Diversification of Bank Relationships from the Customer Perspective (and also from the Independent Asset Manager)

As an independent wealth manager entrusted with wealth built up over decades (and often longer) it is important to keep the focus on risks.

One risk is that of having a clients assets locked up with one bank and that bank then going into administration. Large banks try to force their independent asset and wealth managers to bring ALL the customers assets to them. This is a fundamental mistake and counter to any logic of never putting all eggs in one basket. In Switzerland the salespeople in charge of independent asset managers (such as myself) are directed to implement this, in my view, very unfavorable business practice. The reason is simple: Salespeople are paid a bonus depending on new assets. They don’t get a bonus for common sense implementation or helping a client reduce risk, as far as I know.

Anyone watching geopolitical developments or taking a look at what recently happened in Cyprus with wealthy clients assets (Cyprus’s central bank said in July 2013 that 47.5 percent of deposits exceeding 100,000 euros in Bank of Cyprus would be converted into equity to recapitalize the troubled lender as part of an international financial bailout for the island.1) will no doubt be aware that a country’s banks or a particular bank can fast be put on sanctions lists or the state can enforce haircuts on assets held at the bank to bolster its capital or liquidity.

That is why I recommend my clients use banks, if not in different countries, then in different market segments. It makes a lot of sense to have cash balances at banks that don’t risk a lot of their balance sheet on property prices, i.e. mortgages. Neutrality of Switzerland historically meant that the chances of being put on a blacklist or sanctions list were slim. After all, if you’re not taking sides, why would someone punish you. That has changed to some extent in the last 10 years as the Euro-US Block has become more aggressive in its tactics and dependence of Swiss Banks on infrastructure abroad (or the possibility of the likes of the NSA to eavesdrop on international bank payments data etc), and access to it, has changed dramatically.

The fact that certain banks do not respect this fundamental risk diversification aspect and want to force customers, or their advisers to put all eggs in one basket is troubling.

A real world example: If the customer is often spending money in a certain country he should do this from an account with low fees, good credit card or debit card conditions. Often the banks offering those are large global players or local players. To decide on which bank is ideal for the clients long term wealth protection and increase different factors come into play. Feel free to contact me for further discussions via mail, email or phone number on the main website depending on your preferences and security and privacy needs.

Another example of an issue a UK customer would encounter with a current or savings account in the UK 2):

The Financial Services Compensation Scheme (FSCS) protects individual savers up to £85,000 for each savings institution. It therefore makes good sense to divide money on deposit between several accounts with different organisations, keeping each account below this limit.

Crucially, however, the compensation limit is per person, per authorised institution. Therefore you need to be careful that you do not hold more than one account under the same banking brand. It is not always obvious which organisations are linked via the same parent company, but you can check out a list at the Financial Conduct Authority’s website at fca.org.uk.

Certain savings institutions are not covered by the FSCS. Again, there is a list available at fca.org.uk.

If you have a large amount of savings it may not be practical to hold many different accounts, so it’s worth considering National Savings & Investments (NS&I), which is backed by HM Treasury so is very safe. Sometimes securing capital is more important than the interest rate gained.

 

In Switzerland: A maximum of CHF 100’000 are privileged in case of bankrupcty proceedings per creditor. Article 37a of the Swiss Banking Law states:

privilegierte-einlage-bankengesetz-100000-franken

References 1) http://www.reuters.com/article/2013/07/30/cyprus-bankofcyprus-idUSL6N0G033120130730  2) http://www.moneywise.co.uk/banking-saving/savings-accounts-isas/should-we-spread-our-money-across-multiple-banks-if-santander-g

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