Category: Blog Articles

Reading Time: 7 minutes

The success of an investment results from an interplay of favorable circumstances and an ideal strategy. Whether active trading or passive investment in index funds – every portfolio is individual and must be managed accordingly. Even with a passive investment, investors must become active so that the chosen investment strategy lasts over the long term. In addition to a review of the portfolio, rebalancing may be necessary.

What this rebalancing is about, what advantages it brings and how it works, you will learn in the following article.

The most important facts in 30 seconds

• When investing, the investment strategy is one of the most important steps.
• Even with passive investments in ETFs, investors should become active from time to time with so-called rebalancing.
• Rebalancing refers to a rebalancing of the portfolio so that the original weighting of the investments is restored.
• Through rebalancing, an investment strategy once selected is followed over the long term.
• Attention must be paid to the costs incurred during rebalancing.

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Portfolio Rebalancing: What is it?

A securities portfolio should be diversified to the extent possible and consist of several asset classes. It can consist of stocks, bonds or other investments and usually reflects the personal risk appetite as well as the expected return. With a high share of equities, investors must generally expect higher price fluctuations and thus be more willing to take risks. A more conservative portfolio, on the other hand, consists of bonds with a very good rating and index funds, for example.

Due to the different development of the investment markets, the individual values can also develop unequally. This results in an imbalance between the various asset classes. Depending on how pronounced the individual price changes are, a conservative portfolio can also quickly become an offensive portfolio.

Rebalancing is about restoring the original weighting in a portfolio by buying and selling individual assets. This also brings the relationship between risk and return back into balance. Rebalancing is therefore often used as a control tool so that the risk taken does not increase uncontrollably in the long term. In rebalancing, upper and lower bandwidths are therefore defined in percent for each asset class. In principle, there are many reasons for regularly rebalancing a portfolio.

Reasons and advantages of portfolio rebalancing

Basically, there are several reasons which speak for portfolio rebalancing. By defining upper and lower ranges, emotional investment decisions are largely eliminated. This investment discipline can counteract the psychological pitfalls of investing and, for example, suppress fear selling. As a rule, rule-based rebalancing can achieve higher returns for the same level of risk than a buy-and-hold strategy. In addition to investment discipline, the particular advantages of rebalancing are risk control and countercyclical trading signals.

Risk control is the main reason for rebalancing the portfolio. In the stock market, prices rise and fall daily. Depending on the asset class, the economic situation and other factors, values can also change in the medium or long term. This is also accompanied by a change in the respective portfolio. Phases can therefore occur in which the proportion of risky investments increases significantly. This is the case, for example, when certain company shares increase in value or ETFs decrease in value.

With portfolio rebalancing, you can optimally control and manage your risk. In a simple way, the distribution of asset classes can be corrected again by individual purchases or sales. If you refrain from adjusting your portfolio, you may unknowingly or unintentionally run a higher risk of capital loss.

Another advantage lies in the countercyclical trading signals sent by portfolio rebalancing. This means that shares in risky forms of investment, such as equities, are sold in good stock market times and bought at lower market prices. This increases the chances of returns in the long term. However, rebalancing should not be confused with market timing. According to prevailing opinion, there is no methodology to reliably determine the right entry or exit point. For this reason, regular rebalancing should be done according to a fixed rule and executed automatically.

Read also:

• Tips for private financial planning
• Options for long-term investments
• The 3-pillar principle for retirement planning

How does portfolio rebalancing work?

Each rebalancing is as individual as the underlying portfolio. Depending on current market developments in the overall economy and the specifics of individual sectors or companies, fluctuations in value can vary greatly. Accordingly, the individual asset classes and portfolios must be considered in a differentiated manner. The time period in which the individual values shift can also be very different.

However, rebalancing can not only happen between asset classes such as equities or bonds. In value-based rebalancing, each individual security is assigned a certain weighting with a defined tolerance range. As soon as the performance of the security falls below or exceeds this tolerance, the rebalancing takes effect.

Example of rebalancing

For our example, we have chosen a simple portfolio with a balanced investment strategy. This has a structure of 50 percent equities and 50 percent bonds with a very good rating. The investment amount is 100,000 Swiss francs and thus 50,000 Swiss francs for each asset class. In our exemplary portfolio, the equities have gained about eight percent. The share of bonds has gained about four percent during this period. As a result, the distribution of the portfolio has shifted from the original 50:50 to 52:48. At this point, therefore, 52,000 francs are now invested in equities and only 48,000 francs in bonds.

As a rule, equities are more volatile than bonds. Bonds, on the other hand, usually react faster and more directly to interest rate changes on the market. Due to the increased share of equities, the portfolio has a higher risk profile and thus a higher loss potential than desired. The balance can be restored by selectively shifting the values in the portfolio. By selling shares, buying bonds or a combination of both, the distribution is adjusted back to 50:50.

What criteria should be used for rebalancing?

Figuring out how often and when to rebalance a portfolio is not always easy. On the one hand, too frequent rebalancing should be avoided. On the other hand, rebalancing needs to be done after a certain period of time to realign and adjust the risk in a portfolio.

In order to be able to manage risk effectively, a distinction must first be made between the individual risks. In a portfolio, there are country risks, market price risks, default risks and other risks. This means that the overall risk can be managed not only through the selection of investment groups, such as equities or bonds, but also through the choice of individual products. In this way, high-risk countries or sectors can be specifically avoided.

Basically, there are three different strategies according to which rebalancing can take place: time-based rebalancing, value-based rebalancing and cash flow-based rebalancing. These strategies exist under different names and in different variations.

The most common and comparatively simplest is time-based or calendar-based rebalancing. Here, a rebalancing is carried out in a cycle of 12 or 24 months and at a fixed point in time through purchases and sales. This usually does not take into account how the market is behaving at that time and how good the stock market month is.

In value-based rebalancing, a portfolio is rebalanced whenever the proportion of stocks, bonds or another asset class reaches a certain threshold. Until this point, the investor usually remains idle. Exceeding the defined threshold then automatically triggers a reallocation. With this strategy, it is advisable to set certain percentages in advance depending on the original value. If a certain portfolio component is to comprise 40 percent and the threshold value is 8 percent, the component may move between 32 percent and 48 percent without triggering a rebalancing. Only when this threshold is reached is the portfolio rebalanced.

Most portfolios are managed dynamically, which benefits cash flow-based rebalancing. The cash flows from inflows and outflows can be used to perform ongoing rebalancing free of charge and, in the case of sales, in a tax-neutral manner. This method reduces the disadvantages in terms of costs incurred. For this reason, the strategy is very popular. However, it is comparatively costly and requires time and know-how.

When and how often does portfolio rebalancing make sense?

As with buying and selling assets, investors are always asking themselves the question of the optimal time for rebalancing. In addition, it is often essential at which intervals or according to which situations a rebalancing of the portfolio should be carried out.

A very simple rule of thumb is that the weighting in a portfolio should be reviewed and adjusted at least annually. This can be done at a certain point in a year, for example. Alternatively, the adjustment can be decided depending on the market situation or the state of the stock markets.

Basically, the shorter the chosen interval, the more expensive rebalancing will be. Large time intervals, on the other hand, have the disadvantage that the portfolio can sometimes move very far away from the initial situation.

In addition to the time-dependent interval, there is also the value-dependent interval. Here, the portfolio is always rebalanced when the proportion of stocks, bonds or another asset class has reached a certain threshold. With this interval, it can be helpful to set certain percentages in advance depending on the original value.

In the case of exceptional market situations, it may also be necessary to reallocate the portfolio outside of defined intervals. Particularly low or high prices may make it advisable to buy or sell securities. When rebalancing, investors generally distance themselves from pure speculative transactions. Rebalancing a portfolio should be a rule-based, forecast-free and disciplined process in order to achieve the highest possible return while maintaining the same level of risk.

What should one pay attention to when rebalancing?

When creating a portfolio, investors should first think about their personal risk profile. This forms the basis for buying or selling decisions and determines the composition of the various assets.

Rebalancing is an active measure in an otherwise passive investment. However, this rebalancing of assets can also be associated with additional costs. For this reason, it should be calculated whether rebalancing is carried out at longer or shorter intervals. Costs incurred should always be included in the overall consideration of the return in order to obtain a realistic overall picture. Especially for smaller amounts, the costs for rebalancing have a greater impact.

