claude suter geneva 12.03.2013 an introduction to private banking and portfolio management bruellan...
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Claude SUTER Geneva 12.03.2013
An Introduction to Private Bankingand Portfolio ManagementAn Introduction to Private Bankingand Portfolio Management
Bruellan Wealth Management
2bruellan wealth management
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Geneva 2013
Table of content
Private Banking and the Family office
Wealth Management, understanding the client
Risk and return adequacy
Portfolio creation and investment strategies
Choosing the right investment vehicle
Evolution of the financial markets
Concept of noise and echo in finance
Private Banking & Swiss Bank Secrecy
Questions and Answers
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Private banking and the Family Office
Financial House
Traditional Swiss Banks
Private Banking
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Private banking and the Family Office
Definiton of Private banking:
Traditionally, Private banking means to provide banking services to wealthy people and families. It is differentiated from retail, investment and corporate banking
Characteristics :
The client is an individual or a Family
He knows his banker and has a close relationship with him, based on trust
The banker provides services and “tailor made” investment solutions, answering the specific needs of the client
Today, private banking has to combine the one on one features of a traditional approach with on-line access to information on a “24/7” basis
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Private banking and the Family Office
Who are the most important actors ?
Private Banks
Private Banking
• Since XVIIIth century
•Single business entity
• Wealthy client
• Taylor made portfolio
• Traditional
• Family Office
International Banks
Private Banking
• Since 1970
• High and Middle class
client
• Segmented client service
• Product oriented
• Family Office
Investment Banking
Corporate Banking
Retail Banking
Independant Wealth Manager
Private Banking
• Since XXth century
•Independance
• High and Middle class
client
• Taylor made portfolio
• Dynamic
• Family Office
Retail Banks
Retail Banking
Corporate Banking
Investment Banking
Private Banking
• Since 2000
• Middle class client
• Mainly fund managed
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Private banking and the Family Office
Definiton of the Family Office :
A Family Office manage the whole wealth of a person or a family. It provides a variety of services including tax and estate planning, risk management, objective financial counsel, trusteeship, lifestyle management, coordination of professional services, investment advice, and foundation management.
Key components:
The client is an individual and often a Family
Portfolio management
An awareness of the family’s interests in less standard and arguably non-financial areas, which nonetheless need to be supported by financial planning within coherent overall wealth management strategy
Risk management
Property finance and legal assistance facilities
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Wealth Management, understanding the client
• Identity
• Objectives (risk / return)
• Fiscal / Financial planning
Client Profile
• Brief
• Strategic asset allocation
• Restriction
• Benchmark
Investment Profile
+• Tactical allocation
• Portfolio optimization
• Risk management
• Stock picking
• …
Asset Management
• Volatility
• Tracking error
• Dispersion
Performance analysis
ReportingFeedback
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Wealth Management, understanding the client
A fruitful, long-lasting relationship depends on our knowledge of the client, his objectives and his financial situation
Personal details
(nationality, domicile, age,
profession, health…)
Family situation
(marital status, children,
heirs…)
Asset and Income
(amount and origin,
real-estate income,
pension planning…)
Client
Do you have a specific objective in mind?
(e.g. buying a house, retiring, starting a business)
What currency do you use for most of your spending?
Objectives
Constraints
Do you have any
legal constrains?
Needs
Do you have any
particular needs?
Preferences
Do you have any
special preferences?
Financialplanning
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Wealth Management, understanding the client
Account characteristics
• Description :
• Base Currency
• Date of inception
• Initial size, future potential
• Objectives :
• Required annual income
• Expected return, benchmark
• Risk tolerance :
• Time horizon
• Liquidity needs
“ If you think education is expensive, try ignorance !”
