Today, we're going to continue the interview we started last week with Frank Suess, CEO of BFI Capital, Swiss-based wealth planning and management service, as well as the leader of the increasingly popular gold storage program Global Gold.
In case you missed it, the first part of this interview can be found here.
Interview with Frank Suess, CEO, BFI Capital Group in Singapore… Part II
He mentioned that he owned a number of contracts on the commodity exchange in Chicago – I can't remember how many – but when he recently inquired about physical delivery, they were willing to pay him a 25% premium to take the whole thing in cash instead of the metals.
Frank Suess: This seems to be an extreme example. But it is absolutely the case that “paper metals”, such as the by far largest gold ETF, the GLD, has a number of weaknesses. In fact, after reading the prospectus of GLD, I have strong reservations and wonder whether in the end, it's really backed by gold at all.
That's a different topic, but it's critical to read the terms and conditions, so you really know WHAT you are buying. And, you need to consider WHY you are buying. If you are buying gold for the purpose of in-and-out trading, then I guess an ETF like GLD might work for you – although I would then recommend other ETFs, for example those issued by some Swiss banks, which are in fact contractually guaranteed to be backed by physical gold.
One of the ETFs we use in our managed portfolios is the Zurich Cantonal Bank Gold ETF. Although I consider that product very solid, when you read the terms you see that they maintain the option not to pay out physical metals. They will pay you in cash if they wish, if they have lots of redemptions, if the stock market in New York is down, and in the event of pretty much any other kind of crisis. The terms are very broad in that respect.
Furthermore, as mentioned earlier, you must deal with the 12.5-kilo bars again. That's over half a million dollars a pop. Unless you want to have half a million worth of precious metals delivered to you in one chunk, you have an issue and will most probably have to live with getting cash.
IM: You mentioned the challenge of selling gold that's inherent in other programs… is Global Gold actually a market-maker, or is it just the nature of the Swiss gold industry that you're more likely to find a buyer versus other jurisdictions?
FS: The term “market-maker” implies that we might have inventory ourselves. Global Gold does not hold its own inventory, which is mainly for safety reasons. We've set the program up to act as a broker. The client sends us funds and we will then buy in the market at institutional rates. Depending on what format a client wants to acquire, we have different providers to buy from, in other words a variety of mints and large recognized wholesalers.
Because of our volume, we get really good prices. We get institutional prices when we sell back to our providers too. That is critical.
IM: Can people move their existing metals into Global Gold, or do they have to purchase through one of your suppliers?
FS: They can move their metals in. We call that an in-kind transfer. So yes, it's possible, but it's a somewhat more complicated process, since the metals sent by the client must go through a quality check with a federally-licensed assayer here in Switzerland. We don't want to have any sub-standard products in storage. The minimum for an in-kind transfer is 250,000 Swiss francs [purchasing metals directly through BFI is CHF 50,000 minimum], and the service, because it's a bit complicated, costs 3,000 Swiss francs and usually takes a week or two to complete.
IM: Are the metals imported or purchased through the service subject to taxes?
FS: The metals are all stored in a bonded warehouse with Viamat, which is a widely-recognized specialist. We've completely outsourced all the logistics to them to the point that we really only get in touch with the metals during our regular inventory audits with Ernst & Young.
Anyway, our setup, with all transactions and all storage being organized within the confines of the bonded warehouse, avoids all taxes and duties including the VAT, so long as the metals remain in the warehouse. However, as soon as you personally take physical delivery in a country that levies VAT, then you would be subject to VAT. Here in Switzerland, the VAT would apply at a rate of 8%.
IM: Let's move out to a little bit of the bigger picture for a moment. Why would someone choose to internationalize their assets in Switzerland versus other strong financial jurisdictions like Singapore, for example?
FS: I think it has to do primarily with a long track record of stability and the kind of confidence that is built over decades and centuries. However, I need to mention here that, contrary to what you might expect, a big part of what our clients do is not Swiss-based, it is very multi-national.
For instance, when we help our clients jurisdictionally diversify their wealth, we do not necessarily always use a Swiss structure. The LLCs, trusts or foundations we use will generally come from jurisdictions like Panama, Nevis or, believe it or not, the United States. Similarly, the Private Placement Life Insurance strategies that we help our clients set up are generally rooted in jurisdictions like Liechtenstein or Bermuda.
