Industry’s future lies in asset management

Delegates were quietly captivated by a keynote address from Jürg Zeltner, CEO of UBS Wealth Management. His bank boasted SFr1,027bn (€837bn) of private client assets going into the 2008 crisis, down to SFr720bn today. Reputational problems at UBS – associated with investment banking write-downs – were exacerbated by mistakes in North America, which led it to withdraw from US offshore business, admitted Mr Zeltner.

With the attractions of Swiss secrecy now fading, Zurich is looking less viable as a private banking centre, heralding an inevitable transfer of assets to Hong Kong and Singapore.

Confronted by these pressures Mr Zeltner believes Swiss wealth managers must fundamentally re-assess value propositions, expecting this to result in expansion in regulated onshore markets and a greater presence in emerging economies.

In performance terms, he admits private banks have previously dined out on leveraged beta, with portfolio managers having contributed almost nothing to their clients during the past decade. “Private banks often make great relationship management firms, but not great investment management firms,” he told delegates.

Yet the notion of splitting up UBS clearly remains a foreign concept to the Zurich bank’s management team. He said the group’s investment bank remains central to product creation, investment ideas and access to emerging markets. However, the investment bank must become smaller, and more closely aligned with needs of private clients, Mr Zeltner admitted.

Until now, asset allocation at UBS had been neither strategic nor tactical. Investment strategies must become more realistic and cheaper for clients to buy into, with an increased emphasis on emerging markets and Asia in particular.

This somewhat downbeat assessment of the wealth management industry had certain echoes of Mr Zeltner’s previous address to the PWM congress in 2008, when he apologised for the private banking industry’s over-promising and under-delivering, particularly through selling structured products which were particularly attractive to bank balance sheets.

Then he promised a re-think of asset allocations, global diversification and the transition to a core-satellite model of investment with greater emphasis on balanced, risk-graded client portfolios, rather than accounts stuffed with high-margin products.

Yet in the three years since the last promises were made, despite Mr Zeltner’s refreshingly frank humility, clearly appreciated by those listening to his speeches, little appears to have changed in Switzerland. What he does have in his armoury is that between 2008 and 2011, wealth management contributed the strongest growth of all profit lines at UBS, so it must be at the centre of any future business strategy.

A more optimistic assessment of opportunities for wealth managers was offered during the evening awards ceremony by Eric Syz, one of three senior Lombard Odier refugees, who created Banque Syz in Geneva in 1995. Today they manage SFr25bn.

The first thing they decided when drawing up a blueprint for how a private bank of the future should look, was that it should be based on expertise in asset management. This meant delivering superior investment returns, achieved by hiring talented staff, motivated by a system of performance fees in order to directly align client interests with those of staff.

Mr Syz believes not having clients to begin with was a blessing in disguise, as there was never a question of imposing a pre-conceived model on them from above. What he increasingly found clients wanted was to make money, whatever happened in the markets. Despite the vastly differing business models of the established UBS and the relatively new kids on the block in Geneva, there is a key fundamental belief shared by both Mr Syz and Mr Zeltner. If they are to survive, private banks must be re-invented as asset managers.

See cover story, p18

Jürg Zeltner, CEO of UBS Wealth Management