In principle, transaction fees are incurred when trading securities. In the case of fund rebalancing, issue surcharges are also added. Such costs must always be in proportion to the desired return when rebalancing. If the costs are too high, it may be advisable to refrain from rebalancing. A rule of thumb says that rebalancing does not pay off if the costs amount to more than one percent of the investment amount.

Reading Time: 7 minutes

In recent months, prices on the world’s major stock exchanges have plummeted. This has led to great uncertainty among numerous investors. They do not know how to behave properly now.

In the following article, we will therefore show you which strategy will help you to survive the turbulent stock market phase. Falling prices offer great opportunities if you act correctly.

The most important information in 30 seconds

• major indices worldwide have recorded price losses of more than 20%
• such stock market phases, also called bear markets, are quite normal
• as an investor you should stay calm and see an opportunity in the stock market crash
• in the long term, share prices will rise, so that you can achieve high returns with the right diversification and the purchase of good company stocks
• if the geopolitical situation eases again, a recovery and thus a next bull market is likely.

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We are currently in a bear market

On the stock market, a fundamental distinction is made between bull and bear markets.

• A bull market can be defined as a period of stock trading in which prices rise almost exclusively over a longer period of time. Minor setbacks are normal and are offset by higher highs. There is great euphoria in this market phase and no one expects bad price developments.
• The opposite of a bull market is the bear market, in which we currently find ourselves. If prices on the stock markets fall by 20% or more, experts speak of a bear market. Two consecutive months of price losses also characterize such a phase.

Looking at the Swiss Market Index (SMI), it is clear that it is trading around 25% below its peak. At the beginning of 2022, the index reached almost 13,000 points. By contrast, at the beginning of October 2022, it is struggling to reach the 10,000 point mark. The other major stock market indices, which include, for example, the S&P 500, the DAX and the Dow Jones, are also experiencing similarly high price losses.

Many investors are looking for the reasons behind the developments of recent months. They are also wondering how long prices will continue to fall. There are many reasons for the bear market. The following aspects lead to the falling prices on the stock markets:

• the start of the Russian war of aggression
• the uncertainty associated with the war (the stock market does not like uncertainty)
• a global increase in inflation
• monetary policy measures of central banks (rising key interest rates)
• after a bull market that lasted more than 10 years, a bear market is not unusual and healthy

Ultimately, a combination of the aforementioned reasons is favoring the current stock market situation. In addition, there is a great deal of uncertainty and fear among investors. These tend to sell shares in a bear market. This often results in a situation on the markets where every investor sells in panic and prices fall significantly over weeks and months.

However, as an investor, you should consider the following two aspects and keep them in mind:

1. Bear markets are a great opportunity because you can buy stocks cheaper
2. Every bear market is followed by a bull market

A look at the past shows you why you should act wisely and keep a cool head right now. Then you will emerge as a winner from the bear market.

A look at the past illustrates the opportunities of the current crisis

If you look at the last decades, you will see that there have been bear markets time and again.

• The bursting of the real estate bubble in 2008 can be counted among the best-known bear markets in history. The bear market lasted from June 2007 to March 2009, and 7 quarters passed before the bull market started again.
• Another bear market hit the stock markets in August 2000. The dotcom bubble burst and the world was in a bear market (= bear market) until March 2003.

In an article, the Handelszeitung has listed the bear markets chronologically since 1928. This overview makes it clear to you that bear markets do occur from time to time and that they are not unusual. Bear markets have historically lasted an average of about 9 quarters. So staying power pays off when investing in the stock market.

Keep in mind that no one can predict exactly when bull and bear markets will start. As a rule, this can only be recognized and analyzed in retrospect. So always prepare for different market phases.

The development of the stock markets points in a clear direction in the long term

Various companies have analyzed the price developments on the stock markets over the past years and decades. As part of this research, they have determined that you, as an investor, would have achieved a positive return on your investment in the SMI in 40 out of 53 years since 1969. The overall performance of the SMI is therefore clearly pointing upwards, despite intermittent price corrections in the context of bear markets.

For example, if you had invested regularly in the SMI from 1977 to 2021, you would enjoy an average annual return of 9.96% today. Other indices, such as the Dow Jones and the DAX, have also achieved a similar performance.

From the data, analysis and graphs, it can be deduced that stocks rise in the long run and thus provide higher returns compared to other investments (for example, gold, real estate and bonds). So far, the stock markets have always recovered sooner or later after a slump. Go for long-term investments.

Real estate markets, on the other hand, have sometimes gone sideways for years or decades. The same development can be observed with gold and other precious metals. With an investment in stocks, however, you have always been right, at least historically.

The reason for this is that economies around the world are increasing their productivity and aiming for a higher gross domestic product. Innovations and increasing globalization are also price drivers. This is not the case with commodities or other forms of investment, which is why you would sometimes have achieved little or no return with gold, for example, over decades.

How should you act as an investor?

The past is no guarantee of how prices will develop in the future. Nevertheless, a trend and a strategy for action can be derived from it. In the current uncertain stock market times, this in turn helps you to make the right decisions. As an investor, you proceed as follows, knowing that bear markets occur from time to time and that they are normal:

1. Remain calm and keep your long-term goal in mind.

Among other things, this means that you continue to invest regularly and do not allow yourself to be unsettled by negative reports on the stock market. You simply sit out the bear market patiently, follow your private financial planning.

2. Review your portfolio regularly, but do not fall into actionism.

Many investors tend to impulse sell because they are scared. This leads to lower returns and even losses in the long run. Stay calm and buy undervalued stocks. After all, the crash is where the money is made. You buy the stocks cheap from the investors who are scared and profit during the next bull market.

Most investors make the mistake of selling in a bear market and then missing the start of a bull market. This should not happen to you. Psychologically, however, it is hard to watch prices fall for months or even years and still continue to invest.

Psychology plays a role in stock market investing that should not be underestimated. If you are mentally strong enough and act anti-cyclically, it will pay off for you.

3. Stay invested so that you do not miss the upswing

Especially the particularly good and stable stocks recover quickly after the bear market. Therefore, be sure to hold on to these stocks. No one knows when the bull market will start and you definitely don’t want to miss it.

4. Keep a cash reserve to make new investments after the bottom is formed

We recommend that you invest regularly. This way, you will definitely not miss the bottom. If the market runs sideways for a very long time and the mood among market participants is exclusively negative, this often indicates a broad bottom. In this case, you should have cash reserves to reinvest. In addition, it is important that you never rely on the money invested in the stock market and have enough cash reserves to easily survive bear markets and the interim losses.

Also, take advantage of allowances and retirement planning tools, read more in these articles:

• Switzerland’s 3-pillar principle
• Vested benefits principle
• Vested benefits account

Price declines always offer great opportunities

Most people don’t like bear markets because prices plummet and they have book losses in their portfolio. However, bad times on the stock market offer enormous opportunities. If you analyze the market carefully and buy stable company stocks, you will achieve above-average returns in the long term.

In particular, the insurance, tourism and consumer goods sectors have a stable business model and recover quickly after crises. It should be noted that you should diversify your portfolio as broadly as possible. For newcomers, an ETF is also more suitable. New investors can use the MSCI World, for example.

It is also advisable to invest in large companies that have suffered particularly heavy price losses. Take advantage of the crisis and diversify your portfolio. This also means that you invest globally. So, for example, buy company stocks from Switzerland, but also from America, the euro zone or Asia.

When will the stock markets recover?

Basically, no one knows when the markets will rise again. However, past experience shows that indices are very sensitive to decisions made by central banks and governments. The current global economic crisis will probably be over when inflation falls and stabilizes at a moderate level.

The Russia-Ukraine conflict also has a major impact on prices. If it becomes apparent that the war will end, this could lead to an upswing on the stock market. Ultimately, falling key interest rates and a loosened monetary policy on the part of central banks, as past experience has shown, lead to a rally on the markets.

One possible development in the coming months could be that the central banks raise key interest rates even further. This is largely priced into the markets, but an unexpectedly high increase could lead to another small stock market crash. However, the even higher interest rates should bring inflation down in the medium term.

With the end of the war between Russia and Ukraine, the pressure on the commodity and energy markets will also ease. The central banks will then lower interest rates again to help the economies out of recession. All these factors could trigger a next bull market.

