This article has been initially published in French in Bilan.ch, Swiss economic magazine.
The first transparency initiative in Switzerland has been fiscal and it has triggered a decline in offshore assets. Within 15 years, Swiss market share dropped from 35% to 25%. Now comes the inevitable second wave: tariff transparency. Transparency has a price.
When opening my daily newspaper, I happened upon a comparison of online trading prices in Switzerland. On 9 online traders benchmarked by Moneyland.ch, the tariff differentials ranged from 1 to 4.5 and for an investment of 60’000 francs, the maximum annual saving was 2.5% on invested assets. For the record, the performance of a portfolio in Swiss francs in 2016 ranged between 1.3 and 1.66% according to IBO index.
Compare 2.5% saving to 1.3% performance
What is surprising is not so much the gap but the discussion of it in a Swiss newspaper.
Europe is more used to it. The obligation to communicate transparently on prices is defined by law. A law that also gives the right to switch bank simply and for free, even fixing a maximum delay of 22 days in France, 7 in the UK.
Trading price comparisons might seem more applicable to retail banks and affluent clients rather than Private Banking. But we are talking about trading, the very same trading proposed by private banks and which still represent a significant source of their income.
For the observer interested in weak signals that gently and quietly bring about change in an industry, this strikes attention.
A wind of transparency is blowing. Communication in the press on this topic is no longer taboo. Players are positioning themselves. The lines have already moved in Europe and the US, they will move in Switzerland. Clients, banks or FinTech start-ups cannot remain indifferent, regardless of the client wealth segment.
Some of these start-ups also come with a new critical landmark: trading rates as low as… free, like Robinhood.com. We can hardly do it any lower.
We do not realize it in Switzerland or even in Europe, but online trading that appeared at the turn of the third millennium was a revolution in the United States (e-Trade and Charles Schwab). A transaction now costs between 5 and 10$, regardless of the volume purchased, because in the digital world, buying for a million shares or a hundred is strictly the same. Buying and selling options costs 75 cents per contract as opposed to 1.5% of the dollar volume.
One way or another, sooner or later, it will affect all clients segments, from retail banking to private banking.
Even if one thinks that wealthy or ultra-wealthy clients do not care about the price (and I would tend to agree this is not their first concern), above a certain level of wealth most have a trusted advisor (independent managers, family office, multi family office, strategic advisors, etc.). And these advisers do pay attention to the price as a quick win to compensate for their own cost.
(By the way, to all who still believe that the Wealthy and Ultra wealthy are not yet gained by digital fever, these advisors also pay attention to digital capabilities as it facilitates their services rendered to their clients)
As their bargaining power increases, the logical consequence is a negotiation in price. Banks will compromise, to win or retain clients and assets. This is because few banks measure the cost of client acquisition, bottom-line profitability and life time value.
In a traditionally non-transparent environment, it is always easy for a client to claim a “0.5% all-in” because “this is what your competitor offered me”. It is endless and inevitably leads to a price war. This war has already started in a discreet and uncontrolled way, via special conditions (tariffs exceptions), especially in the segment of ultra-wealthy clients who behave like professional clientele. As a Pricing Manager of a private bank writes ironically: “My job is an exceptional job!”.
The adverse effects of a price war
Special conditions will increase. These exceptions are nothing except a hidden commercial cost. However, who is thinking about reducing that cost?
If the banks’ response is to get into a price war, their only space to manoeuvre is to reduce costs. The problem is that an industry moving in this direction, mostly because of lack of innovation, will soon be trapped into it, because there will always be a competitor to outbid the downward trend. It is an infernal spiral that pulls all market players down.
This has already been observed in the airline or telecom industries. In the airline industry, where opportunities for client innovation are limited (As the product is essentially limited to move a customer from point A to point B with more or less comfort), and owes its salvation only to consolidation and route-sharing agreements, but the industry’s Return On Equity is taking time to recover.
Nobody wins in a price war. Not even the clients when pushed to the extreme. As without margin an industry can no longer innovate nor maintain its level of service.
So where to go from here?
There is another choice.
The first step is for a wealth manager to understand its costs (down to the individual client level which is rarely done), its own price in comparison with competition and / or amongst its own clients within the same profile, and the value delivered to the client (risks and performance investments, non-investment services). This is a starting base for a balanced negotiation and a win-win relationship. Each party has an equal interest in having the other feel comfortable with the price to continue the relationship and guarantee highest quality service.
But above all, wealth managers can choose to redefine their offer and business model by sticking to the real needs of their clients. Wealth Management can return to a true client-centric service industry. The Professional Services segment is one of the top-ranking industries for Return On Equity.
Traditional wealth managers, especially in Switzerland, have an extraordinary heritage created over the last 200 years that cannot easily be replicated or substituted. If they play the lowest cost card, they will lose. If they lack transparency or charge prices that are no longer justified, they will also lose.
The strategy of Excellence
But if Switzerland presents itself as the center of excellence in wealth management for sophisticated clients, consolidates wealth, protects, engineers, holistically advises (in the sense of patrimonial advice and not just investment advice) and combines all asset classes including Private Equity, while mastering international laws, what other financial center could really compete?
Each international financial center will play its own card, to access talent pools, asset classes and geographies.
Financial places are thus becoming products
But who is well positioned enough above the crowd to ensure a strategic role of consolidation and advice?
Swiftly, Switzerland could become the center of excellence which researches and manages the best product and service provider and then negotiates pricing conditions for its clients, instead of suffering them. The best advocate for clients.
Their trusted partner
Swiss wealth managers would therefore be able to practice fair and balanced pricing based on the added value that the clients receive. In return, clients would be less inclined to negotiate, because we do not negotiate with a trusted partner.
The next challenge of the Swiss Wealth Management industry is to focus on service rather than transactions, clients rather than products, the real cost of a client relationship and a fair win-win price. With this it could achieve renewed long-term profitable development.