Private banking: Julius Baer’s wealth-gathering machine
Hiring more than anyone else in the wealth management industry and hoovering up the assets of failing competitors, Julius Baer is going head-to-head with its two larger Swiss competitors in Asia and Europe. Given CEO Boris Collardi’s tenacity, if the markets go his way, he may just pull it off.
|Illustration: Kevin February|
Boris Collardi, chief executive of Julius Baer, is against stop-and-go strategies. “You need momentum at all times – whether you’re at 80% expansion or just 20% expansion, you have to always be in investment mode somewhere.”
If not, inertia sets in, and it is far harder to kick start a business once that happens, he adds.
One cannot help wondering if he is talking about himself. Collardi has not stopped since taking on the role at just 35 years of age in 2009 in the middle of the global financial crisis. From 2012, Collardi changed up a gear by boldly buying Merrill Lynch’s international wealth management business for a song.
That deal set a trajectory that would turn, in his words, a “medium Swiss bank” into a fully fledged international private bank – and an aggressive one at that. European expansion followed with the acquisition of Bank Leumi’s Swiss and Luxembourg businesses in 2014, and then last year Julius Baer added Commerzbank’s Luxembourg business and a majority stake in Italian asset manager Kairos.
At the end of 2009, when Collardi became CEO, the bank had SFr150 billion ($150 billion) in private banking assets, of which 80% were booked in Switzerland. He has since more than doubled those assets under management to SFr336 billion, making it the third-largest Swiss private bank. It is expected that within five years, Switzerland may represent just 40% of all Baer’s assets, with Europe and Asia representing another 40%.
Collardi – perhaps thanks to his youth – is not known for following his peers. When other banks are in a wait-and-see mode, he sees it as a time to buy. And it is not just banks that Collardi has been buying. Julius Baer is known to be one of the most aggressive hirers in the industry; Collardi has developed a reputation lately of impromptu senior hires, poaching wherever possible in order to bump up AuM. Last year, while other private banks were trimming headcount, Julius Baer increased its own by 166 bankers.
“Competitors were struggling and we wanted to seize the opportunity,” says Collardi. Most of those hires were in Asia. Before 2012, 75% of employees were based in Switzerland, now it is 54%. Asia accounts for 22%. The firm has 6,000 employees worldwide, of which around 1,400 are relationship managers.
It is a growth strategy that many of Julius Baer’s peers have been unable to keep up with. Global private banks have instead been cutting geographies deemed unprofitable, while simultaneously grappling with increased costs and lower margins that make their bankers and assets easy prey.
Julius Baer, on the other hand, has the advantage of having had Collardi at the helm for eight years. The firm’s business lines used to include mature and growth clients, but in order to increase efficiency that was tweaked into five new regional lines: Switzerland and Europe have been the traditional core; Asia and Latin America are considered two distinct high growth markets; which leaves a looser collection of geographies covering India, the Middle East and Africa, plus Eastern Europe, where coverage focuses on entrepreneurs and first- and second-generation wealth.
To some extent Julius Baer is regrouping, particularly in Europe. The region had been split into north and south and was something of a mash-up of country businesses inherited from acquisitions. Now the region is united and will have Luxembourg as its hub. The Commerzbank Luxembourg acquisition came with the IT platform that the whole bank is moving to, supporting that transition. Yves Robert-Charrue is the new regional head.
With RoEs coming down, you need to have at least $35 billion in Asia to break even, and there aren’t many of us. But those of us there are, differ dramatically - Jimmy Lee, Julius Baer
When the subject turns to Asia, Collardi’s eyes really light up. Of course, he is far from alone in this among his wealth management peers, but some of them have had to turn tail after investing heavily in Asia, only to struggle to make the business pay.
Collardi insists Julius Baer will not make the same mistakes. Collardi says his strategy is simple. “We look at three things: costs, investments and three-year revenue growth. At the beginning of each year, we are prudent and adjust short-term expenses and decrease headcount where needed. Then we look at the investment programmes we have in place with regards to infrastructure growth over the short to long term.”
For example, Collardi says the firm is making a several hundred million Swiss franc investment in overhauling the bank’s technology globally. By 2020, all booking centres will be operating on the same platform and the bank will be completely digital, says Collardi.
“No one should be touching paper by the end of the decade,” he says. Asia and Europe go live this year; Switzerland will be the last.
As for the creation of revenues over the next three years: “That’s the role of senior management. We have to clear up past liabilities. We have to understand what is working and what isn’t, or whether we might consider acquisitions, for example.”
Collardi’s watch has not been without distractions. Julius Baer got tied up in the Fifa scandal and reached settlements over US client tax evasion. But, compared with many other long-established private banks in Switzerland, the charge sheet has been relatively small. That said, without the settlement with the US Department of Justice, Julius Baer would have increased profits last year by 174%, with a gross margin of 91 basis points.
|Boris Collardi, chief executive of Julius Baer
Colleagues say Collardi is one of the more energetic private bank leaders; he has put much of that energy into constant travel, meeting with clients and employees and promoting the business.
“The key for us is to keep costs, investments and revenue creation balanced at all times,” Collardi says. A look at Julius Baer’s earnings demonstrates his point. Personnel expenses, for example, went up 9% last year with the increased headcount from acquisitions and new hires, while general expenses were cut by 43%, despite the technology investment. Assets under management rose 12% and operating income rose 5.9%.
Collardi says he has witnessed his peers “get killed” adopting a strategy of investing without considering costs, only to then cut costs and ignore investments. “The outcome is always the same for any firm that plays that game,” he says.