Derek Bok, Harvard University
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Wealth Management, understanding the client
Account characteristics
• Guidelines :
• Investment universe : asset classes, countries,
currencies…
• Risk management : hedging policy, derivative
instruments
• Restrictions :
• Legal
• Tax related
• Maximum exposure to asset classes, countries, sectors,
…
• Qualitative restrictions : no alcohol or tobacco stocks, …
• Management of the account :
• Mandate of portfolio management
• Personal implication of the client
• Advisory
“ You’re wrong when the price drops below your purchase price”
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Risk and return adequacy
Definition of risk
For most private investors :
• Risk = likelihood of loosing money (shortfall risk)
• The absolute amount of loss (e.g. CHF 50’000.-) is often more
relevant (and more painful!) than the a percentage of total
wealth (2%)
• A paper loss is not considered as a real loss
• The risk / return perception is not static but is constantly
fluctuating between greed and fear
“ Finance is the art of passing money from hand to hand until it finally disappear”
Robert W. Sarnoff, Former Chairman of RCA
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Risk and return adequacy
Definition of riskFor the asset manager:
• Risk is expressed in terms of volatility, measured as the standard deviation of returns : the higher the variability of monthly returns, the larger the risk
• Risk can be managed and to some extend reduced through
diversification
• Risk is closely associated with return
• Risk is considered in absolute but also in relative terms, i.e. the
risk to underperform a benchmark or the competitors
“ Most investors should prefer losing small amounts of money infrequently
to losing large amount often”
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Risk and return adequacy
What does risk mean ?
“ An investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return.
Operation not meeting these requirements are speculative”
Risk measures the volatility versus the mean performance of a portfolio’s total return over a given period of time
0
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Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
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Low-Risk Portfolio
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Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
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High-Risk Portfolio
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Risk and return adequacy
Determination of the risk / return profile
“ Don’t attempt to buy at the bottom nor sell at the top”
Objetcive Rigth Wrong
1Achieving, in the long run, a total return higher than the inflation rate is one of my priorities 1 2 3 4 5
2I don't need frequent and steady income from my investments 1 2 3 4 5
3 I have a long term time horizon 1 2 3 4 5
4I am ready to tolerate a large volatility on my investments 1 2 3 4 5
5I am ready to bear a negative performance in the short run in order to achieve a higher long term return 1 2 3 4 5
6 I am ready to accept a low level of liquidity of my investments 1 2 3 4 5
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Risk and return adequacy
Life cycle : risk aversion and age
Equities Cash
Investment
Early career
Income<
Expenses
Rent
Retirement
InvestmentIncome
Legacy, donation
End of lifeSaving
Mid career
Income>
Expenses
Generally speaking, risk aversion increases with age as you can no longer count on income from working to offset any losses on your investments.
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Risk and return adequacy
Risk profile : characteristics of our investment profile
Income Low risk Balanced Growth Pure equities
Main objectivesCapital preservation
Capital preservation in real terms
Capital growthCapital growth in real terms
High return
Source of return Regular income Mainly incomeIncome and capital gains
Mainly capital gains
Capital gains
Low volatility Low volatility Average volatility
High volatility High volatility
No negative return
No negative return
-5% downside -10% downside -20% downside
Time horizon 1-3-years 2-4 years 3-6 years 5-10 years > 10 years
Risk
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Risk and return adequacy
The client’s objectives in terms of risk / return are central to our investment process
+ Personal details, family situation, assets and income
+ Reference currency
+ Definition of a client’s objectives and assessment of risk tolerance
+ Clarification of constraints and preferences
• The investment strategy
• The benchmark
• The tactical bands
Definition
of
“ It is better to have permanent income than to be fascinating”
Oscar Wilde
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Portfolio creation and investment strategies
Investment Strategy : an ongoing process
• Main macroeconomic parameters must be constantly monitored and forecasts are updated regularly
• A global financial scenario is designed and translated into concrete asset allocation decisions
• Out of the box and unconventional thinking is required (“What is obvious is obviously wrong !”)
