Do You Really Need a Swiss Bank?
There are a number of myths regarding the banking business in Switzerland.
This assertion is predicated upon my observations from the uniquely dual vantages as chairman of a Swiss bank…and, chairman of an American bank.
The Swiss banking community certainly merits much of the high respect it is accorded; nevertheless, Americans would do well to seriously consider several factors before hastily embarking on any such banking or investment relationship.
First, there is no way for a Swiss bank to provide Swiss bank secrecy within the United States. It is just not possible or feasible under existing regulations.
As an American banker, I can tell you that governmental agencies are in our bank, as well as all other banks, most of the time. They can obtain pictures or records of any documents and there is no legal way they can be denied this by any U.S. financial institution, irrespective of whether or not it is Swiss-owned.
Secrecy should not be correlated to evading taxes. There are a number of good reasons for people to require secrecy and they do not necessarily mean tax avoidance. In any event, that type of secrecy can only be provided outside the United States.
The second thing that should be understood about Swiss banks is—and not surprisingly so—they are in the business of making money, and as a result, brokerage and safe-keeping costs are substantially higher.
For example, on brokerage, Swiss banks tack on an additional 50 percent. If an order is executed for your account and the brokerage commission in London is 100 pounds, you will pay 150 pounds because the Swiss bank charges an additional 50 pounds as its commission.
Another myth regarding Swiss banks is their supposed large size. In fact, most Swiss banks are small, and all but the top five banks in Switzerland are about comparable to a medium-sized bank in the United States.
In today's international market, U.S. banks generally have the advantage due to size, efficiency, and association with a currency of wide acceptance.
Size is not only important in making very large loans; it also confers a competitive marketing advantage by attracting depositors who often equate safety with size—although that equation is not necessarily true, because quality is as important as quantity. The 5 largest banks in the world are based in the United States, and 6 of the top 10, 8 of the top 20, 9 of the top 30, 11 of the top 40, and 14 of the top 50 are U.S.-based. The deposits of the largest U.S. banks are nearly twice the size of their largest foreign competitors.
Banks in the United States are probably more efficient than those abroad—a result of the much larger number of U.S. banks. There are 14,000 banks in the United States—more than in the rest of the world together! The very large number of banks in this country reflects the 19th century populist fear of centralized money trusts which has led to barriers against branching across state lines—or across the street in Chicago.
The reason why U.S. banks are both more numerous and larger is because our economy is such a large part of the financial world. There are more financial assets in the United States per capita than in any other country. Demand deposits in Chicago alone exceed those in France.
This competitive aspect of American banks again points up the significant advantage over those in Switzerland—mainly that of price. Swiss banks are not competitive in the full sense of the word, having reached mutual agreements in respect to their pricing policies.
Therefore, Swiss banking is not for all. There are many other ways to achieve the same results, should you want to have your assets outside of the country without having to pay higher fees.
Admittedly, this may all sound very strange, a Swiss banker in effect pointing out the advantages of the American banking system, but it is a fact: you do not need a Swiss bank to maintain a portion of your assets in a foreign country.
As I previously pointed out, I am also the chairman of a medium-sized bank in the Midwest—the Bank of Indiana. For the past seven years I have lived outside of the United States and as of January 1975 I have returned to specifically develop International Money Management services for its Trust and Investment department.
It is interesting to note that I have spent the better part of the past seven years trying to convince the U.S. bank's board of directors to adopt a posture of heightened international awareness regarding financial matters.
They are all astute businesspeople, with substantial net worth and in most instances, executives who head their own major business enterprises. Yet, it was not uncommon for them to say, "I'm not buying a Mercedes Benz—what do I care if the price of gold goes up. What difference does it make to me?"
So, recently these directors passed a resolution that in effect states: "A prudent person does not put all his eggs in one basket." To my knowledge, this action now makes our bank the first in the United States which can place on an international basis up to 25 percent of the assets it manages.
This may not seem all that earth-shattering to seasoned international investors, but this has been a very difficult transition, and typical of the problems that trust departments in many banks face. A prudent person in the eyes of too many financial institutions does nothing. He waits for everybody to lead and most of all, he always tries to avoid trouble. This reasoning is based on the misguided notion that if he makes the account any money, nobody thanks him; and if he loses the account money, everybody sues him.
These banks do as little as possible; they report to you how the Dow Jones Averages have done—perhaps that it is off 16 percent, but that they instead have managed your account in such a manner that it is only off 14 percent. Have they done an outstanding job?
Well, we do not look at it that way. Instead, we are firmly dedicated to the objective of preserving one's purchasing power.
Simply stated, our U.S. bank's new philosophy is based on the premise that one's assets should be in world-wide diversification.
Off-shore, our Banque Indiana Suisse manages funds for people from 16 different countries and in each case we will not place that person's investment in their own currency. More specifically, if you are an American or a Canadian, we would keep your investments outside of North America.