However, this is only a possible scenario. The market is ultimately dependent on many economic and political variables and factors and is currently very volatile.

Reading Time: 8 minutes

Managing one’s own assets is a major challenge, especially if the assets are not only to maintain their value but also to increase it. For this purpose, part of the assets must be invested in securities, real estate or other assets.

An asset management mandate represents a lucrative opportunity to have the assets managed by experts according to one’s own ideas.

The following article explains the possibility of asset management in more detail and offers a comparison of different investment forms.

Quick overview: The most important things at a glance

• Expert asset management agreement
• Asset managers are authorized by the client to create and manage a portfolio with a fixed amount of capital
• Management according to the agreed investment strategy
• Asset management saves demanding and time-consuming work
• Mandate is exercised according to the individual agreements and the predefined strategy

Asset management mandate definition

An asset management mandate confers the power to fully manage the agreed assets by the asset manager. In doing so, the managers make active investment decisions by buying and selling stocks, funds and other assets, thus investing your capital over a specific investment horizon.

The agreement of a strategy depends on the client’s goals and risk tolerance and determines the measures of management. Furthermore, there are different types of asset management, which can differ fundamentally in their characteristics, depending on the investment assets and risk tolerance.

The asset manager acts independently and without the participation of the client in the agreed period of time. Thus, it is possible to react quickly to changes in the market. If a need arises, this may also mean changing the general investment process.

The making of individual decisions and the independent making of purchases and sales also represents the fundamental difference compared to an advisory mandate. In the case of an advisory mandate, the advisor only has an advisory function. The final investment decisions, on the other hand, are made by the client himself.

What types of asset management mandates are there?

There are many different types of asset management. Which one is right for you depends largely on the agreed investment strategy. Furthermore, the risk tolerance as well as existing asset reserves also determine the optimal type of asset management. The best-known forms of investment are examined in more detail below:

Asset management with index investments

Many funds are based on an index and try to replicate or even outperform its price performance. However, only a few of these investment funds actually succeed in doing so. An investment in indices with an adjusted risk orientation is therefore a proven asset management strategy.

Depending on the investment strategy, assets are invested in indices that adequately reflect the relevant market. The portfolio is then managed for profit by means of intelligent balancing. This means that depending on market developments, the portfolio is always adjusted so that it still reflects the selected investment strategy.

Asset investments with investment funds

In this investment process, the assets are invested in a diversified portfolio. The respective proportions are determined by the investment strategy and risk tolerance. Actively managed funds are used to supplement the portfolio, either to increase the potential return or to reduce the overall risk of the portfolio. Usually, the individual securities are distributed across regions and sectors in order to compensate for the fluctuations in value that are customary in the market.

Asset management with individual securities

The management of a portfolio with individual securities is a variant that focuses on individual securities such as shares or certificates. In this case, investments are usually made with a higher risk tolerance due to the lower diversification in order to achieve targeted higher returns. However, the risk can also be broadly diversified and specifically reduced in the case of management with individual securities. This form of asset management offers the highest possible degree of individualization, as individual companies can be selected and not a whole package, as is the case with ETFs or funds.

Asset management BVG-oriented

BVG describes the law for the minimum requirements for occupational pension provision. In common usage BVG is often used as a synonym for pension fund. A BVG-oriented asset management therefore describes a portfolio that is oriented towards the average of Swiss pension funds. This includes investments in stocks, bonds or even real estate. In the area of this management, the portfolio is also constantly adjusted in response to market developments.

Asset management according to discretionary mandate

Depending on the amount of investment assets and the desired investment strategy, individually designed asset management mandates can also be agreed. Since such mandates require more effort both in their creation and in their management, they are usually only recommended above a certain level of investment assets.

In a so-called discretionary mand ate, an investment strategy is developed together with the client. This sets a framework that determines how granular the portfolio is designed and in which assets it is invested. At this point, both the amount of the investment assets and the personal risk tolerance are taken into account.

What rights or decision-making powers are delegated with these mandates?

An asset management mandate places numerous rights and duties in the hands of the manager. This entails a high level of responsibility and therefore also requires a great deal of trust on the part of the investor. The interest of the manager is therefore to create trust by providing the most professional, transparent and responsible service possible.

What decisions can the administrator make independently?

The transfer of an asset management mandate confers numerous decision-making powers on the manager. These are necessary in order to be able to manage assets as profitably as possible. The mandate therefore includes, in particular, powers to buy and sell securities. This is carried out by the administrator independently and without consultation with the client.

Compliance with the legal system

As the manager of a third party’s assets, numerous legal regulations apply. Great importance is attached to compliance with Swiss laws and regulations. In addition, the handling of third-party assets requires internal regulations, compliance with which must be strictly observed.

The legal system comprises numerous regulations, which include complete documentation of the asset management. Furthermore, the manager has a duty of disclosure, which relates in particular to the risks of the investment. In addition, compliance with investment guidelines is an important factor in asset management. Read also our article on digital asset management.

What else is usually reconciled?

Mandatory reconciliations are made as part of the management process. Furthermore, individual agreements and the respective investment strategy can also add further reconciliations. Since the risk appetite is a central factor in investment management, the definition of a risk framework is of particular importance. This reconciliation is recorded accordingly and provides the manager with the extent of risk diversification.

Who is liable in the event of a loss?

Since there is a comprehensive duty of disclosure within the framework of the contractual agreement, the investor is aware that an investment can involve losses. In this respect, the asset manager must act to the best of his knowledge and belief and in accordance with the prescribed laws and guidelines. Furthermore, requirements such as those relating to risk diversification and due diligence must also be complied with.

In the event of a breach of certain duties, the asset manager must pay for possible financial losses. However, the risk of asset loss due to general market fluctuations and developments is known to the investor. The latter therefore bears the risk and is generally liable for any losses incurred as a result. However, a possible duty to provide information in the event of a certain loss must also be observed here, which must be complied with by the manager.

Why are there asset management mandates?

Asset management mandates have been successfully taken on for many years and enjoy a high level of popularity. There are numerous reasons for this high demand. There is no denying the advantages of having your own assets managed by experts.

Expert management for high returns

The management of one’s own assets by specialists is probably the greatest advantage that asset management brings. At any time, the portfolio is monitored and managed by people with expertise and great experience. In this way, action can be taken quickly. Furthermore, the right decisions are made at the right time, as experienced asset managers are better able to recognize market developments and draw the right conclusions.

High time savings

Another major advantage of having your own portfolio managed by a third party is that it saves time and effort. It is not only the acquisition of the necessary knowledge that takes a lot of time. In particular, the constant monitoring of the market as well as political and economic changes require a lot of effort.

Avoiding one’s own emotions

Dealing with one’s own assets requires a high degree of discipline. This is especially true for activities that involve a certain degree of risk. Therefore, investors often tend to let themselves be guided by emotions. In the field of securities trading, this can lead to wrong decisions, which can have negative consequences. The management of the portfolio by an independent person leads to a detachment from this emotional attachment and allows a complete focus on the factual level.

For whom are asset management mandates a suitable tool?

Wealth management is perceived by a wide variety of groups of people. In terms of personal and financial situation, asset management offers numerous possibilities. This is sometimes due to the great advantages as well as to the variety of different models that can be adapted to the individual investment strategy.

The idea of expert management according to one’s own specifications

The basic idea behind asset management mandates is that individuals without the necessary expertise to manage and grow an investment asset can successfully operate a portfolio. Since many individuals do not have the required knowledge but still want to create an asset, the idea of third-party management by experts was born. These experts can manage the assets depending on the current market developments and the personal ideas of the investor.

More attractive for higher investment assets

The asset management mandate comes with fees. These fees can often be reduced for higher investment assets, as many asset managers have a tiered pricing model where the percentage fee decreases as assets increase. Therefore, asset management is more worthwhile for people who want to have higher assets managed. The fee also depends on the type of asset management chosen.

FAQ

What fees are charged for asset management via a mandate?

The fees for an asset management mandate cannot usually be given as a flat rate, as they depend on several factors. Sometimes it depends on how complex the management of the agreed model is. In addition, the amount of the assets and other factors play a role.

What alternative approaches are there to asset management mandates?