“If you cannot afford to loose, you cannot afford to win”
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Portfolio creation and investment strategies
The investment universe is divided in asset classes
Cash Risk adjusting asset class
BondsMajor contributor to portfolio income and risk immunization instrument through cash-flow and duration matching
EquitiesParticipation to economic growth through long term capital appreciation
CurrenciesConsidered as a separate asset class with integrated hedging strategies (currency overlay)
Derivatives / Futures Used in hedging and/or in return-enhancing strategies
Realt Estate Decorrelated investment from the financial markets
Alternative investments Hedge funds, structured products etc
Commodities Gold, Copper, mining equities, soft commodities etc
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Portfolio creation and investment strategies
Investment Strategy for the three main risk profilesType of investment Conservative Balanced Growth
Historical return
Historical Volatility
Expected Return
Benchmark
Cash and Short Term 10.0 5.0 2.0Monetary Index CHF Citigroup 3 mth 10.0 5.0 2.0 1.6 0.3 3.4
Domestic Bonds 26.0 15.0 5.0Merrill Lynch Broad CHF 1+Citigroup CHF Gov Bond 1-3 41.0 25.0 0.0 4.5 5.4 7.2
International Bonds 15.0 10.0 5.0
Domestic Equities 20.0 20.0 15.0MSCI Switzerland ND 20.0 20.0 12.0 3.0 15.1 8.8
International Equities 7.0 24.0 45.0MSCI Europe ND 3.0 8.0 10.0 2.6 18.6 12.1MSCI USD ND 3.0 8.5 20.0 2.2 15.7 10.3MSCI Emerging Market ND 1.0 7.5 15.0 11.7 26.1 14.9MSCI Pacific ND 3.6 20.2 12.8
Alternative Investments 15.0 20.0 20.0HFRI Fund of fund index 15.0 20.0 20.0 5.0 5.3 6.9
Commodities 2.0 1.0 5.0Dow Jones AIG commodity index 2.0 1.0 5.0 6.7 15.7 6.0
Real Estate 5.0 5.0 3.0GPR 250 World Total Return 5.0 5.0 3.0 8.5 14.5 10.7
Total 100 100.0 100
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Portfolio creation and investment strategies
Risk and return characteristics for these strategies
Allocation Decision Conservative Balanced Growth
Return / Volatility ProfileHistorical Return 3.8 4.2 4.3Volatility 3.6 6.5 8.4Expected Retun 5.9 7.5 8.2
"Shortfall Ratio"Loss probability over 1 year 5.3 12.8 16.6Loss probability over 3 years 0.3 2.4 4.7Loss probability over 5 years 0.0 0.5 4.7
ExposureExposure to reference currency 76.0 65.0 45.0Exposure to foreign currencies 24.0 35.0 55.0Exposure to bonds 41.0 25.0 10.0Exposure to equities 27.0 44.0 60.0
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Portfolio creation and investment strategies
Our style combines active management with regular risk control
Active management
We deviate from thebenchmark• Tactical asset allocation• Bottom-up stock selection
We favor internationaldiversification• Reduces portfolio risk• Broadens investment universe
Risk monitoring
Comprehensive monitoringprocess• Continuous monitoring• Quarterly review
User of quantitative models
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Choosing the right investment vehicle
Fundamental analysis (top-down approach)
Macro-economicforecasts
Quantitativeanalysis
Technicalanalysis
Companyanalysis
Asset classweightings
Strategyscenario
Stock selection(bottom-up approach)
Geographicrecommendations
Sectorrecommendations
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Choosing the right investment vehicle
Company analysis
Financial andNon-financial Press Firm’s Clients
Firm’s Competitors
Sell-Side Analysts
Internet
Organizations
Firm’s Reports
Company Visits Accounting Projections
Valuation Methods RatingBroker Reports
Recommendations
Organisation of multipleInformation sources
Full independenceof the stock selectionprocess
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Choosing the right investment vehicle
The analyst’s toolbox
Is the Price Right?
Relative Valuation“Absolute” Valuation
Return ValueAbsolute Value Return Value Return Value
Book Value
Net Asset Value
Break-up Value
Option Pricing
Discounted Dividend
DiscountedFree Cash Flows
Equity(Free Cash Flow to Equity)
Enterprise(Free Cash Flow to the Firm)
Discounted EconomicValue Added (EVA)
P/EP/E growth
P/BV
P/Sales
DividendYield
EV/EBIT
EV/EBITDA
EV/Sales
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Choosing the right investment vehicle
Understanding the business : key to proper forecasts
Understand the Business- What are your products/services?- What is your sales growth?- What are your margins?- Who are your clients?- In what countries, what regions?- Who are your competitors?- What is your market share?
Clarify the Accounting Principles- What accounting principles are used?- What consolidation method do you use?- How do you value securities, receivables inventories, tangible or intangible assets?- What is your depreciation policy?- How do you book foreign currency?- Etc.
Determine the Company’s Strategy- What are your competitive advantages?- How are you going to strengthen them?- What are your weak points?- How are you going to deal with them?- What is your aquisition policy?- How will you finance expansion?- Etc.
Asses the Potential- What is the potential of your products?- What ne products wil you launch?- How much will sales volumes increase?- How will selling prices change?- How much will acquisitions contribute?- What non-operating charge is expected?- Etc.
