clients in Switzerland. “But EFG, LGT and Vontobel were all outperforming Julius Baer in the recruitment stakes. There is a lot of good talent they could have grabbed, which went elsewhere. They failed to seize the opportunity.”

“Julius Baer should have been in a prime position to be a key beneficiary of the situation at Credit Suisse”

With Mr Dreckmann — until recently chief operating officer responsible for migrating legacy systems to a more modern digital outlook, and a Baer insider previously overlooked for the top job — now taking over the reins, at least on an interim basis, the question is what the future leadership and direction of the bank will look like.

Assumed competence

Traditionally, Baer’s leaders have always come from the Swiss financial milieu, steeped in its heritage, culture and client-service mentality. While bank-watchers have discussed the possibility of bringing in an Anglo-Saxon leader from Citi, JP Morgan or Merrill Lynch, most believe this is unlikely to happen and the bank’s culture means will remain Swiss-centric.

Rather than a universal lesson about the future of the Swiss banking industry, Mr du Pasquier sees the latest imbroglio as a signal that wealth managers must get back to the basics of managing wealth for clients, stick to their core strengths and not expand into new regions and markets without having done the research, risk profiling and recruitment of appropriate teams.

This story of assumed competence that never existed — one of the oldest tales in wealth management, which also plagued banks during the global financial crisis — this time in real credit analysis, is not easy for regulators to spot and requires stronger internal checks.

Questions will naturally arise about the suitability of regulatory bodies to oversee the complex investments initiated by those under their supervisory umbrella. It is nigh on impossible for a body like Finma to examine individual credit decisions and to monitor positions that are built up over several years.

The changing economic situation and the ability of both banks and regulators to deal with it, is also a moot point. Just as today’s successful investment firms typically have youthful staff who are not used to dealing with a higher-rate environment, following a long period of financial repression, the large banks are also unused to the new dynamic of lending against the new economic backdrop.

Most observers agree that these recent events at two of Switzerland’s leading banks should not lead clients to look at the country’s wealth management industry through fading light. “Switzerland has a long tradition in private banking, with an exceptionally high standard of service which is delivered to end clients. This is part of the culture and DNA of the finance and banking sector in Switzerland,” says Nicole Curti, president of the Alliance of Swiss Wealth Managers and managing partner of the Geneva-based Capital Y boutique investment house.

“Julius Baer is one of the top-quality banks of our landscape. But generally, too rapid growth, can lead in certain institutions to higher appetite of risk.”

Hasty expansion

Throughout the Swiss banking sector, growth is often the pivotal objective, she says, leading to hasty expansion. The role of a CEO in these plans is always critical, with a need to match personal objectives with a firm’s intrinsic values, and the need for a firm to accept its boss’s vision.

“Mismatches between leadership values and the prevailing organisational culture can disrupt the delicate balance needed for sustained success,” comments Ms Curti, who believes it is time to promote a healthier ecosystem where smaller banks can thrive alongside the behemoths.

“The crux lies in the strategic separation of responsibilities: entrusting a bank with the safeguarding of assets while relying on an independent wealth manager for proficient wealth management,” says Ms Curti.

This more specialised and focused approach ensures a more discerning and client-centric handling of financial affairs. “This delineation allows each entity to concentrate on its core competencies, mitigating the risk of undue avarice,” she adds.

“The bank allowed itself to be charmed by a famous entrepreneur clouding its handling of a complex corporate labyrinth”

It is this risk-taking culture, rather than processes and structures, says commentators, that has blighted the fortunes of previously world-renowned stalwarts such as Credit Suisse and Julius Baer. Combined with failure to recognise false prophets, it has been the downfall of a new generation of private bankers, probably not for the last time.

“The bank allowed itself to be charmed by a famous entrepreneur clouding its handling of a complex corporate labyrinth,” says Ray Soudah, a former c-suite private banker now running the MillenniumAssociates mergers and acquisitions firm out of Zurich.

“The unending desire to deal with wealthy famous large clients will sadly always lead to risk-taking disasters sooner or later, for both smaller and larger private banks,” he adds. “They can’t resist the glamour of mixing with the rich and famous.”