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

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. We first estimate the unobservable skill of a bank as a deviation of observed cost efficiency from expected efficiency. In a second step, we find that 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. 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. Consistent with the notion that trust plays an important role, banks with a higher service intensity (number of employees per assets under management) attract more future funds; by contrast, investment performance for clients seems not to explain future net new money growth.