By Nicholas Faith
Like many another fast-growing family business, Julius Bär is suffering from a surfeit of the problems inevitably associated with success. How can it adapt its business methods to face new competitive situations?
Should it tempt providence by constructing a purpose-built head office to replace its present homes, a number of converted apartment blocks and smaller offices scattered throughout Zurich? Can it find and retain enough young middle management in competition with bigger and richer rivals? How far should it spread its thin top layer of expertise internationally?
Above all, Bär has to answer one fundamental question: how can a business which has flourished as never before over the past 15 years, because of the entrepreneurial flair of three extraordinary cousins, transmute itself into a properly structured business while retaining its feel for the marketplace?
Many of the questions must ring a bell with other businessmen who are similarly placed: what is extraordinary about Bär is that it is a private Swiss bank, a member of supposedly the most secretive band of financial animals in the capitalist jungle: yet, during several days spent at the bank's head office, in what must have been the first detailed journalistic investigation of such a bank, this reporter encountered a degree of frankness – at all levels far greater than that prevailing in many supposedly more open Anglo-Saxon financial establishments.
(In some ways the discovery that the Bärs and their employees were not 19th century hangovers but an alert ensemble, interested and articulate about the problems they face in the last quarter or the twentieth century, was a disappointment. The reporter felt cheated of any sense of mystery. Even the men who keep the secret of the numbered accounts turned out to be ordinary clerks rather than the keepers of the Holy Grail they ought, by popular reputation, to have been).
The fundamental question for Bär is: how can it transmute itself into a properly structured business while retaining its feel for the marketplace?
The bank is a curious institution, rather different even from its brethren in Zurich and Geneva. It is, for a start, a hybrid. Rather like Robert Fleming in London, it is a mixture of a relatively small commercial bank (its total assets are under $500 million) which is at the same time in charge of a great deal of other people's money – nearly $2 billion worth in Bär's case, virtually all of it personal fortunes, apart from a few pension funds.
By Swiss standards this is a curious mixture. The three big Swiss banks also, of course, are in charge of vast sums of money (the total managed in Switzerland probably amounts to around $100 billion) and are also commercial bankers on a far bigger scale. There are a number of smaller public banks, federal and cantonal, with substantially bigger deposits than Bär – though they are not important portfolio managers.
Of the private banks, the biggest, apart from Bär, are in Geneva. And these, Pictet, Henstch, and the others, manage in some cases more funds than Bär, but none is as big in purely banking terms.
The three Bärs
Bär's other differences from any particular Swiss norm are partly the result of history, partly of the talents of the present top management. The bank is not an especially historic affair. It was only in 1897 that Julius Bär, a German by origin, joined what had previously been the partnership of Hirschorn & Grob, itself then only 20 years old. By contrast, many of the other survivors from the classic era of Swiss private banking date from the turn of the nineteenth century (the first revolution to frighten the Genevese private bankers was that of 1789).
Two of Julius's three sons, Werner and Walter, followed him into the business (though, to get adequate financial backing he had had to take in a money partner, one Dr Hans F. Mayenfisch, described in the bank's official history as a bon vivant, and, more bluntly, as a playboy by the present generation of Bärs). The present generation of Bärs are all grandsons of Julius. Nicholas, the chairman, the most obviously correct and bankerly of the three with a doctorate in economics from Zurich, is the son of Walter.
Peter, the son of Werner, at first shy and retiring, is the trader, his eyes lighting up as he explains to the bemused laymen the peculiar joys of arbitraging in some new and delightfully complicated fashion (he even has a telex machine in the garage of his holiday cottage in the West of Ireland, much to the bemusement of the local population. who do not understand that the daily quotes telexed from Zürich are his equivalent of the day's racing results).
Hans, large, loud, ebullient, the author as a young man of a standard book on Swiss banking, prepared to talk the hind legs off a whole herd of donkeys, is, improbably, the son of a retiring intellectual, Richard Bär, who deserted his father's business to become a professor of physics. Over the past decade, if any financial journalist came up with a particularly apt quotation supposedly from the lips of a Zurich banker, it was odds on that he heard it, emphatically, gutturally, epigrammatically, first from Hans's lips.
Hans's willingness to talk openly is not the only way the family, like the bank, differs from any Swiss norm. The family is, for a start, the only Jewish one which owns a major Swiss bank: they have long been firm Zionists – partly because Richard was a great friend of another physicist, Dr. Chaim Weizman, though they are not close to their fellow religionists in Switzerland, since none of the family is religious in any way. In addition, the three have always been more outward looking than the Swiss average – they married Americans, English girls, girls from French Switzerland (even more foreign, in correct Zurich eyes). Although the bank's working language is, inevitably that series of gutteral grunts known as Swizzerditsch to its enemies, and Suitzerdeutsch officially, the bank's employees are equally at home in English or real German.
