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Thu 3 May 2018 04:57 PM

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Julius Baer: Banking for the Middle East's ultra-rich

Julius Baer private bank CEO Bernhard Hodler on the importance of the Middle East, how FinTech is changing banking, and the risks of cryptocurrency trading

Julius Baer: Banking for the Middle East's ultra-rich
Bernhard Hodler, CEO of Zurich-based Julius Baer private bank.

Private banking has always occupied a rarefied air, a perception of polished cherry wood doors and brass plaques on a central London street.

In a Middle East context, though, it is more about accessing the possibilities of the global economy in an efficient, consistent and trustworthy manner.

The best practitioners, according to Bernhard Hodler, CEO of Zurich-based Julius Baer private bank, are those with the ability to serve up those three elements to individuals. Investment, he tells us, is about returns rather than speculation.

While Julius Baer was founded well over 100 years ago as a banking partnership in Zurich, Switzerland, over the decades it has grown to become one of the most prominent private banks to ultra high-net worth individuals (UHNWIs) all over the world, with offices across Latin America, Europe and the Middle East.

In January, the bank reported a net profit for 2017 of $832m, with $22.7bn net of new money– a 6.6 percent increase that surpassed the bank’s own expectations – as well as $400bn in assets under management.

The bank also continued to place a strong emphasis of mergers and acquisitions, acquiring a 95 percent stake in Reliance Group, a Brazilian wealth management company. Growing its own portfolio was a prime concern, too.

This is one of the growth areas and has contributed substantially to new net money. We want to continue to grow here”

A commitment to the region

Speaking to Arabian Business during a visit to the Julius Baer office in Dubai International Finance Centre (DIFC), Hodler says the bank has long been committed to serving the needs of the Middle East’s – and in particular the Gulf’s – UHNWIs.

“The bank has always had clients from this region, but served them traditionally from Switzerland, mainly through Geneva, Zurich and other locations,” he says.

“Then in 2004 we decided to open an office here, when DIFC was launched. We were the first ones to get a license. That showed our commitment to the region. It’s important to us and has contributed very nicely to our growth over the years.”

Since then, the bank’s operations in the region have grown exponentially, with the Dubai office now boasting 120 employees, in addition to smaller offices in Abu Dhabi, Beirut and Bahrain. Hodler says that the company has more room to grow and is working to hire 80 new relationship managers this year.

“We don’t disclose how many in which areas of the world, but since this is one of the growth areas and has contributed substantially to net new money, of course we want also to continue to grow here, and there is a budget for managers,” he notes.

A game of thrones

Hodler was appointed as the bank’s CEO in November 2017, when his predecessor Boris Collardi defected to become one of seven partners at Pictet, a rival private bank and asset manager. At the time, Collardi’s sudden departure prompted rumours that many of Julius Baer’s clients or staff would follow him. According to Hodler, this hasn’t been the case.

“Look, we have lots of competitors,” he says, matter-of-factly. “One of the competitors is Pictet. It’s a good brand, but they have a different business model. They are quite good on the asset management side, but on the wealth management side our platform is substantially bigger.

"To be honest, we have competitors that are much stronger in the wealth management field; UBS, some of the local banks are very good, HSBC and others. We haven’t seen clients or relationship managers moving.”

Julius Baer opened an office in 2004 when DIFC first opened in Dubai

At the time of our interview, media speculation surrounding Switzerland’s famously secretive banking sector was further exacerbated by a week’s worth of hectic boardroom scrambling before Hodler’s appointment and the impression that perhaps Hodler – known as being a particularly discreet and quiet executive – was merely a stop-gap. At first, Hodler did little to dispel these rumours, saying that it’s always best to have a plan B “in case [he] gets hit by a tram”. According to Hodler, however, he’s here to stay.

“I was the plan B because I was deputy CEO, so if something happens to the CEO, or if he’s run over by a bus or goes over to a competitor, then the deputy obviously takes over,” he notes. “I was never nominated to be temporary, so I’m here to stay. But, of course, it’s probably the most important role of the board to ensure that they think about their plan B, if the CEO moves on or retires after 10 years.”

FinTech and blockchain

Hodler’s appointment as CEO came just months after Julius Baer hired a chief digital officer, who reports directly to the Nic Dreckmann, the bank’s chief operating officer. This move, Hodler says, was a natural step as the world continues to move towards digitisation and technology continues to change the way that businesses – banks included – operate.

“Technology and digitisation are changing every business, so it’s important for us to ensure that we don’t miss that boat. We therefore nominated somebody that really thinks about that change and looks at all the different aspects of it,” he says. “For me, there are two different aspects. One is the backbone of the organisation, so we’ve invested a lot of money into a new system, to automate it and make it more efficient over time.”

Nic Dreckmann, Julius Baer’s chief operating officer since July 2016

Perhaps more important, Hodler says, is the front-end technology that allows AI-assisted machines to help analyse what clients want and what their risk appetites are, as well as regulatory matters such as cross-border taxes. This system, Hodler proudly notes, was built internally at Julius Baer with additional input from financial technology companies.

“What it does is constantly look at the portfolio of our clients, and compares it with the old static information that we have, such as client investment profile, defined asset allocation, and it comes up with proposals if we have to change something, or buy this or sell that,” he explains. “It’s a machine that tells the relationship manager what he has to discuss with the client.”

We do not advise our clients to speculate in the cryptocurrency market. We give them access to structured products if they want, but we tell them that it’s speculative”

On the other hand, Hodler says he is less excited about cryptocurrencies, although he and Julius Baer remain interested in the potential applications of the blockchain technology that stands behind them.

