Baer bows to the inevitable

May 20, 2009

REUTERS— Margaret Doyle and Alexander Smith are Reuters columnists. The opinions expressed are their own —

Raymond Baer is splitting the family firm. He has noticed the conflict between the private bank and asset manager. Or, as he puts it, “both entities will benefit from their sharpened focus and the absence of competing interests, thus acting pro-actively in the best interest of all of our stakeholders”.

In English, this means that Baer has realised that its long-term interests are not served by stuffing its well-heeled clients with pricey funds that generate fees for the bank at the client’s expense.
Indeed, many of the rich are feeling bruised from the losses they have taken over the past few years on structured products and alternative assets, like hedge funds, that were supposed to deliver an absolute return.

Fortunately for Julius Baer, it looks as if their private banking clients escaped much of the carnage visited upon GAM, its fund of hedge funds business, in the wake of the Lehman collapse last year. Just 10 percent of GAM assets came from clients of Julius Baer.

This may have been more through luck than judgment. GAM has only been in Julius Baer’s ownership since 2005, when it was acquired as part of a package of banking assets from rival UBS.

Even so, the lessons from the credit crunch are clear. It is impossible for private bankers to act in the interests of their clients if they get kickbacks on the sale of funds. And if private bankers are not trying to funnel their clients’ money into their asset manager, why own it in the first place?

Moreover, Julius Baer has recognised that the two businesses are quite different, with distinct client types. The private banking client is an individual or family seeking to preserve wealth, whereas those who buy hedge funds tend to be institutional investors looking for growth.

Mr Baer has pooh-poohed any suggestion that the move has anything to do with American and German hostility to traditional Swiss banking secrecy and the accusations of tax evasion that go with it. However, it hardly helps the asset managers to risk being tainted with any investigation of the bank.

The new Julius Baer can now go hunting among the disaffected clients of UBS, while pointing to its lack of conflicts.

However, the more difficult question is what to do with the money, once the client has deposited it, without creating the same conflict all over again.

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