We will accept only 25 percent of an individual's assets. We consider this a reasonable figure for investment in a foreign currency. Also, depending on overall portfolio positions, investors should have that 25 percent off-shore directly tied-in with the type of on-shore investments they own. If they are heavy on gold stocks or gold coins, or whatever the situation may be, the entire portfolio has to blend. As a result, all accounts are managed very much on an individual basis.
I am proud to state that the off-shore accounts we manage have all more than doubled in value in the last three years.
This performance is not quite as outstanding as it might first appear, because we have not only been dealing in gold stocks but also foreign short-term certificates of deposit.
An example: An American who opened a Swiss Franc Savings Account five years ago, at 5 percent interest, less 30 percent Swiss withholding tax, has more than doubled his money. This is the result of a shrinking dollar or the increasing value of the Swiss franc. But, whichever way you look at it—an outstanding, conservative investment.
This is an interesting departure and perhaps we are mavericks as far as the banking industry is concerned. But, we think we have taken the blinders off. For the first time, a bank in the United States is indeed practicing prudence. The fact that American banks, to our knowledge, only invest in U.S. securities basically indicates they have not looked at the whole world in realistic terms.
What is realistically happening is that one of the most noteworthy postwar financial trends has been the acceleration of foreign investment throughout the free world. Both corporations and individuals have increasingly availed themselves of the sensible investment diversification possible in a stable world market.
Leaders in this trend, of course, were many of the most prestigious North American firms such as the automotive giants—Ford, General Motors, and Chrysler. Oil, electronics, chemical and heavy machinery have followed suit. Large and small European corporations have returned the favor by making heavy investment in North America. World business has, in fact, been far more "internationally minded" than world politics.
Investment abroad has become almost a patriotic duty in many countries whose balance of payments depend to a large extent on the repatriation of their foreign profits. It is not surprising that many nations today award handsome subsidies to firms who specialize in earning foreign currency. Then one could say that fiscal isolationism, at least, is as dead as the dodo? Not quite.
Certainly the corporate sector is off and running. Even the much feared possibility of a trade war is unlikely to blunt the powerful thrust toward international fiscal interdependence. Unfortunately, private investment has not yet reached anything like its true profit potential. In the private sector the Europeans have clearly taken the lead. For decades now, almost 80 percent of Europe's most respected crowned heads and industrial leaders have considered that any truly balanced portfolio should invest at least 20 to 30 percent in North American securities. This is a figure that has been maintained through good times and bad. According to U.S. Federal Reserve Board data, during one recent year net purchases of U.S. corporate securities by foreign investors accounted for a whopping 52 percent of the entire U.S. stock market!
Yet Americans have, thus far, been shy about making their own private investments in Europe. Why? Certainly when they invest in many of the largest and most successful North American firms they are in fact investing in many world markets—but by proxy. It follows then that the old-fashioned notion that it was somehow "unpatriotic" to have private investments abroad has been shattered once and for all by America's most respected corporations themselves. Indeed, the repatriation of foreign profits, from whatever source, private or corporate, would provide a welcome lift to the U.S. balance of payments.
Why then do some Americans, as individuals, continue to lag behind in investing abroad? I feel a lack of accurate information can be the only plausible reason left. Europe, with more than a dozen languages, its different laws, plus its totally different set of investments signals, looks to be a bewildering market indeed. And the Japanese market is even more inscrutable to the average private investor of comfortable means.
It is evident that individual Asians and Europeans who wish to invest in North America have a far easier time of it. Here they find a more or less homogeneous group speaking the same language. The basis of law is similar everywhere and there is a certain measure of assured stability—usually.
Obviously, any intelligent American investor would like to do as his most gifted European cousins do—namely, maintain 20 percent to 30 percent of his own investment portfolio in high quality European and Asian securities. Certainly the American is no less aware than the European that balance and diversification are the twin cornerstones of any intelligent investment program—for industry or the individual.
In summary then, why should one invest internationally? Both human nature and political expediency strongly suggest that inflation is here to stay. Obviously, it will fluctuate greatly according to the prevailing economic climate. And, it will continue to fluctuate from continent to continent and country to country. It is fallacious to say that the grass is always greener on the other side. But today—very often it is!
Inflation corrodes and wastes away assets and money like an unseen acid. In the dissolving quicksands of inflation one must find firm but diversified foundations to escape the smothering effect of money depreciation plus the fast accelerating cost of living.
A graduate of DePaul University Raymond Daly has studied banking at the University of Wisconsin, Harvard Banking School, and Trinity College, Dublin. He received his Ph.D. in economics from the University of Lausanne, Switzerland.
Editor's Note: For those readers interested in discussing such a program with their own bank, Mr. Daly has agreed to make available a copy of his book on international investment policy. Write to: Raymond E. Daly, Chairman, Bank of Indiana, N.A., Standard OH Building of Indiana, Suite 5108, Chicago, IL 60601.
This article originally appeared in print under the headline "Do You Really Need a Swiss Bank?".