“Blockchain, I think, is here to stay. We have looked at it already for some applications. It’s real, and companies use it. I think it will change the landscape, not only within banking,” he notes. “Cryptocurrencies are a bit different. I think it’s a lot of speculation. There’s a lot of volatility, and nobody knows which cryptocurrencies will make it. I personally think that some will make it, because the idea behind it isn’t completely bad, but we do not advise our clients to speculate in the cryptocurrency field. We give them [clients] access to structured products if they want, but we tell them it’s speculative.”

In a December 2017 statement posted to its website, Julius Baer noted that the bank is “negative” on Bitcoin and other current cryptocurrencies from a long-term, fundamental standpoint. “We believe, counter-intuitively, that blockchain-based ‘coins’ are actually extremely deficient currencies, as their terminal coin supply and their velocity are both capped, making them highly deflationary,” the statement noted. “Their ‘safe haven’ function is a more convincing use case, but we believe issues also abound in that context.”

The statement noted that although cryptocurrencies and blockchain are “an amazing technological development”, Julius Baer is also concerned by reports of fraud in the initial coin offerings (ICO) space and market manipulation on cryptocurrency exchanges.

Future plans

Looking to the future, Hodler says he largely plans to continue the company’s M&A strategy, as well as focus on its traditional core strengths, rather than venturing out into other fields.

“We produce maybe half our growth through M&A, and half through organic growth. One element of the strategy is the concentration on wealth management,” he says. “We really want to stick with this pure-play wealth management strategy and not venture into asset management, B2B or other things – and that is something clients like. It is very clear to us that the investors, our shareholders, our owners, that when they buy Julius Baer stock, they just get wealth management. There is no investment banking or commercial banking risk whatsoever. We’ll continue to stick to that plan.”

AI-assisted fintech is being used to help analyse what clients want and their appetite for risk

This pure-play strategy, Hodler notes, diminishes the risk of conflicts of interest – a fact he says distinguishes Julius Baer from most other private banks.

“Our USP is that we have less conflict of interest and can offer more holistic advice. If you look at the portfolios of our clients, maybe they’ll have five to ten percent Julius Baer labelled products, because we have some very good products ourselves, but we will only put it into the portfolio of the client if they’re better than other products we look at,” he says.

“That’s exactly what I want to preserve,” he adds. “Some of our smaller competitors are also pure private wealth managers, but locally. We have global reach.”

The Julius Baer approach

How the bank believes you should invest your money this year

While Julius Baer notes that recommendations to clients are unique and based on his or her risk profile and reference currency, the bank says it remains “generally constructive” on the equity market, as it believes its fundamental picture looks healthy, with a positive global macroeconomic situation, a good earning season and a generally low level of interest rates.

“Investors looking to generate high single digit target return will have no choice but to turn to the equity market,” says Diego Wuergler, Julius Baer’s head of investment solutions and advisory Middle East. “Julius Baer believes that such an investment demand will continue, and no major rotation [from equities to bonds] is forecasted as long as rates remain below four percent.”

Wuergler adds that the generally cautious mood of the average investor “bodes well for the continuation of the equity bull market, as it is known that markets climb a wall of worries. We should fear excess optimism and euphoria, such as in 2000 or 2007, but be happy about people being sceptics as bull markets are built on investors’ cautiousness.”

From a sector perspective, Wuergler says Julius Baer is fond of technology, financial, energy and industrial companies, while from a regional perspective, the Eurozone remains the banks preferred area. Within the emerging markets segment, “Asia Consumption” is the most compelling investment opportunity.”

Wuergler notes that Julius Baer is “more prudent” on the FI [financial institution] market, particularly its riskier segments such as high yield emerging markets where current low credit spreads failed to adequately compensate investors for the risk they are taking. “Therefore, we prefer a safe approach focused on focused on high quality [investment grade] bonds and inflation-adjusted securities. Duration, which measures the interest rates’ sensitivity, is kept rather low.”

Investors versus emotions

Among the most significant trends among investors today, Wuergler says, is that their mood is often driven by what they read or watch in the news every day. “We are bombarded on a daily basis with horror stories such as trade war fears, nuclear war, inflation fears, data privacy issues breaking Facebook’s business model, Trump’s tweets...” he notes. “Investors overreact and get scared. The fact is that the financial markets are not driven by these events. In the long term, they focus on fundamentals and are driven more by the very high levels of liquidity rather than what Mr Trump says.”

Wuergler also downplays analysts who predict that volatility will be a major trend of 2018, instead saying that short-term volatility is the norm for financial markets. “Julius Baer believes that the current volatility is nothing extraordinary and just opens attractive investment opportunities,” he notes.

Julius Baer and the arts

In February 2018, Julius Baer became the first company in the financial services industry to become an official sponsor of Dubai Opera.

With the announcement, the Emaar-owned venue became the latest art platform supported by Julius Baer, with other examples including Switzerland’s Verbier Festival and Lucerne Festival, as well as the Austria’s Gustav Mahler Jugendorchester. In the UAE, Julius Baer has also been a sponsor of Art Dubai for the last four years.

The Julius Baer Art Collection, meanwhile, encompasses more than 5,000 works, including paintings, sculpture, photography, video, graphics and drawings. These are displayed in Julius Baer’s offices around the globe. Established in 1981 by Hans J Baer (1927-2011), the collection was inspired by his belief that art presents a starting point for conversation.

In line with Julius Baer’s innovative spirit, the collection focuses on supporting up-and-coming artists, following them throughout their careers and to help develop a diverse selection.

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