A partnership system 'more enduring than marriage'

Interview

How does a financial institution focusing purely on asset and wealth management manage to survive two centuries, without going public, without mergers and acquisitions, and without changing its pure play business model?

Such institution is The Pictet Group. Bearing the founding family name, Pictet does not have external shareholders and very few people have been able to gain an inside look at its inner workings.

Older than Goldman Sachs and Citigroup
"I hope my successors can look after our clients’ future generations"

In 2023, Credit Suisse declared bankruptcy, and only avoided further global financial market turmoil with the acquisition by UBS. During this crisis, it was Pictet that quietly replaced Credit Suisse as the second-largest financial institution in Switzerland by assets under management.

Founded in 1805, Pictet was established earlier than most global financial giants, such as Goldman Sachs and Citigroup. While most financial institutions had been busy with mergers, acquisitions and diversifying into various businesses such as lending and securities underwriting to build financial empires, Pictet has always remained focused on one thing—helping clients with wealth and asset management.

The family’s motto, which is also the core principle of the business, is: "Do well and let it be said."

Discretion and focus are in the Pictet family’s DNA.

As the ninth generation Pictet family member to be a managing partner in the firm, François Pictet told Business Weekly that he attended public schools like any other Swiss pupil.

Former managing partner Ivan Pictet once said that at Pictet “We don't show our money.”¹

Unlike the high-profile and fast-talking Wall Street financial figures, François Pictet has a gentle manner, speaking in a calm albeit firm tone. The firm’s notion of a “time horizon” is also very different.

While most publicly-listed financial firms and their investors meticulously scrutinize quarterly financial reports, Pictet told Business Weekly that for Pictet, with past partners having lived through the First and Second World Wars, the Gulf War, and many financial crises, they view time not in terms of quarters or years, but in terms of “forever.”

 “The time horizon of our clients is basically forever,” says François. As the guardians of our clients' assets, “our goal is that my successors down the line can look after our clients’ future generations.”

Only focus on Asset and Wealth Management for clients
Not engaged in Investment Banking, avoiding conflicts of interest

He said that many clients' primary goal is not just to grow their assets but to pass them on to the next generations. Therefore, these clients seek institutions with the same vision and time horizon. Pictet aims to be an institution that aligns with this long-term perspective of its clients.

"We have 200 years of history behind us. Twenty years is short-term thinking," he said. This belief leads the Group to prioritize taking care of clients' assets over pursuing the company's own financial growth.

Another former managing partner Nicolas Pictet once told his employees that retaining a client is more important than making a profit. They believe that instead of focusing on the firm’s short-term financial performance, being guardians of clients’ assets enables Pictet to grow more sustainably in the long term.

"If you carefully think about Pictet's 219-year history, in reality, we have only done one thing, and that is investing," said Junjie Watkins, CEO of Pictet Wealth Management Asia (excluding Japan).

François described this level of focus as Pictet as having "only one child (wealth and asset management business)."

In contrast to other financial peers, Pictet can maintain this adamant focus by being privately owned, enabling them to concentrate on pursuing clients’ interests rather than shareholders’.

If you take Credit Suisse, established over a century ago, as an example, the downfall of this former giant partly stems from neglecting the underlying risks in its pursuit of short-term growth, which led to successive losses in various businesses.

Not only Credit Suisse, but even UBS, which acquired it, was also embroiled in the financial crisis, suffering losses of billions of dollars and even requiring a government bailout by the Swiss government.

For Pictet's managing partners, these are cautionary tales in business operational risks.

François gives an example: When a financial group simultaneously owns asset and wealth management as well as investment banking departments, there is inevitably a conflict of interest. How does it reconcile managing its client’s assets over the long term with the need to earn fees from distributing products to clients and encouraging them to trade in the short term? He believes that this conflict of interest may potentially harm client interests.

"(Bank financing or loans) could be great business if we increase our credit activities, and be more aggressive on that part. But is it really good for your clients? Are you always sitting on the same side of the table as your clients when you start being aggressive?" He believes that diversification of business may not only harm client interests but also make the company's financial structure overly complex. "We don’t want to play with our balance sheet."