Ensure Consistency
“There are no good stocks, they are all bad, unless they go up”
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
5
30
80
130
180
230
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330
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430
480
530580630680USD in % (100 based) TREND IN % (100 based)
In USD
Range 14.12.1990 - 20.05.2011
MS WORLD $ 282.37%FAIRFIELD SENTRY 0.00%
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Jul 11 Oct 2012 Apr Jul Oct 2013 Apr Jul
-35
-30
-25
-20
-15
-10
-5
0
5
10
15
20
25
CHF in % TREND IN %
In CHF
Range 05.04.2011 - 05.04.2013
MS USA GDL 23.02%MS SWITZERLAND $ 17.04%MS JAPAN $ 9.83%MS WORLD $ 6.72%MS PAC FR-JP $ 1.89%MS EUROPE-UK $ -8.39%MS EMF EMERGING MKT FR $ -14.74%
Evolution of the financial markets
World stock markets returns since 05.04.2011
Fears on Greece andon the viability of the Euro
Bank of Japan start new round of QE
Fear on chinese slowdown
“The trend is your friend”
Switzerland benefit from interest in high quality stocks
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Jul 11 Oct 2012 Apr Jul Oct 2013 Apr Jul
-35
-30
-25
-20
-15
-10
-5
0
5
10
15
20
25
30
35
40CHF in % TREND IN %
In CHF
Range 05.04.2011 - 05.04.2013
MS WLD 1HEALTH CARE $ 35.21%MS WLD 1CONSUM STAPL $ 29.64%MS WLD 1CONSUM DISCR $ 23.04%MS WLD 1INFORM TECHN $ 10.03%MS WORLD $ 6.72%MS WLD 1INDUSTRIALS $ 2.29%MS WLD 1FINANCIALS $ 2.19%MS WLD 1TELECOM SERV $ -0.58%MS WLD 1UTILIT IES $ -1.92%MS WLD 1ENERGY $ -11.99%MS WLD 1MATERIALS $ -22.44%
Evolution of the financial markets
World sectors returns since 05.04.2011
“If you buy a stock right, you’ve solved half of your selling problem”
Fear on chinese slowdownFears on Greece andon the viability of the Euro
Buzz on Apple
Switzerland benefit from interest in high quality stocks
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Evolution of the financial markets
In the financial world, assets are either highly correlated, negatively correlated (which in portfolio construction terms comes to the same thing) or uncorrelated. Blue is high, red is negative, green is uncorrelated.
HSBC heat map before Lehman
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Evolution of the financial markets
This is the post crisis world. Most of the map is either red or blue. In a risk on/risk off world, polarization is very high; making the risk management in investment more difficult.
HSBC heat map post Lehman
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Jul 11 Oct 2012 Apr Jul Oct 2013 Apr Jul
-20
-17.5
-15
-12.5
-10
-7.5
-5
-2.5
0
2.5
5
7.5
10
12.5
15
CHF in % TREND IN %
In CHF
Range 05.04.2011 - 05.04.2013
United States dol lar 1.04%Pound sterl ing -4.69%Euro -7.38%Japanese yen -12.10%
Evolution of the financial markets
Currencies against CHF since 05.04.2011
Run to safe heavencurrencies
BNS puts a floor on the EUR
Bank of Japan start new round of QE
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Jul 11 Oct 2012 Apr Jul Oct 2013 Apr Jul
-15
-12.5
-10
-7.5
-5
-2.5
0
2.5
5
7.5
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27.5USD in % TREND IN %
In USD
Range 05.04.2011 - 05.04.2013
Swiss franc -1.03%Pound sterl ing -5.68%Euro -8.33%Japanese yen -13.00%
Evolution of the financial markets
Currencies against USD since 05.04.2011
Reducing fears on Europe
Run to safe heavencurrencies
Bank of Japan start new round of QE
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Jul 11 Oct 2012 Apr Jul Oct 2013 Apr Jul
-30
-25
-20
-15
-10
-5
0
5
10
15
20
25
30USD in % TREND IN %
In USD
Range 05.04.2011 - 05.04.2013
GOLD OZ 7.74%ICOM BRENT BLEND -14.23%ICOM CRB FUTURES -20.61%SILVER OZ -31.15%
Evolution of the financial markets
Commodities over since 31.12.2010 (in CHF)
“If you are not sure, don’t trade”
Attack on precious metals
Fear of world economy slowdown Fear on chinese slowdown
Attack on precious metals