The best-known option for asset management support is investment advice. This form is not a complete management, but only an advice for own decision making.

Who offers an asset management mandate?

An asset management mandate is offered by numerous independent asset managers. These can also join together in various legal forms and usually offer their services independently of banks. Banks themselves, including major banks and private banks, often offer asset management services in addition to investment advice.

Asset management better through a bank or independent managers?

Banks often have comprehensive products, which are gladly offered during an investment consultation. Banks often enter into a conflict of interest if they also use the bank’s own products in asset management. Independent asset managers, on the other hand, specialize in asset management and do not offer their own products. This means that there is no conflict of interest and the risk for the investor can be reduced.

Is it worth hiring an asset manager despite incurring fees?

The fees for an asset manager also depend significantly on the investment assets and the chosen financial instruments. The high volume of orders and experience indicate that this is a form of value investment that definitely pays off in comparison to other forms. The certainty alone that one’s own assets are in professional hands and the personal service is already a reason for many to decide in favor of asset management.

Continue reading in our journal:

• Family Office Background
• More about Private Equity
• Factor Investing with Everon
• Private Banking

Reading Time: 11 minutes

Everyone has dreams and wishes. Whether it’s their own house, private retirement provision or a trip around the world. For this purpose, it is necessary to save money so that dreams can become reality. Aimless saving leads to rash actions. The consequence of this is that wishes do not come true.

Is it possible to achieve one’s goals safely and quickly with well thought-out private financial planning? Yes, it is – in the following article we offer you some assistance in this regard.

The most important things at a glance

• Any private financial planning is based on one’s own situation, desires and ideas and requires perseverance and conviction.
• By answering specific questions and making concrete plans, financial planning can take shape.
• In the article, we offer guidance in the form of a sample calculation and planning – it can help as a guideline in your elaboration.

All the following questions should be answered honestly and self-critically. As a result, you will receive a useful framework for your personal financial planning at the end of the guide.

Definition – what does private financial planning mean?

The starting point for sound financial planning is to determine your current situation. You should take stock of all available factors. These include:

• Income
• Expenses
• Assets
• Debts

which you carefully determine in order to obtain a realistic basis for your private financial planning.

Income

Income includes the current salary per month. If financial planning is carried out for the family, the income of all members also counts. Other sources of income include rental income, interest, dividends, other income and income from self-employment.

Reading-Tip: Investment Strategy in Focus: The Power of Income Strategy

Expenses

The largest item in expenses is fixed costs for rent and living expenses. You can find these expenses from the budget. Other expenses include costs for motor vehicles in the household and for insurance and loans.

Assets

Part of assets are real estate, investments, savings, and balances in life insurance or regular savings plans.

Debts

This is where you need to determine the current balance of loans for real estate and personal loans for purchases.

It is best to create a template or Excel spreadsheet to record all this information.

What are the goals of private financial planning?

It is important to have a clearly stated goal in mind with private financial planning. It is irrelevant whether the desired goal lies far in the future or is already achievable in the medium term. What is decisive is the strategy that is worked out to achieve the desired goal. Here are some examples of short- or medium-term and long-term planning goals:

Short- and medium-term goals

• Building up a reserve as a contingency fund
• Purchasing a car or home furnishings
• Planning a trip around the world
• Extension of the existing real estate
• Wedding of the children
• Early loan repayment

Long-term goals

• Capital accumulation to purchase a property
• Family planning for children’s education
• Building up private pension provision
• Capital accumulation in order to retire earlier
• Establishment of an own company

Private financial planning is the central element in bringing the desired goal into focus. Now it is a matter of recording income and expenses so that the targeted plan can be realistically achieved. With the help of good detailed planning, it can be checked whether suitable savings measures are helpful. In many cases, the desired goal can be achieved more quickly.

What is the starting position for your own financial planning?

The basis for forward-looking life planning is a critical examination of the current situation. To do this, you need to take stock of your finances and ask yourself the following questions:

• What salary is being earned?
• Is there any other income?
• What assets exist?
• What expenses are burdening my budget?
• Are there debts and in what amount?
• Is an inheritance to be expected?
• What assets do I need for retirement?

What salary will be earned?

On the income side of the budget planning is the monthly salary for dependent employees. The advantage over self-employed / freelancers is that this item is easy to determine based on the payroll. In many cases, the monthly salary hardly changes.

Is there any other income?

When determining further income, only secure values should be included in the financial planning. This includes rental income and interest from financial investments. Irregular income from sideline activities or dividends, which could also fail one day, should be assessed with caution.

What assets exist?

The easiest way is to assess credit balances at banks and cash investments as of the respective reporting date. Savings plans and life insurance policies communicate the asset value or surrender value of the insurance on a regular basis. The assessment of the value of real estate is more difficult. The values here should be set rather conservatively. Reserves for uncertain times as financial investments also belong to the assets.

What expenses burden my budget?

On the expenditure side, private households have to bear the costs of rent, living expenses, motor vehicle costs, insurance and old-age provision. There should be enough wiggle room in your expense approach to plan for leisure activities and vacations. Otherwise, financial planning will become a nightmare for the family later on.

Are there debts and in what amount?

You can use confirmations from the banks to determine the amount of the remaining debt as of the balance sheet date.

Is an inheritance to be expected?

Extraordinary income is helpful to reach goals faster.

What assets do I need for retirement?

Retirement planning is an important part of financial planning. The cost of assisted living or a place in a elderly home, in particular, has become a considerable expense. After all, you want to be independent in retirement and enjoy time with your partner or family, old-age poverty affects about 20% of people in Switzerland.

Read also:

• Vested benefits principle for occupational retirement provision
• 3-pillar principle for pension provision in Switzerland

What are the risks and how can you cover them?

The value of one’s own health is an important asset. An accident at work can happen on any day. The Corona pandemic of the past two years has caused health problems in many families. Usually, these are unexpected events that strike like a bolt from the blue. In the case of prolonged illness, sources of income are at risk.

Sickness benefits in Switzerland amount to about 80 percent of previous pay for a period of two years.

But how can health risks be hedged?

When there are declines in income in private households, the entire finances often get into trouble. Costs remain the same, and further expenses are often required for rehabilitation and the restoration of health. The healthcare system in Switzerland is exemplary. However, it does not cover all services. Especially for hospitalization and dental treatment, it is a good idea to take out supplementary insurance. With occupational disability insurance, the package of preventive measures is complete.

The world of work has been changing rapidly since the turn of the millennium. Jobs that were considered crisis-proof for decades are being displaced by new technologies. The digital age has changed jobs in many industries. Employees have lost their jobs or had to look for new fields of employment. Economic crises have led to short-time work, which means loss of income.

You should have a financial reserve for these cases. This is absolutely a part of your private financial planning. For this emergency, it makes sense to create reserves in the amount of at least three net monthly incomes.

When building up private assets, investments should be put to the test in times of crisis. When investing in shares, safety instruments such as stop loss should be discussed with the investment advisor. It is crucial that you are always in control of the situation and remain capable of acting. It is better to forego a promising business than to take too great a risk.

What ideas and values influence your own private financial planning?

A few years ago, the focus in private financial planning was on maximizing returns with manageable risks. This view has since changed. The low-interest phase on the global financial markets, which has been going on for years, is only giving investors low returns in the interest area. Such investments are hardly worthwhile any more. Other values are coming to the fore and investors are paying more and more attention to them.

Climate change is increasingly focusing attention on environmental issues in the financial sector. In investment consulting, experts are paying attention to sustainability and judging companies not only by their business success. They question how the results are achieved and whether ethical principles of occupational health and safety and human rights play a role.

Corporations that produce armaments are judged cautiously. The same applies to companies that have products manufactured under inhumane conditions in low-wage countries. Investors scrutinize these issues carefully before committing to investments in shares or financial market products. In the end, it is up to the individual investor to decide the extent to which moral principles are incorporated into the investments to be made.

When it comes to financial market instruments, stocks and ETFs are at the forefront of investment advice. Depending on the time horizon and risk tolerance, there is a wide choice. In the annual reports, brochures and on the Internet you have the possibility to inform yourself about ethical and moral principles regarding the individual companies. In addition, there are also ETFs that focus entirely on sustainability, but the definition of sustainability is not always the same.

