Attacked from all sides, smart private bankers are regrouping to survive, recover and fight again. First there was a sustained decline in gl...

Attacked from all sides, smart private bankers are regrouping to survive, recover and fight again. First there was a sustained decline in global and in particular US stock markets in which many substantial Swiss portfolios are invested. The NASDAQ technology craze also had fed the fashion of short-term trading and brokerage activities in IPOs and active stocks in advancing new sectors. Private banks automatically enjoyed not only higher fee revenues drawn from higher asset values but also received higher brokerage commissions as clients traded the markets inspired by short term and easy gains.

For those companies with international business, Swiss franc weakness boosted the values in local terms even more. Many private bankers assumed the good days would last forever - building up their staff levels and undertaking new investment plans. In fact, their profit increases till the year 2000 led them to believe they were achieving success due to a sound business model. This is sadly not the case as automatic huge growth in profits is often a sign of an unbalanced cost/income structure that has now been exposed; instead of heading towards a productivity ratio near to 50 per cent they headed towards 100 per cent and nearer the crisis danger point.

Sadly their business models were not founded on balanced activities and mostly, despite the relatively low risk nature of private banking, suddenly suffered crashes in earnings, especially in 2001 as recent results have shown. On top of their own lower performance, their clients are increasingly dissatisfied with poor investment performance including many who have lost substantial sums.

What went wrong? These structural problems also suggest the solutions that can be and in certain cases, have already started to be pursued: Five principles for success are:

1. A movement towards a greater portion of fixed fees rather than fluctuating with the stock markets; this will of course moderate income growth when markets recover but at a minimum it’s a hedge against further crashes.

2. Introduction of higher margin alternative investment products that not only can improve client portfolio performance but also generate higher fees for the bankers.

3. Further outsourcing of uneconomic activities like operations, IT, custody and fund product design.

4. Focusing on client management and asset allocation rather than the whole value chain.

5. Reducing or eliminating institutional asset management that better belongs with large-scale suppliers.

Cost cutting like reducing personnel numbers and irrelevant projects are additional measures but these will not structurally resolve the issues. Even an M&A transaction will only defer the day when a sound business model is a must (although M&A is often a means to execute some or all of the five principles for success and will be pursued more regularly in select cases).

The crisis faced by Swiss private bankers is not unique to Switzerland. Wealth management companies in the US and other key European countries who had similar unbalanced business models are faced with similar issues and have seen drastic cuts in profits, even now have losses. How come so many people trusted their life savings and funds to asset mangers who themselves were not watching their business structures and service offerings?

The issue is that many firms confused asset management with business management and there is a rarity of executives who are both. The intrinsic private bankers were more inclined to be asset managers than businessmen. Now that model is reversing with business management more critical than the narrower field of a particular asset manager. In fact, asset allocation and product selection are the keys to client satisfaction with sound business management being needed for shareholders or for wealth managers' firms themselves to be secured.

Swiss private bankers are facing management tasks unprecedented in their histories and can survive and fight back. Their success, however, will depend more upon themselves as managers than upon improved stock market performance or firing some or many of their personnel. They should also not forget their biggest asset: their clients who deserve good investment performance.