At credit suisse, a good feeling comes first

A stroll down Zurich’s bustling Bahnhofstrasse, past the flagship Swiss stores of Bally, Madler and Bucherer, brings you eventually to the Credit Suisse headquarters in Paradeplatz.

This is a place of uniformed doormen, palatial rooms, and breakfast tea served in china cups by discreet assistants. Credit Suisse’s giant private banking arm has an image to live up to, and it’s not just about percentage returns, but making the client feel good about things.

“Client satisfaction is not necessarily about performance,” confirms Burkhard Varnholt, head of the financial products and investment advisory team at Credit Suisse Private Banking. “It’s about professional advice. As a client, you want to feel that somebody is taking care of you, listening to you, providing you with insight, market intelligence and performance. It’s all part of our value proposition.”

Mr Varnholt took on the role, comprising a vast swathe of responsibility for the bank’s client advisers and the product lines they sell, after having successfully established Fund Lab. This self-service supermarket boutique for client advisers marked a watershed in open architecture, when Credit Suisse opened its bank shelves to external providers in 1999.

Creative period

“Credit Suisse started open architecture well before UBS,” says Mr Varnholt, clearly proud of his creation. “Fund Lab is still Europe’s largest open architecture supermarket. When we built the thing in 1999, this was the first time one of the established players was using the opportunity provided by technology, rather than being reactively forced into funds. Clients liked it and non-clients liked it too. It’s a wonderful tool.”

For somebody as reserved, conservative and typically non-committal as Mr Varnholt, his enthusiasm for Fund Lab runs dangerously close to a display of passion.

“A great number of our competitors are using it,” he adds, describing the ultimate accolade of open architecture. Despite his rise in the organisation to membership of the bank’s management committee, Mr Varnholt maintains his zeal for open architecture. He says there is no preference for in-house channels of production.

“We always start with open architecture when sourcing a product,” he says. “When we are talking to wealthy families, we get client requests, asking for customised investment solutions for investments of €100m and more. They ask us specifically to diversify the issuer base and we are very well placed to do that. We always make it clear that we source our expertise from outside. This is something clients are very clearly aware of.”

Private rivalry

The Swiss bank runs $413bn (e315bn) in private client assets, according to Scorpio Partnership, well behind its bitter rival UBS, which runs $578bn in Europe. But Credit Suisse is enjoying the slightly faster annual growth rate of 8.79 per cent. Results for 2004 saw net revenue for the Wealth and Asset Management division, which includes Private Client Services and the CSAM funds franchise, rise 8 per cent to SFr1bn.

Net inflows were SFr1.6bn (e1.04bn) in the fourth quarter, up from just SFr500m in the corresponding period in 2002, when many private clients had clearly lost confidence in the bank. Much of the product creation activity fuelling this profit growth from inflows into managed assets has been focused on designing structured products. During 2003 and 2004, Mr Varnholt’s division structured a large number of index certificates snapped up by nervous investors.

Credit Suisse sold just SFr4.7bn in structured products in 2002, generating revenues of SFr124m. These revenues surged to SFr273m for SFr13bn of issuance in 2003. And 2004 saw the bank place SFr31bn in structured products.

“Our investment committee in 2003 was very bullish on the equity market,” remembers Mr Varnholt, a strong believer in immediate translation of market views into product solutions. “But they realised new clients would need safeguards and additional security. So we said let’s do some certificates, some simple index tranches, which have become our most popular asset class.”

Basically, certificates provide straight market performance with “some kind of airbag” to cushion against crashes, says Mr Varnholt. “If the market declines by a given amount, such as 50 per cent over five years, the capital is protected. This is a compelling argument. It’s simple, bullish and transparent. This has been a huge success for us.”

A similar formula has been applied to the commodity market, where there is a sparsity of managed, diversified funds available for private clients. This cannot be said for equity and fixed interest markets.

But Mr Varnholt denies that Credit Suisse is milking the derivatives-based product pipeline purely to shore-up profits. “We put great emphasis on the advisory process,” he insists. “First and foremost it is one of client understanding. Once we understand the client, we need to construct risk parameters, then emphasise their investment needs, while taking a clear view of markets and opportunities.”

After this extensive advisory process, what Mr Varnholt calls the “pillars of homework,” his advisers go to Fund Lab and the bank’s structured derivatives desk to source the right product. “But what can happen – if a product is recently launched – is that banks go to clients and ask them to buy it. That is the worst thing you can do,” he warns. “You need to start from the premise of asking clients what they want, and then the rest will come.”

Critics of Credit Suisse in the Swiss banking community accuse the Zurich giant of a push-button mentality, with Mr Varnholt’s advisers given the command to sell tranches of expensive, structured products investing in the theme of the month, something he hotly denies. His team have been known to sell SFr2bn worth of index products in just 48 hours. But he says this has only happened because clients have responded to sharp falls in equity markets.

“My emphasis is never on products per se,” says Mr Varnholt. “I couldn’t care less which structured derivative or mutual fund an investor prefers, or whether they are buying stocks or bonds. Everything depends on the client’s wishes.”

Internal production

He says there is no internal pressure to buy products managed by Credit Suisse Asset Management (CSAM), although CSAM clearly creates some products specifically for internal consumption, with external distribution a bonus. CSAM currently manages $40bn or more than 10 per cent of the bank’s private client portfolios. “We have the best fixed income manager in Switzerland, and doubt whether there is some value in going outside,” admits Mr Varnholt.

In the Road Map to Integration, recently laid down by Mr Varnholt’s boss, Oswald Gruebel, asset management will be re-positioned, over the next two years, as a “value proposition across all our businesses”. Some Zurich staff see this as a green light for CSAM to be handed more assets by Credit Suisse Private Banking, with no questions asked. Although there will also be a renewed emphasis on client segmentation, this is unlikely to reprise the targeting of “mass affluent” clients which amounted to a foray into Continental European high street banking during the late 1990s.

But Mr Varnholt would not be drawn on any strategic changes going forward. “We already sell to all client segments,” he says. “My business is simply focused on wealthy individuals and clients of Credit Suisse. This client focus will always be the driving force behind our strategy.”

Varnholt: seeking to understand the client