Which way is the best? – Knowledge, procedure and advice

Private financial planning is an important part of life planning. It is significant if you include all family members in the first step. You lay the foundation by recording:

• Income
• Expenses
• Assets
• Debts

are determined. It is not necessary to consult an advisor for this.

The next step is to determine the investment horizon for achieving the goal. In this context, it is necessary to consider how you can most safely achieve the investment goal with the available funds. Here, the selection of financial instruments is already a more challenging task. Not every person is a financial expert and knows all the advantages and disadvantages of each investment.

Simple financial investments such as:

• Time deposit
• Term deposit
• Savings bond
• Fixed-interest securities

are easy to understand and can be concluded after a short consultation.

As investment products become more complex, it is better to seek advice from an experienced investment advisor. For financial planning investments in:

• ETFs
• Fund investments
• Shares
• Derivatives (e.g. options)
• Commodities / precious metals
• Real estate

you should seek the advice of an experienced expert.

It is not enough to understand what riskier forms of investment are all about. It is important to know exactly all the risks and what impact this could have on your private financial planning. In any case, you should follow the principle of risk diversification and never invest all your money in one type of investment.

Choosing the right investment advisor is a matter of trust. If you have a long-standing relationship with your bank, your first point of contact will certainly be there. In any case, your investment expert should have sufficient expertise and prepare serious proposals. You should avoid self-appointed experts who sell financial market products and make extraordinary promises of returns. Those who think they can increase their assets in a short time usually end up with a nasty surprise. Long-term investments are usually the better choice.

What does an example of successful private financial planning look like?

1. the initial situation

Personal key data

• Mr. Planer, family man 32 years old
• married, 2 children
• Working as an employee
• Own house as a goal of financial planning

Financial key data:

• Family income: 5’000 CHF per month
• Sum of all expenses: 4’000 CHF per month
• Surplus for private financial planning: 1’000 CHF
• Assets: 15’000 CHF
• Debts: none

To simplify the example, we have already included in the financial key data in the expenses costs for retirement, professional security and leisure activities of the family. Thus, the complete monthly surplus of 1’000 CHF is available for asset accumulation in the private financial planning.

2. determination of the goal and the appropriate measures

Goal: Purchase own house

Investment horizon: 8 years

• A) Build up financial reserve
• B) Investment of 50 percent of the surplus in safe financial investments
• C) Investment of 40 percent of the surplus in forms of investment with yield opportunities
• D) Maximum 10 percent of the surplus as investment in risky financial assets

3. allocation of surplus for financial planning

A) Building up financial reserve

The financial reserve should be available at all times to avert harm to the family in case of emergency. Three monthly salaries are planned for this purpose. This is an amount of CHF 15,000, which is taken from the existing assets of CHF 15,000 and invested in a separate time deposit or call money account.

B) Investment of 50 percent of the surplus in safe financial investments

Safe investments include fixed-term deposits, installment savings plans, fixed-income securities and investments in funds with a focus on real estate and fixed-income securities. CHF 500 per month is invested in this segment.

Result after 8 years

• Capital: 500 CHF per month saved over 96 months = 48,000 CHF
• Return: estimated 1.5 percent return per year during the term = 3’529 CHF
• Result of the investment: 51’529 CHF

C) Investment of 40 percent of the surplus in forms of investment with yield opportunities

ETFs, fund investments in shares and share purchases belong to the somewhat riskier financial investments with return opportunities. CHF 400 per month is invested in this segment.

Result after 8 years

• Capital: 400 CHF per month saved over 96 months = 38’400 CHF
• Return: estimated 5.0 percent return per year during the term = 9’292 CHF
• Result of the investment: 47’692 CHF

D) Maximum 10 percent of the surplus as an investment in high-risk financial assets

High risk investments are made in warrants, derivatives or commodities and precious metals. In our example, a maximum of 100 CHF per month is invested in this segment.

Result after 8 years

• Capital: 100 CHF per month saved over 96 months = 9’600 CHF
• Return: estimated 10.0 percent return per year during the term = 5’240 CHF
• Result of the investment: 14’840 CHF

It is essential to have an experienced and serious financial advisor at your side when investing in forms of investment with potential returns and when investing in high-risk financial assets.

4. result of private financial planning

Total result after 8 years of financial planning

• Building block A: 15’000 CHF
• Building block B: 51’529 CHF
• Building block C: 47’692 CHF
• Building block D: 14’840 CHF

Investment result: 129’061 CHF

With the investment result of 114,061 CHF (component A is a liquidity reserve and is not touched), 20 percent equity can be provided for the purchase of a single-family home worth just under 570,000 CHF. The remaining just under CHF 456,000 is to be financed by a loan. With a monthly surplus of CHF 1,000, the annuity for the loan can be paid.

FAQ about financial planning

What is private financial planning?

This tool makes it possible to achieve individual goals and dreams based on the current situation. A well-designed financial plan is helpful in achieving a targeted financial goal with a high probability of success.

Why is it important to create a private financial plan?

With the help of planning, a thoughtful approach to investments is put in place. With discipline and perseverance, intermediate goals can be reviewed. A good plan facilitates the achievement of the desired goal.

Is a financial planning guidebook significant?

Absolutely! An expert in the financial industry can tell if private financial planning is realistic and all factors have been considered. The financial expert’s advice is especially important if riskier financial investment products are used as part of the planning process.

How is financial planning arranged in a relationship/ marriage?

Trust and transparency are important in private financial planning in the relationship / marriage. Which account model the partners decide on in the end is up to each person.

In what form should financial planning be made?

Tools include app, Excel spreadsheet or a simple sheet of paper. Especially for recording the current situation and formulating the goals, no special form is needed. It is then more challenging to simulate various possible scenarios in the area of financial investment and to include complexities such as savings plans.

Reading Time: 9 minutes

Most people do not know much about investing money. However, they want to build up assets and need to provide for their own old age. Many customers are also afraid of losing money when they invest it.

In the following article, we therefore explain how you can structure your own wealth accumulation in such a way that you increase your chances of return while at the same time taking a manageable risk. Long-term investments help you to achieve your own financial investment goals in a structured way.

The most important information at a glance

• there are a variety of ways to invest money over a long period of time
• Long-term investments differ from short- and medium-term investments and trading in numerous respects.
• one’s own return expectations, investment goals and personal risk appetite are important aspects to consider in long-term investing
• with long-term and regular investments, the fluctuations and risks on the money and capital markets can be profitably exploited

What is meant by a long-term investment?

ou always make long-term investments when you invest your money for several years. Many investors want the highest possible return and at the same time want to take little or no risk. In addition, they want to be able to dispose of their money at any time. In this context, people talk about the so-called “magic triangle” of investing money.

“Magic” is the triangle because not all three wishes (availability, high return and little risk) can be realized at the same time. As an investor, therefore, you must always choose no more than two “corners” of the triangle. For example, a longer investment period goes hand in hand with a higher return opportunity. If you are prepared to take risks, you can also achieve good returns with a short term or if the money is available at any time.

Long-term investments should be distinguished from traditional “trading“. Trading is the trading (buying and selling) of shares or other securities. The buying and selling dates are usually only a few days apart. Short-term investments even have a term of only a few weeks or months.

Different forms of long-term investments in detail

Investors are often looking for a quick profit. So they want to invest their money and achieve high returns in the shortest possible time. However, this approach often results in losses because too much risk is taken. The stock markets, for example, are subject to short-term price fluctuations of up to 24.00%.

Therefore, it makes more sense to focus on long-term investments. You have the following investment options to invest your money for the long term and achieve high returns:

1. Stocks or stock funds (investment savings)
2. ETFs (investment savings)
3. Real estate and real estate funds
4. Bonds

Shares and share funds

Shares and share funds are among the classic forms of long-term investment. If you want to invest in stocks/stock funds, you should allow for an investment horizon of about 7 to 10 years. With a long time horizon, you can easily ride out a crash on the stock market or even use it for your own investment.

It is important that you never invest exclusively in one or a few individual stocks. Instead, diversify (spread) your money by buying 30 different stocks, for example. A stock fund is also good for diversification.

