Julius Baer's chairman explains split

Raymond Baer, the last of the Baer family members to actively run the Swiss private bank, was recently on a tour of Asia. We caught up with him in Hong Kong to talk about business.

Would you still consider yourself at the helm of a family business?
It's interesting that you call it a family business, because culturally that is where we come from, that's what we are. But we run the business in a modern way because we are a public company and we have all the ingredients of a public company with state-of-the-art governance. If you look at the way we pick our management, I think we have proven that we want to run a meritocracy in our company. The recent appointment of a young CEO, Boris Collardi, is a good example for this. It looks like an unusual step for an old established house like Julius Baer, but obviously there were a lot of reasons we selected him.

We are a family business rooted in great tradition. But we are also a modern company with a great future as we believe we have the right ingredients. We want to be en guarde, we want to be pushing the envelope to try to be ahead of the curve, which is also a reason why we came up with the separation of our two businesses.

Well let's get right to the point: Why has Julius Baer split the business? What's the rationale?
To be provocative. (Laughter). We just lived through the worst financial crisis in the past 100 years and I thought: It will be extremely awkward if we live through this and come out of it with the same business model, with a business-as-usual, let's-continue mentality. I thought that cannot be an honest response to this crisis.

If you dig a little deeper, you have to acknowledge openly that the asset management arena worldwide has disappointed or failed, however you want to put it. No matter what sophistication level was applied, the search of alpha, or hiding behind beta, or the Markowitz efficient frontier; these are all intellectually very stimulating and ingenious, but the fact of the matter remains that they may not have been good enough. We have to reinvent the whole industry. Don't misunderstand me, I believe this industry will recreate itself, because the people involved are brilliant. They will inevitably come up with new approaches.

The background of our separation is as follows. When we bought GAM, funds of hedge funds were an absolute necessity to our private clients around the world. This is different today. GAM's performance has been good this year and it performed well on a relative basis last year, but it is disappointing in absolute terms like everyone else.

On the other side of the coin we looked at our other business, the private banking business, which grew very nicely -- the integration of the three banks that we bought in 2005 went superbly and our footprint is increasing day by day in the core and emerging world -- all as we had charted it out. After the separation, we will also have a unique 'open architecture' set-up which will be attractive for clients.

Our ambition is to become the most respected private bank in the world for high-net-worth individuals. We don't want to have any unnecessary conflict of interest. We do not want to be in the product manufacturing anymore and we do not want to be exposed to the unspoken or discrete pressure to sell products. I think if we approach clients today and say we have an open architecture; and we truly are open architecture because we don't have any large factory of asset management anymore and we hopefully have fantastic structuring people and fantastic research advisory people. I think our private clients are better positioned than anybody else's in the industry today.

Do you think there's room for asset management and private banking to work together?
I truly believe that the private banking world and the asset management world at this stage are moving at different speeds. The asset management world will quickly try to rejuvenate and reinvent itself and merge, and I think the GAM platform with all the ingredients we gave them will be very attractive in Europe and the US to forge those links and I think it will be a preeminent asset management force going forward as they have great management. We will continue to use them. But I think the businesses should be run independently, and that Julius Baer should be viewed as one of their best clients.

On the private banking side, we can look at consolidation; we can look at adding teams, in a very pure way. We have confirmation from head-hunters from around the world that what we are doing is appealing to a whole new set of client advisers that would not have talked to us a year ago.

Were you sure of the move?
It's a gutsy move because nobody has yet gone to that extreme -- also, we've become smaller in the process. But there is an old saying in French that if you step back you are probably preparing to jump ahead, and I think that's what we are doing.

During the several weeks when we worked on this deal behind closed doors, we were unsure. I mean I knew we were pushing the envelope and going to the extreme, but we were encouraged to see the response from all sides: shareholders, clients, private bankers, they were all unanimously positive.

Do you think other private banks will attempt to copy this model?
The large integrated banks won't be able to copy this, although I think they have to become smaller. They have to do something, spin-off parts of the business, but I think the global platforms, in my opinion will be questioned because this paradigm shift is for good -- employees and clients don't want to stay with global platforms. So they may have to downsize in smart ways, but I don't know exactly what that will mean for each bank. I don't think a pure advisory angle is the right choice for every bank, but this will make it more enriching for the clients. They will have real choices. They can go to a focused boutique bank like Julius Baer or they can go to the integrated bank, but clients have learnt a lot and they know there are conflicts of interest.

In Asia, it's very common for private wealth clients to have more than one bank. Do you see customers consolidating their business?
I think it makes sense if you have large wealth to diversify. But some may have gone overboard. I think to have two core banks probably makes sense but to have four or five banks makes little sense. It is inefficient. So I think there will be some consolidation in that sense. But I would not recommend, if you have large wealth, to have just one bank. You want to feel and see the market.

What is next for Julius Baer, particularly out here in Asia?
It's always preferable to grow evolutionarily because at the end of the day it's intensive emotionally to buy, but one should never say never because there may well be a "right deal" to be had that is accretive to the shareholders and makes sense business-wise. If we see that, we will look at it. But I think the reality is that it is best to always have a great, rich pipeline of good, strong people who want to join your organisation, then there is less immediate pressure on the business.

But one thing is true, net new money in the private banking industry is much more difficult to get. So at the end of the day, the push is real because you have to satisfy growth and if you can't grow evolutionarily you have to grow in another way. So our M&A people are looking -- it's their job to look at every option available -- but so far there is nothing out there for us right now.

Do you see Asia playing a key role for your business growth?
For me it's clear, the winners of this financial crisis are the emerging markets. That's why our base strategy has not changed. In 2004 we wanted to make the base business of Julius Baer larger so we could invest in new clientele, and today I think we have reconfirmation that the emerging world can be faster on their feet. They have been through crises over and over again. Continental Europe is shaken.

Growth will come back more quickly in the emerging markets and it is our job to make sure that we are participating here. We are committed to Asia, and recently announced that Thomas Meier, CEO for Asia, Middle East and Eastern Europe at Bank Julius Baer, and a member of the executive board, is to relocate from Zurich to Singapore in order to be even closer to these important and exciting markets.