“Not to be the bank for everything or everyone”
The partnership system explained

As a result, they choose to remain a pure play business. “It's a deliberate choice not to be the bank for everything or everyone” François explains.

The ability to resist temptation and not pursue short-term profits is backed by a unique partnership system. This system is common in industries such as law and accounting but very rare in the financial industry.

Currently, Pictet is managed by eight managing partners. Among these eight members, including François Pictet, only two are members of the Pictet family. The others are professional investment managers from outside the family.

“(Being appointing a managing partner) none of that is automatic or inherited,” François points out. He said that most of his relatives from the Pictet family did not choose to join the family business.

To become a managing partner at Pictet, one must possess both professional skills and the approval of existing partners. When a new partner is appointed, he or she receives a form of loan from the others. Very often their entire financial wealth may be in the firm, and they pay it back over several years from their share in the success of the firm.

Unlike typical corporate executives who can sell shares to cash out during their tenure, the shares held by Pictet partners are mostly not fully liquidated until retirement or upon leaving the partnership.

Pictet said that under this system, typical alpha individuals with big ego who are solely focused on performance and unable to work effectively in a team, will not be the top choice as managing partners.

In Pictet’s entire over two hundred years of history there have been only 47 managing partners, each with an average tenure exceeding 20 years. François is the ninth generation Pictet family member who serves as a managing partner at Pictet. Bloomberg describes this system as “a bond more enduring than your typical marriage.”

As the company has never been publicly listed, the shares of the company cannot be liquidated at any time. Consequently, partners are not incentivised to chase short-term performance and instead focus on long-term strategies.

For example, during the financial crisis, while most financial institutions were downsizing, Pictet not only suffered relatively minor setbacks but also continued to recruit talent and expand its workforce, in contrast to some other Swiss peers.

“Especially in challenging times, we strive to stand by our clients,” remarked Sunny Lin, General Manager of Pictet Asset Management Taiwan. Lin emphasized that during the financial crises, clients may need more guidance in managing their assets. When financial firms are downsizing, “the cost may be lower, but it's not beneficial for the clients. How then can we rebuild their trust in us?”

“There is a very strong alignment of interest between the partners and the firm as a whole,” explains François. Under such a system, partners do not think about how to quickly improve financial numbers for the next quarter but rather consider, “as a managing partner how can I, in 20 years’ time, hand over to my successor a firm that is in as good a position as it is today, hopefully, better?”

When the long-term interests of clients and managing partners are closely aligned, what is created is Pictet's unique strategic time horizon, distinct from its peers.

Long-term thinking weathers the storm
Not as easy to scale up, yet less prone to missteps

Taking the Japanese market as an example, Pictet established an asset management presence in the country as early as 1981, but it took a full twenty years before it turned a profit. Today, its managed assets rank fifth among foreign peers in Japan.

Taking twenty years to bear fruit would be intolerable for most other financial institutions or publicly traded companies. Junjie Watkins candidly stated that this is Pictet’s advantage of being private and its long-term thinking.

While others expand through acquisitions, Pictet chooses organic growth; while others rely on star managers to lead, Pictet counts on the collective wisdom of its partners. While peers in the face of adversity choose to first abandon some crew members to lighten the ship's burden, Pictet does not abandon its crew but instead seizes the opportunity to recruit other talented crew members.

When both its positioning and system are unique, a company's approach to customers, talent, and growth trajectory will also be different.

Certainly, such choices come with their own costs.

A former senior executive at a global private bank pointed out that Pictet's biggest disadvantage is its difficulty in scaling up. In the foreseeable future, it is unlikely to rank among the likes of JPMorgan Chase, Citigroup, or UBS in terms of size.

Nevertheless, François Pictet and his partners remain steadfast in their belief that not everything can be rushed or achieved via shortcuts; trying to rush things may lead to failure.

He shared his philosophy with us as "If you want to go fast, go slow".

While players may make mistakes by focusing on the short term, Pictet takes a long-term time horizon. ‘Doing well and letting it be said’, this is the key to Pictet's position as the second-largest financial institution in Switzerland today.

Original interview written in Chinese by Victor Chen and published in Business Weekly, 13 June 2024. Translation to English by the Pictet Group.