As an independent asset manager, we must find top-level private banks to partner with for the benefit of our clients. Independent asset management firms do not hold the funds of their clients but rather work through a limited power of attorney to manage the clients' funds held by the bank. It is a perfect setup for the client as it allows them to have a partner who has the expertise and an established relationship with an offshore bank to ensure a top-level bank is serving them. In the search to find these banks, there are many considerations we take into account before establishing a partnership with them.
A few of these considerations are; What banking jurisdiction makes up their regulatory environment? Does the bank have the knowledge and expertise to work with American clients? What is their business model? Do they have their financial books in a healthy position? Are they problem solvers? Do they have an entrepreneurial spirit? Etc... However, for this blog, we will look at the question of "What banking jurisdiction makes up their regulatory environment?" and boil that down to looking at the differences, similarities, and environments of Switzerland and Liechtenstein.
The country of Liechtenstein is tiny--eight times smaller than the city of Los Angeles, California--and a lesser-known banking hotspot located between Austria and Switzerland. The country's capital is Vaduz, nestled in the Alps, which houses a solid financial center for its size. The government of the alpine nation has virtually no debt, with a debt-to-GDP ratio of 0.5%, which helps to keep the economic environment quite favorable for its population of 38,137. It also creates a fertile environment for the 12 banks that are a part of its financial center. The total assets under management in its financial center are CHF 424 billion. For a bit of context, their gross domestic product (GDP) was CHF 6.4 Billion in 2019.1 This helps to show the amount of private and professional clients seeking the solutions offered by their financial center.
It distinguishes itself through its high level of political continuity and stability, liberal economic policy, legal certainty, and quick decision-making. Its central location, its monetary union with Switzerland--its use of the Swiss franc (CHF) as its currency--and free market access across Europe are the key factors behind its success. As a result, Liechtenstein is an attractive location for international asset structuring, private asset management, fund business, and insurance solutions. Clients' and investors' privacy is respected in order to protect assets from unauthorized access.1 All in all, the government stability, good economic environment, and free access to the Swiss and European markets make it an ideal environment for private banks to thrive.
Although a much larger country than Liechtenstein, Switzerland is still a small island economy and private banking paradise in the heart of Europe. Their entire economy is backed by an excellent education system, incredibly high professional standards, military neutrality, and a strong Swiss franc (which you can learn more about here: Switzerland as a Financial Jurisdiction). Switzerland ensures its financial center is set up to protect the wealth being held in the country with high reserves and low debt as a nation. The debt level in relation to the national GDP only rose 2.1% over three years to 41.4% from 2018-2021.2 In the first half of 2022, the Swiss GDP has grown. Further, while many of the world's major economies are experiencing high inflation—such as the U.S. with 8.3%—Switzerland is experiencing 3.3% inflation.3 While this is high for Switzerland, it is not near the realm of many of the major economies facing severe inflation issues.
The main financial hubs are Zurich and Geneva, both of which have an international reputation, with Lugano taking third place. The Swiss financial sector is a cornerstone of the Swiss economy and generates around 10% of the GDP.4 The assets under management in Switzerland grew by 18.3% in 2021 to a record of CHF 3.30 trillion due to high net inflows and a strongly performing financial market.5 When the world experiences economic turmoil, people seek places that will have less risk in protecting their hard-earned wealth. Switzerland has for a long time been fostering an environment that protects those using its financial services and allows private banks to thrive.
Further, Switzerland has the banking secrecy act that protects the client's data and financial information from being shared. Some experts refer to it as bank customer secrecy, as the act does not protect banks but their customers and their right to share their financial detail with those they wish and not the bank. Bank customer secrecy is deeply embedded not only in the Swiss culture but also in its legal systems, including laws relating to the basic rights of citizens and civil, criminal, banking, and privacy laws.6
Differences and Similarities
Liechtenstein and Switzerland offer incredible environments for private banks to thrive in, which is why we, as an independent asset manager, look to partner with private banks in those jurisdictions. Their financial centers provide a strong and stable economic environment for the client's assets to be held. They both have incredibly low levels of government debt, and both use the Swiss franc, which has been able to navigate the pandemic and post-pandemic times in a stable fashion. The stable economic environments allow private banks to focus more on outside factors rather than domestic challenges, offering clients seeking capital preservation a perfect environment for financial services.
Both countries have strict privacy regulations for financial service providers to ensure client protection. A main difference between the two countries is the rate at which changes to their regulations take place. Switzerland is quite a slow-moving country when implementing changes, and Liechtenstein can move much faster. While this is neither a good nor a bad difference, it is a consideration that clients may have when deciding on which of our custodian banks they would like to hold their assets. Another difference is the amount of Debt to GDP each country has, with Switzerland having 42% and Liechtenstein having 0.5%. Again, both countries have high reserves, and while Switzerland has much more debt than their tiny neighbor, their national debt can not increase further due to the laws that place a cap on the government from increasing its debt any further in relation to its GDP.
Another difference that can also weigh into clients' decisions in choosing a custodian bank is that the banks in Liechtenstein tend to be less expensive than the banks in Switzerland in terms of service fees. The reality of private banking and top-tier services is that they come at a cost. Another important difference to note is that Liechtenstein is a part of the European Economic Area (EEA) and Switzerland is not. Although neither country is a part of the EU, being a part of the EEA does tie Liechtenstein closer to the economic pressures of Europe. On the other hand, Switzerland remains an island economy through its clear stance of independence.
All in all, both jurisdictions provide great environments for us as an independent asset manager to search for the highest quality private banks around the world with the assurance that the jurisdictions are being managed well and are set up for the protection and success of both our custodian banks and our clients. While this is just one of the considerations we take in finding competent partners, it is important because the economic environment's stability, regulations, and strength matter when protecting the client and their wealth.
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