The troika became full partners at the end of the 1950s, when they were in their early thirties. or in Peter's case, late twenties. Werner died in 1960, but his brother Walter remained active for some years longer. This longevity taught the three a lesson, that they in their turn should not remain too long, so they have agreed to retire sometime between their sixty-second and sixty-eighth birthdays – which postpones the evil day of their departure into the late 1980s and beyond.
In theory the three divide up the bank's operations between them – with Peter, naturally, in charge of trading, Nicholas taking care of the trust and advisory departments, and Hans of commercial banking. But through the great growth period of the 1960s, when the bank's staff more than doubled to its present 350 within a very few years, what Hans describes as "our charming disorganization" clearly prevailed, with every member of the troika doing some of the others' work. The cousins' clear compatibility is naturally proving a problem in changing the bank. "This unique troika is also a curse, we are so close", laments Hans.
But for all their protestations that the business's growth was largely accidental ("In my opinion you never make deliberate policy", declaims Hans "decisions are always made for you"), they followed a clear policy and pattern. They remained, and remain, primarily investment managers, but at a level where many of their clients run substantial businesses and often, therefore, need a full range of commercial banking services – this is why the bank can say, with equal and paradoxical accuracy, that 90% of its business comes from portfolio management, if you count the loans made, the bills discounted for investment clients as part of the service: but if you count them as banking services, then only half of its income comes from fund management.
Quite obviously, not all investment clients are equal. To get anything like a personal management service you need to start with at least $100,000. Below that level you will be pointed to the virtues of the various investment funds run by the bank, specializing in bonds (Bärbonds), convertibles (Conbär, a fund which has a regrettably tricky ring to Anglo-Saxon ears), stocks, or even smaller, growth businesses (Grobär). But in any case "a client cannot come in off the street, he has to have a plausible story as to why he wants to come to us" – he also has to be introduced, a procedure which, the Bärs hope, precludes the management of funds dubiously or criminally acquired.
(They are quite strict in their rules: they do not like even changing travellers cheques for strangers in their little banking hall, a small office just inside the bank's unimposing entrance – itself in a sidestreet, not on the main Bahnhofstrasse. This reluctance was once extremely useful. The cashier grew suspicious of one Italian who had changed a load of lire and informed the police, who discovered that the client was a well-known kidnapper, come to Switzerland to launder his ill-gotten gains by changing them, first into Swiss francs, and then back into lire at another bank altogether).
Of the bank's 15,000 customers, clearly the majority either hold bonds (highly suitable for "people, like our clients, who have most of their equity tied up in their own business") the mixture laid down by the bank's investment policy, an ever-changing mix of equities, currencies, bonds and liquid investments – curiously, and again unlike virtually every other Swiss bank, the Bärs have never been very keen on gold. They bought some during the recent gold rush, but now their clients hold only between 0 and 5% of their portfolio in gold, compared with 35% to 45% in equities.
"A client cannot come in off the street, he has to have a plausible story as to why he wants to come to us"
Most clients – and their managers – have to operate within these limits, though there are exceptions for specially favoured customers. But only a handful, a couple of hundred or so with at least $10 million to brood about get the full VIP treatment – though catering for even this select bank occupies most of the partners' evenings during the week, since they prefer to negotiate either in their hotel suites in Gstaad or St Moritz, or in some quiet country inn near Zurich where they will not easily be recognized. As the number of clients increases, so, of course, do the ranks of those important enough to feel that they are automatically entitled to see a Mr Bär: the solution, says Hans "is to call a lot of other people Bär".
At least a third of the clients are local Swiss people, and a large number more from Germany, neither class anxious to hide anything from their tax-man, or to use the famous numbered accounts. But they can also be used – as the Americans do – to hide from greedy wives or ex-wives (the amount of alimoney the bank doles out on behalf of its clients, is, apparently, incredible). The bulk of the rest of the bank's clientele, from Central and South America, are, indeed, using the anonymity of the numbered account to escape from what the Bärs, like the Swiss in general, regard as the intolerable and capricious demands of non-Swiss tax authorities. Some clients are so secretive that their accounts are in the names of investment trusts, stifftung, registered in Lichtenstein, where bank secrecy really is absolute.