However, where we have so far almost exclusively used Switzerland as our base is when it comes to banking custody and the asset management dimensions of wealth management. Of course, some of our clients ask about the services offered in the banking centers of Hong Kong or Singapore. But, in my experience, the level of service quality, the depth and breadth of services and products available in Switzerland, is unmatched by those younger financial centers.
I am currently in Singapore, after arriving from Hong Kong yesterday. Next I will be traveling to Dubai. Partially, this trip is aimed at client meetings. It also serves the purpose of evaluating the status and possibilities of potential bank partners. I am actually quite impressed. Hong Kong and Singapore have come a long way and are developing rapidly.
However, the level of service quality, particularly in the context of private banking and advisory services, is nowhere near to what you find in Switzerland. This of course also provides opportunities for a company like ours. However, from a client's perspective, I would keep my assets in Switzerland. Obviously, I am Swiss and therefore certainly my view is skewed. I am quite familiar with other jurisdictions and think I have a good basis of comparison. There's a long tradition and culture of private banking and wealth management in Switzerland – much more so than most other jurisdictions. It comes down to the question of service offering, experience, qualified staff and legal safety.
Clients that come to us in Switzerland do so because they feel safe and because they expect high-quality service offered by dependable, highly-educated people. The fundamentals in Switzerland are solid. The country has a long tradition of political stability, economic prosperity, and solid rule of law.
IM: It's probably an understatement to say that many things have changed in Switzerland over the past 20 years or so in the world of banking and finance. In your mind, what have been some of the most important developments, both from a positive as well as a negative point of view?
FS: On the positive side, the tools and products we have available today has progressed a lot. Obviously, the rapid development of technology has had a huge impact on the way we are able to serve our clients and communicate with them. For instance, the possibilities one has today in regard to performance reporting, risk analysis, transaction placement or global reach are not comparable to what existed 20 years ago.
In addition, innovation, the variety of products available today has grown dramatically. While easy money due to low interest rates has created a lot of “black box” type products you want to avoid, some well-constructed products can be attractive and effectively integrated in your asset allocation.
On the not so positive side, obviously, are the regulatory developments. Swiss banking secrecy has been weakened over the past years with pressure from bankrupt countries around Switzerland, as well as America. The current Swiss government, unfortunately, has caved in on various aspects in this regard, and that's regrettable. But, I think in a way this is refocusing the energies of the Swiss financial sector back on service quality, innovation and competitiveness, so it's not all bad.
This, of course, is not just a Swiss trend. It's global. Worldwide, financial services are drowning in an unending flood of regulations in the financial services industry. The bureaucracy and administration that comes with it are not beneficial.
This trend originates primarily in OECD regulations, and they are passed down to Switzerland. They start somewhere in Brussels and London and Washington, and generally arrive under a camouflage of improvements for the benefits of investors. That is nonsense though. In the end, mountains of paper and red tape do nothing to protect the investor. To the contrary, they decrease self-responsibility and create an air of false security.
If you're slammed with a pile of paper and you sign it without reading it, it doesn't make you safer at all. The piles of paper actually create a stronger defense line for the large banks and institutions against their clients. It is not for the benefit of the client.
IM: Absolutely. Personally it's something I've always found interesting – the more regulations they pile on, the more investors feel safe, while in fact the opposite is true. The investors are now in more trouble, because the institutions have legal loopholes to get them out of stupid and potentially dangerous decisions.
FS: I agree with that. If you look at the kinds of contracts we used to have in Switzerland, you'll see that they were beautifully short and very much to the point. Now, they are starting to become longer and wordier, nowhere close to what you find in America, but still very much headed in the wrong direction. I hope that tide changes at some point.
We've seen in the past that despite the Securities & Exchange Act in the US, for example, when it regards a private placement, all that paper doesn't increase the safety at all. It really just creates more paper and more red tape.
IM: That's all for today. In the conclusion of this interview, Frank will share:
- 2 current threats to the Swiss wealth management industry
- The biggest challenge overseas financial firms face in dealing with US based persons
- The most important consideration new “asset internationalists” are wise to address before they move their money into any wealth management service