The end of an era for private banks

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Private banks must pay heed to regulatory and technological change, and changing client attitudes, or face extinction.

Switzerland’s oldest private bank, Wegelin & Co, announced in January that it is closing after pleading guilty to helping US clients evade taxes and paying a $57.8 million fine. Its closure is indicative of the end of an era for private banking. Over history, and undoubtedly because of geopolitical issues and economic pressure, private banks had taken on a role as being chief advisers on how to hide money.

The problem is that that mentality persisted even when geopolitical risk had waned and tax rates had been lowered or economic pressure had ceased. When "know your client" regulations were introduced soon after 9/11, private banking was flourishing thanks to growing wealth among baby boomers and in Asia. Banks could see that the future would be one of transparency, onshore banking and no tax avoidance, let alone tax evasion, but some relationships managers were too reluctant to tell long-standing clients that they would have to change – especially when there was such heightened competition for their wallet. Some older institutions that relied on holding the wealth of families they had known for generations were particularly reluctant. It was clear they would not attract new clients when up against big global machines with investment banks and asset management arms. So to survive, they kept quiet.

Wegelin will not be the last several-hundred-year-old private bank to close its doors. Tax avoidance has become as socially unacceptable as smoking in the past few years. So much so that lobby groups are forming among wealthy younger generations demanding higher taxes for the rich. For those banks such as Wegelin that get caught, fines are too much to take. A $50 million-odd fine for a small niche private bank cannot be recovered from when margins are tight and investment returns so low. The reputational damage can be fatal too.

There are lessons from this that all of today’s private banks can learn – not just the older establishments. It does not pay to avoid modernization. As private banking faces a $40 trillion wealth transfer to the next generation, and a mass move to digitization, to ignore advances, be those regulatory, generational, economic or technological, is tantamount to suicide.