The wide geographical spread of Bär's clients poses one unusual problem: the currency in which they are measuring their advisers' performance. Peter claims that he actually asks his new clients the currency in which they dream (one Hungarian-born refugee living in Latin America, dreamt, it emerged, in Deutschemarks, because of the dominant Germanic influence in the Hungary of his youth). More seriously, the strength of the Swiss franc over the past few years – a strength which the Bärs think will continue for some time yet – has knocked conventional measurements of portfolio performance sideways over the past few years.
Helmut Saurer, one of the brightest of the new generation of Bär's managers, put it this way in a recent talk to other investment managers: "As investment managers based in Switzerland. we have a natural tendency to measure and report performance in Swiss francs. While this is perfectly alright for clients living in our country, it may be totally misleading and indeed come close to masochism if we apply the same reporting procedures for clients living, for instance, in North or South America. Why should we tell them how poorly they did in Swiss franc terms when we can make them happy by showing an excellent performance in dollar terms?"
Saurer reinforced his thesis with figures: an American investor, buying $1000 of 5½% Swiss franc bonds in 1970 would now have an investment yielding over 9½% and worth $1750. Conversely "an investor who bought IBM at its 1970 bottom of $175 has made 47% in dollars but lost 16% in francs and gained only 4% in Marks." Nevertheless the bank finds that clients from South as well as North America, while grateful "for all the money we've made for them in such funny, exotic currencies as Marks and francs" now want to get back into familiar old dollars, the currency in which, presumably, they all dream (I wonder at the currency of people's nightmares: sterling or the lira?).
The money to be made and lost in judging the correct currency rather than the right stocks in which to invest has worked to the relative advantage of the bank in the past few years, since, in the world of portfolio management, there is less competition in judging currencies than stocks. The bank's expertise has ensured that, in the long-term, its funds have outperformed most of their competitors' offerings.
"Why should we tell them how poorly they did in Swiss franc terms when we can make them happy by showing an excellent performance in dollar terms?"- Helmut Saurer
The Latin-American connection has proved increasingly useful over the years as the Bärs roamed far and wide looking for ways in which they, as relatively small fish in the enormous currency pool, could make money out of short-term banking. Indeed (because, Hans insists, of an accident, the employment of a first-class agent in Mexico a generation or more ago) the bank has long specialized in what it calls "semi-exotic" paper, Mexican, Brazilian, or Finnish in origin, but guaranteed by one of the handful of banks in those countries which Bär really trusts. It finds that other banks mistrust such paper (the bank's trading manager, Albert Merz, another of the younger generation., quotes what he claims is an old Swiss proverb "what the peasant doesn't know he doesn't eat").
This is a classic instance where Bär, like the smaller London merchant banks in competition with bigger animals, has to live off its wits rather than its deposits, which is where Peter's expertise at discovering anomalies in sinking fund redemptions of Eurodollar bonds, or willingness to invest in formerly busted flushes now, hopefully, on the way back, is useful.
But the churning, expansive phase ushered in by the troika's talents required some thought about the bank's long-term future. By the end of the 1960s, it was clear that it could not remain forever within the rigid, demanding framework of a private bank, with each of the partners having unlimited liability for the bank's debts. So Bär had to plan for its transformation, the first in recent Swiss banking history, from private to corporate banking status.
The brothers' first step was to bring in Ernst Bieri, then finance minister of the canton of Zürich, and, before that, a senior editor on the Neue Zürcher Zeitung for nearly 20 years (the NZZ is somehow more respectable than any non-Swiss paper can ever be). Since his arrival six years ago it has been Bieri's ungrateful task to try and get the partners, and the staff, to behave in a rather less informal fashion, actually write down their decisions, create committees to supervise management and investment policy, actually hold meetings (all cleared out of the way between 7 and 9 a.m. so that the day's real work could then start) and generally behave in a fashion sufficiently structured to persuade the Swiss Banking Commission, or rather the Zurich authorities, that Bär was well enough organized to be allowed to transform itself into a different kind of corporate animal.
The negotiations which led to the incorporation of Julius Bär on 1st January 1975 as a company, rather than a partnership, were prolonged, if only because they were setting such an important precedent – Hans hopes that the ground rules laid down by the case will be called the lexBär. One misty area concerned the capital gains tax to be paid on the change – negotiations which have rather restricted the bank's ability to mobilize further capital resources for a couple of years to come.