What has helped Julius Baer stay on a growth trajectory, Collardi says, has been the stability of the senior team. Indeed, last year was the first time since becoming CEO that Collardi began to make changes.
“The hire and fire that we see in senior level positions at banks does not work,” he says. “We try to keep people in their functions for many years – that way we’re not constantly having to re-explain the strategy. There becomes a unity of purpose. When people know they will be working together for a while, they develop a relationship of trust and openness. Similarly, clients will develop trust in us.”
After years of mild pessimism, it looks like clients believe, at least, that we are entering a new phase - Boris Collardi, Julius Baer
Among the changes was Thomas Meier, who grew the Asia business from 25 employees to over 1,000 in his 10-year tenure as head of the region, but returned to Switzerland to run corporate social responsibility – one area where Julius Baer is playing catch-up against most other big international banks.
He was replaced in Asia by Jimmy Lee, who had led Credit Suisse’s business in Hong Kong. Collardi hopes that Lee’s drive and the fact that he is local will help to meet the aggressive goals of expanding the Asian business.
As a new starter, Lee is in a good position to compare Julius Baer with its main competitors. Straight off the bat, he describes Julius Baer as being “entrepreneurial”. He points to the bank having a can-do attitude and benefitting from being a pure-play private bank.
It is a lofty goal to put Asia at the top of the revenue stream, second only to Switzerland – particularly when Asia is seen as the region of growth for all of the largest global banks – yet Lee seems unfazed. He says the landscape is competitive, but also fragmented.
“With RoEs coming down, you need to have at least $35 billion in Asia to break even, and there aren’t many of us,” says Lee. “But those of us there are, differ dramatically. The investment banks cannot be challenged on what they offer in terms of depth of equities and fixed income businesses. Then you have the universal banks that have private banks as a sideline, which aren’t really in the game. The regional players are strong in loans and tend to serve those lower down the wealth spectrum, say $5 million. And then there is the bucket that we compete in: wealth planning for those with $20 million and above. It’s all we do, and we do it well.”
When Lee joined, he brought with him nine other bankers from Credit Suisse and a further 90 relationship managers from across nearly every large global and regional private bank, refreshing an employee base still largely based around Merrill Lynch alumni.
Known to be somewhat ruthless in his hiring, Lee took only relationship managers who were likely to transfer the majority of their clients over with them. Typically, a relationship manager will bring just 30% of their book with them. Hong Kong clients tend to prefer to spread their assets across many banks. “We wanted people with high client engagement,” says Lee diplomatically.
In just a short time, Lee has also implemented an overhaul of the Asia business. Four important markets were highlighted for Asia: Singapore, Hong Kong, China and Indonesia (where it provides offshore wealth management services). “We think we can see multiples of growth in China,” says Lee.
He also reconsidered the service offering, honing in on wealth planning to serve the more than one-third of Asia’s wealthy that are transferring wealth to the next generation. Pictet’s Bhaskar Laxminarayan was hired to be the Asia CIO – a new role at Julius Baer.
“Finally we looked at how clients are engaging with us, how much of their business are they doing with us,” says Lee. “We set up a leadership structure that enables the relationship manager to better deliver the entire firm to the client.”
Now the plan is to move into more fee-based and managed solutions, says Lee. “With [Markets in Financial Instruments Directive] rules and retrocessions disappearing, we need to improve the quality of earnings to be more stable.”
Those efforts are already under way in Switzerland. Last year, Julius Baer rolled out its new advisory model – similar to UBS’s move three years ago. At Julius Baer, Swiss clients are questioned about their investment needs and risk appetite before either receiving advice on how best to invest if self-directed, or being put into discretionary funds managed according to that advice.
Collardi says that has several benefits beyond creating smoother revenue streams: “We can reduce the dispersion of quality of advice we are giving, making sure that every client is getting the same high quality. It also gives our clients an institutional level of advice. Every day we can assess a client’s portfolio and tell them whether they are outside of the allocation they desire. And it should mean better performance for all client assets.”
The model is rolling out in Europe, and Asia will soon follow. Already 45% of Julius Baer’s assets under management are now mandated – that is up from 30% in 2015 – with the goal of hitting 100%.
After eight years in the chair, Collardi remains a man on a mission. If there are roadblocks, he quickly removes them. Barend Fruithof is a case in point. Fruithof was brought in around the same time as Lee from Credit Suisse, tasked with refreshing the Swiss business. Fruithof’s determined style seemed to match Collardi’s, but a clash of opinion over restructuring meant the two parted ways within a year.
One fear among the Julius Baer hierarchy is that Collardi could be tempted to switch to a new challenge himself. He is often touted as a potential leader for Credit Suisse if the current CEO, Tidjane Thiam, fails to pull off his restructuring plan.
Collardi’s main concerns are over events beyond his control.
“In the end what drives the agenda of any wealth manager is ultimately the economic outlook,” he says. “It drives activity, assets, clients’ resilience, patience and expectation, and revenues.”
His ambitious plans for Julius Baer require markets to be supportive. He is optimistic on that front. “After years of mild pessimism, it looks like clients believe, at least, that we are entering a new phase,” he says. “We have high volatility and a positive market outlook together – that’s a new thing – so advice and making sure clients are invested are going to be imperative.”
Already Julius Baer’s clients have reduced their cash holdings slightly to 23%; Collardi expects that level to fall to 20% over the next two years if investment appetite increases. For the near future at least, it looks like Collardi will be keeping his foot on the accelerator.