Advantages of investing in shares or share funds:

• You have high yield opportunities
• dividends are paid out at regular intervals (however, not all companies pay dividends)
• the money is available at any time
• shares are part of the special assets – even in case of insolvency of your bank the securities are protected

Disadvantages of investing in shares or share funds:

• the securities are subject to (short-term) high fluctuations
• a total loss is possible
• You need a securities account and pay fees for the purchase and sale of shares.
• the selection of suitable shares and funds requires expert knowledge

ETFs

In the recent past, more and more investors have decided to use ETFs (Exchange Traded Funds) for strategic asset accumulation. An ETF is defined as an exchange-traded index fund. An ETF therefore tracks an index (for example, the Dow Jones) 1:1. ETFs are also well suited for investing money over the long term and profiting from stock market developments. The advantages and disadvantages of ETFs at a glance:

Advantages ETFs:

• good return opportunities
• low fees
• the invested money is available at any time
• in case of insolvency of the ETF provider the money is not lost

Disadvantages ETFs:

• ETFs are subject to price fluctuations on the stock market
• you need a securities account to invest
• choosing the right ETF requires expertise
• You can only buy the whole index but you cannot choose the individual companies

Real estate and real estate funds

Buying or building your own property is also one of the long-term investments. If you do not want to buy your own house or condominium, you can invest in real estate funds instead. These generate an annual return. Real estate, on the other hand, can either be owner-occupied or rented out. Of course, real estate investments also have advantages and disadvantages:

Advantages of real estate as well as real estate funds as an investment:

• You benefit from monthly rental income
• alternatively, you live rent-free in old age
• You have tax advantages if the property is rented out
• real estate protects you from inflation, as it is a tangible asset
• through real estate funds you can invest in real estate even with little capital

Disadvantages of real estate and real estate funds as an investment:

• investing in real estate requires a high level of expertise
• sufficient equity capital is required
• Interest on borrowed capital and ancillary purchase costs must be taken into account and calculated
• Real estate funds can not be sold at will, but are subject to a holding period

Investing in bonds

Bonds are still an option as a long-term investment. When you invest in bonds, you make a loan to either a company or a government and receive a fixed rate of interest each year. At the end of the term, you get your invested money back. Bonds also have several advantages and disadvantages:

Advantages of bonds:

• regular distribution of interest
• Bonds are generally subject to lower fluctuations in value than shares
• If the bond is held until maturity and the issuer is not insolvent, no losses are made with bonds
• Bonds can be sold at any time

Disadvantages of bonds:

• Depending on the credit rating, corporate bonds can also be subject to a high level of risk
• If interest rates on the money and capital markets rise, the market value of a bond falls.
• Depending on the credit rating and interest rate level, bonds can have very low yields.

Reading tip: The Evolution of the Correlation Between Stocks and Bonds

Other forms of investment

There are other forms of investment that are suitable for long-term investment. For example, you can invest your money in precious metals (gold, silver), cryptocurrencies, derivatives, private equity and similar investments. All forms have advantages and disadvantages. Which investment form you ultimately choose should depend on your own financial goals, risk tolerance and investment horizon.

Keep in mind, however, that it always makes sense to spread your assets as broadly as possible across different asset classes. For example, buy some gold, invest some of the capital in stocks (individually or as an ETF/fund), and also acquire some real estate. This way you are well positioned for the long term and you have assets to fall back on.

Interim conclusion: Shares are suitable for long-term asset accumulation

Above all, shares are well suited for long-term asset accumulation.

Provided you have the opportunity to invest your money over several years or even decades, investment savings (ETFs and equity funds) are particularly suitable for long-term wealth accumulation. But why is that? Why do you benefit from long-term investing through investment savings?

The benefits come from three main aspects:

• You benefit from the compound interest effect
• short-term market fluctuations do not play a role
• The cost-average effect means that the time of entry is less relevant.

The example of the Dow Jones is an excellent illustration of the fact that you would have generated a return of approx. 9 percent per year with a long-term investment from 1980 to 2014.

What aspects should you consider when choosing the right (long-term) investment?

When choosing the right investment for you, several factors always play a role, which we will now discuss in more detail:

What are your financial goals and what is your time horizon?

The decision on which investment you choose should be based primarily on what financial goals you are pursuing with it. Do you want to save for the time after your active working life or do you want to buy a house in 10 years? Do you want to use the money to finance your child’s studies?

The next question is what time horizon you have available to achieve these financial goals. For example, if you plan to retire in 10 years, it is not advisable to finance a completely new property, because repayment usually takes about 25 to 30 years. If you have not yet set aside any capital for your own retirement, you will also have to take higher risks in order to reach your financial goal in 10 years.

What portion should you keep as a “nest egg”?

The second point concerns the diversification of your assets. It is advisable to always keep a “nest egg” in your account. This is about three months’ salary that you can easily dispose of in case of an emergency. Some people feel more comfortable having a higher nest egg. Others do without it altogether, but this is not advisable, as it may force you to sell some of your investments when liquidity is needed.

What risks do you want to take?

As you already know, your chance of return increases as long as you are willing to take a higher risk. Nevertheless, everyone has an individual risk propensity. So consider whether you could live with it if the invested capital falls in value over several months or even years, as can happen in the stock market. Are you financially and also psychologically able to endure such a phase?

How well do you know the different forms of investment?

Do you have knowledge in investing in the stock market? If you answer “no” to this question, it makes sense to seek advice in advance. If, on the other hand, you already know your way around, you can start buying shares, funds and ETFs in a structured way. It is always important to understand the type of investment you are putting your money into.

Do you plan to invest money once or monthly?

Choosing the right form of investment also depends on whether you plan to invest one time or monthly. For example, it’s a great idea to invest in an ETF on a monthly basis. On the other hand, if you want to make a one-time investment with a short time horizon and a low risk tolerance, you are more likely to choose a life insurance policy.

How flexibly do you want to dispose of the money?

You can invest your money on a fixed basis or look for investments that give you the flexibility to dispose of the money at any time. Physical gold, for example, is liquidable (you can sell the coins), but you have to go to a dealer and fees apply.

Do you want to benefit from regular distributions or is total return important to you?

For many people, it is important that they receive regular distributions, for example in the form of interest or dividends. These investors then usually opt for rental property, dividend stocks or bonds. However, if total return is important to you, then choose stocks or ETFs that do not pay dividends. This may also have tax advantages.

Reading-Tip: Investment Strategy in Focus: The Power of Income Strategy

Conclusion

At first glance, investing is a complex topic. Especially private provision (3rd pillar principle) is important for every investor.

• Through long-term investments and a good diversification of your assets, you minimize the risks and increase your chances of return.
• Before making an investment decision, consider what goals you are pursuing and also see to what degree you are willing to take risks.
• Then divide your money among different asset classes and let it work for you over the long term.
• You can also read our articles on the vested benefits principle and on vested benefits accounts.

FAQ

Where can you get advice?

In principle, it is possible to get advice at any bank. However, local advisors often work on a commission basis. This means that you profit if you buy a certain product. Therefore, get as many different opinions as possible from independent advisors and additionally inform yourself online.

Should every investor make long-term investments?

Long-term investing ensures that you have an above-average chance of return with a manageable amount of risk. As a result, you beat inflation and benefit from the compound interest effect. Only long-term asset accumulation ensures that you have enough money in old age. The 3rd pillar (your private pension plan) should therefore be designed entirely for long-term investments.

Which providers are there for long-term investments?

You can find numerous providers in the market where you can make long-term investments. These include:

• traditional banks
• Online banks as well as online brokers
• Wealth management companies and asset managers
• Robo-advisor
• Fund companies
• Insurance companies

Reading Time: 8 minutes

The world of finance is complex and not immediately understandable to everyone. Private banking is a term you hear more and more often in connection with finance – but what exactly is private banking?

Private banking is the optimal solution for customers who value individual advice and management of their assets. Private banking services range from wealth planning to finding suitable investment objects. Estate planning and inheritance matters are also handled by the Private Banking team.

However, private banking is not for everyone – there are certain minimum requirements that must be met before you can enjoy these services. However, digitization and new providers are making private banking accessible to a much wider range of customers in Switzerland as well.

In this article, you will learn what private banking means, for whom the offers are suitable, and what you should consider when selecting providers.