But the most critical area concerned the bank's management structure. In theory no one person could serve on both the supervisory and the management boards; yet it would have been absurd to exclude the Bärs from either. So, says Hans, "we were grandfathered"; all three were, as matters of personal exception, allowed onto both. The new supervisory board brought in a number of independent-minded Swiss industrialists, but, Hans admits "they will take five or ten years to change us: they have jumped on to a galloping horse".
The change in official status brought one bonus for outsiders: they can see, with a frankness not visible in non-Swiss bank accounts, where the Bärs make their money, since the profit and loss account is divided into areas of trading activity. So we can see that commissions on investment management, at around $9 million, was the biggest contributor to profits last year, followed by foreign exchange dealing, followed by security dealing, with the contribution from banking (defined as the difference between interest and discounts received, and the interest paid) being, net, little more than $3 million – though this is slightly unfair to banking, because the other departments' figures are before expenses of any kind.
But the figures, besides giving some indication of the size of the bank, show how much money it must have under management (the maximum commission payable by a small personal client is ½% a year, a figure which reduces to ⅛% for really big clients, so the $9 million figure must indicate at least $2 billion under management). It also shows how underlent the bank is in Zurich, compared with the figures from its London and New York offices. It also, and, to an outsider, most surprisingly, shows that Swiss banks pay really rather a lot or tax - $2.4 million in 1975, leaving a net of only just over $3.5 million.
The foreign offices clearly play a major part in Bär's plans for the future, and not only because they account for over a third of the bank's assets. They are not, however, alike: the New York office was started in 1940, when the bank's clients desperately needed a safe custodian for their funds.
More recently, the Bärs have found that New York is so parochial that Swiss expertise in currencies and the trading of bank paper could be made to pay. So that the bank now has an official subsidiary in the city, one of only four Article 12 banks, the others having far larger parents, like the EBIC bank consortium. The Bärs hope that many of their Latin American clients, accustomed to regular visits to New York, will be prepared to take their Swiss banking advice from someone resident in the US rather than Switzerland ("though", as Hans remarks "it is by no coincidence that we have sent over someone with a strong Swiss accent to New York").
"We will have to offer the world more than the charm of the Bahnhofstrasse and secrecy"- Hans Bär
The bank's presence in London has a shorter, if more troubled history. Set up partly at the instigation of Bär's friends at Barclays – nearly 10 years ago as a partnership with the then-mighty finance house, United Dominions Trust, Bär has seen its partner fall on bad days and has bought it out. But the basic raison d'etre remains: "We're replacing in London the basic trading skills imported by an earlier generation of immigrants, the Warburgs and Bleichroders", say the Bärs. And they have to be present in London, dismissing scornfully any suggestions that it could be replaced by Paris, Brussels, or Frankfurt as the European banking centre par excellence.
However, in spite of their successes in London and New York, the Bärs are firm that their geographical expansion will be limited: "It is not the stance of a private bank to have branches", they say firmly; and even within Switzerland, although they regret the absence of a Bär presence in Lugano, their interest even in Geneva is confined to a modest 20% stake in a bank there. They clearly have enough to do, coping with the expansion of their present business looking for "a whole new class of customers with funds in the low six figures to manage": they also have to wrestle with their structural and managerial problems.
These have been simultaneously exacerbated and simplified by the virtually simultaneous retirement, last year and this, of four department heads, who had 200 years of service to the bank between them. They have been replaced by the likes of Saurer and Merz, all solid German-Swiss (though less physically so: the youngsters are svelte where their elders tend to possess the most magnificent beer-and-bratwurst bellies). There is also the inevitable tension between Ernst Bieri, trying to structure the bank in a fashion formal enough to satisfy the banking authorities, and the rest of the bank.
More fundamentally, there is the whole question of the future of the Swiss banking system. There is no doubt that the official authorities have been panicked by continuing accusations over the abuse of banking secrecy by foreign criminal elements, and by the relentless flow of hot money into the country. The combined pressures have led to an unprecedented spate of regulatory activity, some (like the ban on the changing of large sums in foreign banknotes) largely cosmetic, some, like the internal disciplining of banks, for real. "We have a very Prussian system" the Bärs remark.
But this official change reflects equal movements in the market. "We will have to offer the world more than the charm of the Bahnhofstrasse and secrecy" is how Hans sums it up. He is also worried about the whole question of the device of the numbered account. It was invented, as he points out, to help Jews fleeing from Germany who were in actual physical danger. Its use, and the justification for its further spread, have now been based on quite other, and less justifiable grounds.
Clearly the Bärs are prepared for a world in which it will no longer exist: but they seem confident of being able to stand up in competition with the international giants even without its help – a confidence that clearly has some basis in reality.