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Jul 11 Oct 2012 Apr Jul Oct 2013 Apr Jul
0
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4
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24- in % TREND IN %
Quotation currency
Range 05.04.2011 - 05.04.2013
IO CIT GBP GOV 1+ £ 24.34%IO CIT AUD GOV 1+ L 18.67%IO CIT EGBI 1+ € 17.67%IO CIT USD GOV 1+ $ 12.79%IO CIT CHF GOV 1+ L 10.06%IO CIT JPY GOV 1+ ¥ 8.58%
Evolution of the financial markets
Bond markets over since 05.04.2011 in local currencies
Bank of Japan start new round of QE
Risk off on Equity markets
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Evolution of the financial markets
Bond markets over since 05.04.2011 in CHF
“Cut your losses and let your profits run”
Jul 11 Oct 2012 Apr Jul Oct 2013 Apr Jul
-15
-10
-5
0
5
10
15
20
25
CHF in % TREND IN %
In CHF
Range 05.04.2011 - 05.04.2013
IO CIT AUD GOV 1+ L 20.32%IO CIT GBP GOV 1+ £ 18.51%IO CIT USD GOV 1+ $ 13.97%IO CIT CHF GOV 1+ L 10.06%IO CIT EGBI 1+ € 8.99%IO CIT JPY GOV 1+ ¥ -4.56%
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Jul 09 Oct 2010 Apr Jul Oct 2011 Apr Jul Oct 2012 Apr Jul Oct 2013 Apr Jul
3.25
3.5
3.75
4
4.25
4.5
4.75
5
5.25
5.5
5.75
6
6.25
6.5
GBPBP
Moving average 50 daysMoving average 200 days
In GBP
0008441830 BP.Royaume-UniEnergy
Last price 4.4710 GBP
On 05.04.2013
Fundam entalsEPS Internal 0.523 GBP
PER Internal 8.55 x
Dividend 0.236 GBP
Gross yield 5.28 %
Concept of noise and echo in finance
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Jul 09 Oct 2010 Apr Jul Oct 2011 Apr Jul Oct 2012 Apr Jul Oct 2013 Apr Jul
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48USDCARNIVAL CORP
Moving average 50 daysMoving average 200 days
In USD
0015854580 CCLPanamaHotels Restaurants & Leisure
Last price 33.5500 USD
On 05.04.2013
Fundam entalsEPS Consensus 3.85 USD
PER Consensus 8.70 x
Dividend N/A
Gross yield N/A
Concept of noise and echo in finance
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Jul 09 Oct 2010 Apr Jul Oct 2011 Apr Jul Oct 2012 Apr Jul Oct 2013 Apr Jul
10
15
20
25
30
35
40
45
50
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60
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758085
USDRESEARCH IN MOTION
Moving average 50 daysMoving average 200 days
In USD
0007256060 BBRYCanadaTechnology Hardw are & Equipment
Last price 14.7000 USD
On 05.04.2013
Fundam entalsEPS Consensus 7.04 USD
PER Consensus 2.09 x
Dividend N/A
Gross yield N/A
Concept of noise and echo in finance
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Private Banking & Swiss Bank Secrecy
Definiton of Bank Secrecy:
Obligation by the bank employees not to reveal any information about the customers to a third party, unless it is compulsory by law.
Characteristics :
Concerns the people working for a bank
All banks in all countries of the world have an obligation to protect the private sphere of their clients
The secrecy is never complete, as a judge can overrule the bank secrecy should a crime be involved
The level of transparency depends of the law of the country in which the account is held
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Private Banking & Swiss Bank Secrecy
What has changed:
Sovereignty vs Extraterritoriality
Progressive disappearance of offshore clients
The client will be looking at other criteria (i.e. performance, service, security)
Some advantages of the Swiss Private Banking :
Multidisiplinarity
Quality of the service
Banking knowhow
Political and Economical stability in the middle of Europe
Performance
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Questions and Answers
Regulatory environment&
Risk management?
Future of Private Bankingin Switzerland?
Prospectsof the Swiss Banking Industry ?
The Cross-border regulation?
Crans-Montana – Geneva – GstaadLausanne – Verbier
Bruellan, the ultimate in Private Banking… because we’re not a Bank!