The days when wealth management and taxation were considered entirely separate are long gone. Swiss portfolio managers now operate within an integrated and transparent environment. Consequently, tax suitability is becoming increasingly important for high-net-worth individuals (HNWI) and Ultra-HNWI.

Tax unsuitability erodes investors' wealth. Potential annual losses of up to three billion Swiss francs are estimated as a result of this.

"After-tax performance is the true measure of the value provided by wealth managers," argues Romain Potet. The international tax expert at BRP Tax explains that overlooking tax implications during investment decisions means neglecting a fundamental component of a client's net performance.

Furthermore, Articles 10 and 11 of the Swiss Federal Act on Financial Services (FinSA) state that firms "must check whether financial instruments are appropriate for [their] clients before recommending them." They also "shall perform an appropriateness or suitability review." Investors are therefore entitled to expect their managers to exercise due diligence regarding alignment with their tax situation.

For Swiss bank leadership, the time for hesitation is over. Adopting a proactive approach is essential. This not only allows them to improve the performance of their clients' portfolios and differentiate themselves in a competitive market, but more importantly, to protect their reputation and avoid legal pitfalls.

Is your bank at risk?
The era of the automatic exchange of information on financial accounts (AEOI) has fundamentally transformed the landscape of Swiss wealth management. International HNWI and UHNWI are now fully aware of their reporting obligations, and the majority are carefully scrutinising the tax impact of their investments.

As clients compare their after-tax returns with those obtained through local banks or other managers, they are becoming increasingly sensitive to the tax aspects of managing their assets.

"A client can very well compare the performance of their different mandates. If a manager places tax-unsuitable products, the client will notice this when filing their tax return and could be disappointed, even dissatisfied, despite potentially satisfactory gross performance," says Potet.

While banks are not obligated to provide tax advice, the Swiss Banking Ombudsman believes that portfolio managers must anticipate the tax consequences of their strategy on their clients' portfolios, including those domiciled abroad.

This position is illustrated by a recent case where a bank had to reimburse 50% of the taxes owed by a client domiciled abroad due to an investment strategy that, despite being high-performing, disregarded her tax residence. In its report, the Ombudsman considered "that a bank with international private clients must be aware of the core elements of the tax systems applicable to its clients."

Potet states that the damage from such negligence can extend beyond serious reputational consequences and lead to civil litigation.

"Within the framework of a discretionary management mandate, placing tax-unsuitable products without considering the client's country of residence exposes the bank to civil risk. A client who suffers significant tax damage may well demand a reimbursement of fees. They could also take legal action against the bank, including from abroad, according to the Lugano Convention," he says.

An opportunity to stand out
Beyond the risks, tax-suitable wealth management presents a significant opportunity to distinguish oneself with an increasingly tax-aware international high-net-worth clientele.

"Offering tax-suitable management is an additional service that demonstrates increased personalisation of the offering," says Potet. "In a context where switching banks is relatively easy, integrating the tax dimension is a considerable competitive advantage."

Demonstrating a thorough understanding of international tax issues and proposing investment solutions optimised accordingly makes it possible to attract and retain demanding clients.

The most compelling marketing argument is the direct impact on after-tax portfolio performance. While an investment may show attractive gross performance, client satisfaction will be significantly diminished if its tax treatment proves cumbersome and costly in their jurisdiction.

By integrating rigorous tax analysis from the asset selection phase, managers can improve after-tax returns. They thus offer tangible added value that goes beyond simple asset allocation.

Tax advice vs tax integration
Swiss wealth managers have often been reluctant to venture into the slippery slope of direct tax advice. They have limited themselves to managing portfolios, referring tax questions to tax specialists. Contrary to a common misconception, however, integrating tax-suitable management does not necessarily mean becoming a tax expert in every jurisdiction.

According to Potet, "the integration of taxation into the investment process is not tax advice, but an essential consideration of the client's jurisdiction."

Some large Swiss banks have already recognised this necessity and have integrated alert systems or tax ratings into their internal tools. However, this approach remains too rare and rudimentary.

Potet notes, "today, there are tools available that allow for the mapping of the tax impact of a type of product or specific products based on the client's country. These solutions can be integrated into existing portfolio management systems, thus offering valuable assistance to managers."

The company Potet heads, BRP Tax, also offers country-specific tax guides that make it possible to assess the tax impact of financial instruments based on the client's residence.

Thanks to its partnership with Indigita, the Croesus Central solution allows for the consideration of this tax data within a much broader process of portfolio personalisation. It then becomes just as easy to integrate tax aspects as all other aspects in creating a portfolio that meets regulatory requirements, as well as the financial goals and needs of each investor.

Risks

• Commercial risk - Client dissatisfaction, potentially leading to mandate termination or fee negotiation.
• Civil risk (litigation) - Possibility for clients to demand fee reimbursement or initiate legal action.
• Reputational risk - Damage to the bank's reputation if perceived as negligent.
• Regulatory risk - There is increasing pressure related to investor protection regulations.
• Opportunities - Compelling marketing argument. The direct impact on after-tax performance is a powerful marketing tool to attract new clients.
• Differentiation in a competitive market - Stand out and attract an increasingly tax-aware international ultra-high-net-worth and high-net-worth clientele.
• After-tax portfolio performance - By integrating rigorous tax analysis, managers can improve net returns for their clients, offering tangible added value.
• Client retention - Demonstrating a thorough understanding of international tax issues and offering optimised solutions strengthens relationships with existing clients.
• Additional service and personalisation - Tax-suitable management is perceived as a value-added service that demonstrates personalisation of the offering, an advantage in a context where switching financial institution is easy.