Which Swiss Gnomes Attract Money? Efficiency and Reputation as Performance Drivers of Wealth Management Banks

39 Pages Posted: 15 Mar 2016 Last revised: 10 Jan 2017

See all articles by Urs Birchler

Urs Birchler

University of Zurich - Faculty of Economics, Business Administration and Information Technology

René Hegglin

University of Zurich - Department of Banking and Finance

Michael R. Reichenecker

UBS AG

Alexander F. Wagner

University of Zurich - Department of Banking and Finance; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI); Swiss Finance Institute

Date Written: December 17, 2016

Abstract

Wealth management constitutes an important aspect of today's banking world, but very little is known about what explains the differences among banks in their ability to attract new assets under management. Using a unique panel database of Swiss private banks, we test the hypothesis that the performance of a bank in attracting new money depends on two input factors: skill and reputation. Relatively skilled banks -- that is, banks that are more cost-efficient than predicted by their input factors -- also perform better in attracting net new money. We also find that negative media coverage (such as in the context of fraudulent business practices related to tax evasion) strongly diminishes the future ability to attract assets under management, especially at small banks. The present value of lost profits is 3.35 (0.73) times the median annual net profit of a small (large) bank. Thus, adding to the explicit fines that many Swiss banks had to pay in the course of the U.S. Department of Justice's investigations, there are substantial implicit and reputational costs to banks of having negative media coverage. Investment performance for clients seems not to explain future net new money growth. In sum, these results underscore the importance of trust in money management.

Keywords: Wealth management, Reputation risk, Net new money, Cost-income ratio

JEL Classification: G21

Suggested Citation

Birchler, Urs and Hegglin, René and Reichenecker, Michael R. and Wagner, Alexander F., Which Swiss Gnomes Attract Money? Efficiency and Reputation as Performance Drivers of Wealth Management Banks (December 17, 2016). Swiss Finance Institute Research Paper No. 16-28. Available at SSRN: https://ssrn.com/abstract=2738806 or http://dx.doi.org/10.2139/ssrn.2738806

Urs Birchler

University of Zurich - Faculty of Economics, Business Administration and Information Technology ( email )

Plattenstrasse 14
Zürich, 8032
Switzerland
+41 44 631 29 52 (Phone)

René Hegglin

University of Zurich - Department of Banking and Finance ( email )

Plattenstrasse 14
Zürich, 8032
Switzerland

HOME PAGE: http://www.renehegglin.ch

Michael R. Reichenecker

UBS AG ( email )

Europastrasse 1
Opfikon
Zurich, CH-8152
Switzerland

HOME PAGE: http://www.ubs.com

Alexander F. Wagner (Contact Author)

University of Zurich - Department of Banking and Finance ( email )

Plattenstrasse 14
Zürich, 8032
Switzerland
+41 44 634 3963 (Phone)

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

European Corporate Governance Institute (ECGI) ( email )

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

Swiss Finance Institute ( email )

Switzerland

HOME PAGE: http://www.alex-wagner.com

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