The most important at a glance

• Private banking means individual management of private assets.
• Asset or wealth management and investment advice are among the core services of private banking.
• Securities management, such as efficient trading in equities, is one of the most important forms of investment. But private banking also takes into account investment opportunities in real estate, closed-end funds and private equity.
• Today, innovative providers and digitalization are making private banking in Switzerland accessible to broad sections of the population.
• Compared to retail banking, private banking is characterized by exclusive products, individual service, consideration of the client’s wishes, and long-term client relationships.
• Low-priced standard products and financial instruments with short-term profit opportunities are just as unlikely to be found in private banking as offers for interest rate hopping.

Private Banking: Definition & Meaning

Private banking in Switzerland, as in other countries, is a service provided by banks or other financial service providers that focuses on the needs of high-net-worth individuals (HNWIs). These services include a wide range of financial products and services tailored to the specific needs of these client segments.

Private Banking customers generally receive a more comprehensive service than in Retail Banking. This is due to the specific needs of the customers, which are generally more complex than those of average banking customers.

Sophisticated services and investment types

Providers offer a range of services, including investment advice, wealth management, asset strategy, credit and financing solutions, tax advice, estate planning, and other specific services.

Private banking primarily involves strategic wealth optimization and planning. This involves needs-oriented analysis and structuring of all assets. Individual operational asset advice and asset management are also offered. Consulting and support services, such as in real estate management, also fall under private banking. In the case of Family Office, private banking is carried out for the assets of all the members of a family group.

The target group: High-net-worth individuals (HNWIs)

The term High-Net-Worth-Individuals (HNWIs) refers to individuals with high net worth. Typically, HNWIs are assumed to have more than $1 million in assets. HNWIs make up a small share of the population, but they have a large share of total wealth.

It should be noted that there are no rigid boundaries for defining the target group. On the requirements, therefore, see also our comments in the section “Who has access to private banking?”.

Private Wealth Management

Customers whose assets fall below certain lower limits are classified as retail banking. When upper limits are exceeded, international private banks or investment banks refer to private wealth management. This is a financial services sector that deals with the management of the assets of so-called high-net-worth individuals (HNWIs).

Unlike private banking, the range of services also includes advice and management of assets outside the financial markets. These include advice on building and managing art collections and the acquisition of antiques.

Personalized advice: the private banking process

To ensure quality in private banking, the process usually follows the following phases:

1. First, you as the customer define your needs and wishes so that private banking can meet your requirements. Keywords in this context are, for example, securing the future, liquidity and retirement. Likewise, generation management can be addressed, where the objectives regarding the transfer of assets to the next generation are discussed.
2. This is followed by the development of a concept that corresponds to the investment objectives. This is always preceded by a well-founded analysis, in which, for example, your willingness to take risks and the possibility of taking risks are determined. A liquidity management takes into account the desired and necessary liquidity – your private financial plan.
3. In the subsequent execution phase, the financial transactions required to put together the defined portfolio are carried out.
4. Finally, the portfolio is reviewed on an ongoing basis and adjusted as necessary to ensure that it reflects current market conditions. Controlling also includes the performance of the individual financial products.

Private Banking: Services at a high level

The services generally include measures for wealth planning and asset management. As already described above in the process, the focus is on working out individual needs. This includes the following essential areas with the corresponding investment forms:

Securities management

• Individual portfolio consulting
• Shares, bonds, debentures, investment funds, ETFs and other financial instruments, including investment and ongoing controlling and updating

Hedging and risk management

• Pension solutions
• Risk insurance
• Property insurance

Liquidity

• Accounts & Deposits
• (Credit) Cards

Real Estate Management

• Consulting for residential and commercial properties

Financing

• short-term, medium-term and long-term loans
• Real estate financing

Equity investments

• Closed-end funds
• private equity

Wealth and succession planning

• Will
• Foundation formation

Precious metals

• Gold as an anchor of stability
• Coins

Who has access to private banking?

Asset management is the most comprehensive service in this area. The private client entrusts the bank with the management of his or her assets in compliance with previously agreed principles and guidelines. Exceptionally high assets are often managed in the bank’s own so-called family office. Alternatively, multi family offices offer asset management services for several, few large assets. In this respect, family offices represent a special segment within private banking.

The term “high net worth individual” is not clearly defined. Banks usually define the term based on the assets they manage for the client. Often, access to private banking only begins with assets of one million francs or more. However, some institutions also have lower limits for individual support. Here, the private banking client often starts with as little as 100,000 francs.

The need for a minimum sum is basically understandable. Compared to retail banking, in particular, a significantly higher expense arises due to:

• individual advice with increased personnel costs
• necessary technical know-how
• independent execution of the necessary financial transactions
• ongoing asset management (controlling and updates)

Naturally, these costs can only be represented above a certain level of assets. For private clients, too, the cost factor would no longer be in proportion to the return if the assets were too low.

Innovative providers enable private banking for broader customer groups

Providers developing digital investment solutions are considered the newcomers in the wealth management rating. However, you should pay attention to subtle but major differences.

While some robo advisors already offer automated investment starting at a few thousand francs, qualified asset managers go well beyond that with their services. The latter use, for example, the know-how and investment philosophy of established family offices. As a result, private banking is being digitized with the aim of opening it up to significantly more customers. This means that the entry hurdle is lowered to 30,000 francs, instead of half a million or even a whole million francs. The offering is thus aimed at technology-savvy customers with a demand for qualified private banking.

What you should look for in a private banking provider

When choosing a private banking provider, it is important that you choose one that meets your needs and requirements. Here are some points to consider when choosing a private banking provider:

• Quality of advice – Expertise in the financial market: private banking is a matter of trust. Even though the Internet is becoming increasingly important in obtaining information and banking transactions are also being carried out online, the quality of personal advice should be the top priority, especially for larger sums of money. Therefore, pay attention to which know-how the advice is based on at the provider. What expertise can the acting persons demonstrate in the areas of asset management and wealth planning?
• Access to high-yield financial products that also focus on wealth preservation: In private banking, wealth optimization is primarily about achieving a balance between income and security. The assets should at least be preserved in inflation-adjusted terms. The provider therefore needs comprehensive research in addition to a sound investment strategy. In this context, pay attention to existing ratings or assessments of whether the provider has met this requirement in the past.
• Security and continuity: As a private banking client, it is important to know that your assets are in safe hands. It is therefore advisable to obtain detailed information about security before deciding on a provider. This includes, for example, ensuring that transactions are carried out via secure access channels.
• Individual and innovative concepts that take your wishes into account: Digitization and individuality do not have to be a contradiction in terms. Innovative providers make it possible, for example, to take into account desired investment topics such as health or environmental protection within the portfolio.
• Independence instead of product sales: The products must be selected exclusively with the focus on the customer and be based on independent decision-making criteria. If a provider only offers its own funds or only standard products, this should be questioned critically. So check on the basis of the financial products offered whether the provider puts them together independently of banks.
• Transparency in investment forms and asset development: What applies to independence in terms of product selection should also apply to ongoing reporting on your asset development: Transparency. Therefore, make sure you have predefined reports from which you can observe the development of your assets at regular intervals. In this context, transparency also means information about transactions that have been carried out.
• Trust as a basis for long-term cooperation: Let the approach work for you right from the start. Do you have the feeling of being surrounded by the necessary competence? Do you trust the investment proposals? Only when trust is established will you perceive the private banking services as a welcome relief.

What is the alternative to private banking?

Anyone looking for adequate support in wealth planning and asset management should first think about their needs. This includes, in particular, the question of whether you are concerned purely with investing money or whether other topics such as inheritance, foundations, retirement planning and taxes are relevant.

The next step is to know the options, depending on the size of the assets. The decision for private banking will always remain a personal one. For example, if you yourself have in-depth expertise in the securities business, you may want to manage it yourself in the future.

If you have smaller assets or only want to have a smaller sum managed by a third party for the purpose of optimization, the robo advisor market now offers a wide range of options. Depending on the provider, the entry barriers are already very low at around CHF 2,000. In return, there is automated asset management with standard products, where you can deposit your desired risk tolerance.

Frequently Asked Questions (FAQ)

What temporal form of customer relationship is private banking about?

Compared to retail banking, private banking is about a long-term customer relationship. The advice is aimed at long-term wealth preservation. In retail banking, the focus is on the products, which is why it is more common to switch providers here (for example, by comparing interest rates on call money).

How safe are private banks compared to big banks?

