For over two hundred years, the association between the Rothschild name and wealth management has held a reputation nearly as legendary as the one between private banking and Switzerland itself. However, recent changes in regulations, investor preferences and the nature of the wealth management industry itself, have posed new challenges for the old vanguard of private banking. INSEAD Assistant Professor of Finance Robert Kosowski and the Rothschild Chaired Professor of Banking Bernard Dumas look at Rothschild's recent history and evaluate their role in shaping the private banking industry of the future.
The private banking industry has changed dramatically over the last hundred years. Only a dozen partnerships remain from more than one hundred Swiss banks conducting business at the turn of the last century. Competition has intensified, now coming from private banking divisions of large investment banks, as well as smaller family-run offices, dedicated exclusively to the wealthiest clients. This has created an environment where banks are not only in competition with other banks, but essentially with clients as well. Perhaps even more concerning, is the threat to advantages once considered hallmarks of Swiss banking.
Traditionally, clients have been categorized along geographic lines into two types: domestic and foreign based, (i.e., offshore). Offshore clients are more profitable, presenting greater opportunities for value-added service. However, recent changes in EU and US regulations have limited tax advantages of banking in Switzerland, leading to declining offshore business, and forcing Rothschild to rely more on other lines of business to generate revenue, including wealth management and trust services.
Wealth management accounts are differentiated into two groups by level of service provided. In the first group, non-managed accounts, Rothschild's role is limited to holding assets and acting as broker, leaving investment decisions to individual clients. These accounts represent a majority of assets held, but are less profitable, not generating commission-based income for the bank. Full-service managed accounts provide clients with a dedicated Relationship Manager to provide expert advice and guide investment decisions. Relationship Managers adhere to a policy of open architecture, not limiting offerings Rothschild products, but providing "the best" to clients, including many external Hedge Fund products.
Rothschild's trust and financial structuring business has become an increasingly important source of income, with commissions amounting to 35% of total income. Competition here is less intense, where unique expertise has left them with few peers, and client relationships are much longer lasting an average of 15 years, compared to five for banking clients. Rothschild is also well positioned to provide Trust services to family offices, creating a niche and responding to a potential threat in one respect, through a clever hedge in diversification of services offered.
Looking ahead, the types and needs of private investors are in the midst of significant change. With a broad portfolio of services offered and a diverse range of existing clients, Rothschild has the flexibility to proceed in a number of strategic directions. Which business areas should Rothschild focus on to be best positioned to meet the challenges of private banking in the future?
This case provides a strong basis for examining the changing nature of the private banking industry. Through leading an evaluation of Rothschild's existing capabilities, new types of competitors, shifts in investor needs and changes in banking regulations, readers are challenged to determine sources of competitive advantage and identify factors that will be most critical to remain successful going forward.
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