Basically, investments at private banks in Switzerland are just as safe as at big banks. All banks in Switzerland have access to the esisuisse deposit guarantee for amounts up to 100,000 Swiss francs. Custody assets are also always owned by the client. This means that in the event of bankruptcy, they would be segregated from the bankruptcy estate and paid out to the customer immediately.

For whom is private banking particularly suitable?

Provided that the minimum investment amounts are reached, private banking is suitable for most customers. After all, few have the expertise and experience in the financial world to work continuously and reliably on asset optimization. The less know-how and time available, the more Private Banking is the right option.

Is private banking more costly than retail banking?

When viewed as a fee percentage, private banking has higher fees. Ultimately, the high-cost service must be paid for. However, this does not mean that using private banking ultimately means a poorer return – the rule is the opposite. Through product- and bank-independent advice, planning and decision-making, more suitable forms of investment are found on the one hand, and their suitability is constantly checked on the other.

Reading Time: 7 minutes

Switzerland’s old-age pension system comprises three pillars. The first pillar is the state pension, the second pillar is the occupational pension and the third pillar is the private pension. Each pillar fulfills its own specific purpose. As a state pension, the first pillar ensures basic provision in old age and is mandatory for all citizens. The occupational pension scheme supplements the state pension scheme and offers additional benefits.

Private old-age provision, as the third pillar of old-age provision, offers maximum flexibility. This applies in particular to the free pension plan 3b. This allows you to secure yourself in old age so that you can live carefree. The high adaptability of the investment instruments of pillar 3b and the legal framework conditions allow you flexibility even in the timing of the payout. This means a payout with tax advantages for maintaining your standard of living in old age and being able to have a say in the timing of the withdrawal.

Below you will find important details, background information and tips on Pillar 3B.

The most important facts at a glance

• Pillar 3b is part of Switzerland’s 3-pillar system and is considered a private pension plan.
• Compared to pillar 3a, the free pension 3b is not tied to retirement. It can also be taken out for medium to long-term savings goals or for further asset accumulation. It is therefore also referred to as free or untied pension provision, there is a maximum amount.
• In pillar 3b, there is no maximum amount in terms of contributions. However, the contributions cannot be deducted from taxes and the assets are subject to wealth tax.

Definition: What is Pillar 3b?

The importance of the free pension 3b within the 3-pillar principle of the Swiss pension system. To classify the free pension 3b, here is first the condensed pillar 3b explanation:

Free pension 3b, also known as pillar 3b, is an umbrella term for all types of savings that fall outside of the state (pillar 1), occupational (pillar 2), and tied private pension (pillar 3a) and thus help achieve one’s retirement goals.

What is the function of pillar 3b within the three pillars?

Pillars one and two are the mandatory pillars, which are regulated by law and must be used by all citizens. The third pillar is the voluntary pillar and can be chosen by everyone. Here, a distinction is made between the tied pension pillar 3a and the free pension pillar 3b.

In practice, there are also differences in the payment:

• The withdrawal from the first pillar is basically a monthly pension payment (AHV pension).
• Within pillar two, lump-sum payments are also possible as an alternative to pension payments.
• The payout from pillar 3b is usually in the form of a lump-sum settlement.

The differences in private pension provision: comparison of pillars 3a and 3b

The third pillar covers the entire area of private pension provision. Due to demographic developments, it will become increasingly important for people to pay into the appropriate investment instruments in good time. In this situation, it is the salvation of prosperity.

In the table below, you can see the main differences between the two areas of private pension provision:

Criterion	Pillar 3a	Pillar 3b
Objective	long-term private provision for retirement	individual provision and closing of personal pension gaps, other personal savings goals can also be in focus
Group of persons	all persons living in Switzerland who are subject to AHV contributions	for all persons living in Switzerland
Tax framework	Contributions can be tax-deductible within the limits of the maximum amounts Interest and earnings within the term are tax-exempt Capital payment at reduced tax rate Retirement pensions are subject to 100 percent income tax	tax deductible only within the framework of lump sums for insurance premiums Retirement pensions taxed at 40 percent tax-free lump-sum payment under certain conditions (minimum term of five years, payment after age 60 and contract taken out before age 66)
Withdrawal / payment	as an annuity no earlier than five years before reaching normal retirement age early withdrawal possible for home financing, emigration or new self-employment	no legal restrictions, specific contract conditions apply
Investment forms	Life insurance, pension policies, pension accounts with bank foundations, pension funds, securities	Life insurance, investment funds, securities, value collections and many other investment instruments
Inheritance	In the event of death, the succession is prescribed by law	Inheritance can be freely chosen, provided that statutory compulsory shares are taken into account
Pledging	Exclusively for financing owner-occupied residential property	Always possible, provided accepted as liquid cover

Preferred forms of investment in Pillar 3b

There are several different insurance and bank solutions for closing gaps in retirement savings in pillar 3b. While insurance solutions are mainly used to cover risks (e.g. disability or death), bank solutions are more suitable for saving for retirement.

There are several reasons for this: Investors have access to their funds at a bank at any time. Also, in contrast to an insurance solution, they can be very flexible in determining the amount and intervals of their personal savings contribution, skip it or cancel it.

Main forms of investment in personal pension plans 3b:

Insurance products

Life insurance was originally conceived as protection for the family against disability or death. But in the form of endowment insurance, it is also a financial product for individual retirement planning.

If you want to improve your chances of return, but do not want to take on too much risk, choose a unit-linked life insurance policy. In this case, the savings are invested in specific securities funds.

Retirement account

The retirement savings account has higher interest rates than a savings account. However, the current interest rate is still lower than the inflation rate. Account management is usually free of charge and the interest is tax-free.

Structured pension solutions

In addition to the pension account, there are also so-called structured pension solutions. In this form, the retirement capital is invested in various financial products and paid out to the investor at the end of a fixed term, including interest.

Securities Savings

With securities savings, you invest your capital in securities. These can be shares, bonds or other securities. You thus participate in future-oriented companies and benefit from maximum potential returns while retaining control over your investment focus.

Reading tip: The Evolution of the Correlation Between Stocks and Bonds

Investment funds

It is advisable to spread your investments as broadly as possible in order to avoid cluster risks. Therefore, investment funds are more advantageous for this purpose than investing in individual securities. With fund shares, you can build up your portfolio broadly for as little as a few hundred francs.

In this context, ETF savings plans have also become more popular due to their low costs.

Individual needs should be the focus

The choice of the right form of investment depends not only on the amount invested, but also on the personal investment strategy. It should be noted that a higher return opportunity is always associated with a higher risk. In view of this, it is essential that the decision to invest takes into account your risk tolerance and risk capacity as well as your investment horizon.

Expert advice can be very useful both in determining your risk profile and in deriving and reviewing your investment strategy. After all, asset management is a complex field in which not many people know their way around.

Free pension 3b: the advantages

Pillars 3a and 3b are important for maintaining your standard of living in retirement. You should not rely exclusively on the benefits of the 1st and 2nd pillars, as these only cover up to about 70 percent of your last income in retirement.

Some other advantages of the free pension 3b:

• Any person living in Switzerland can pay into investment products of the free pension 3b.
• You alone determine how the capital is used.
• You are free to designate a beneficiary.
• You are free to choose the date of payment.
• There are no annual maximum amounts with regard to the payments.
• The entire capital, including income, is tax-free upon payout if you comply with the legal conditions.

Provider and conclusion of investment instruments of the free pension plan 3b

With Pillar 3b, you have a choice of providers between banks and insurance companies. The free pension 3b can be opened both in the form of an insurance solution and as a pure cash investment.

Independent financial advice

The search for a tailored retirement plan is often difficult. The 3b offer is extensive and your choice should fit your life situation.

Which risk factor you take into account is up to you. Nevertheless, it is advisable to obtain precise information in advance and analyze your own needs. In this way, you can determine whether a low-risk or high-risk investment fits better into your concept.

In order to work out the right investment strategy for you, it may also make sense to engage the services of an independent financial advisor. After all, the capital from pillar 3b is not necessarily to be used for retirement provision. Therefore, holistic investment advice is the optimal solution in many cases.

Different ways to pay in depending on the investment product

You have various options as to how you can pay in. Do you intend to pay in constant amounts periodically (e.g., monthly)? Perhaps you have made an inheritance or have a larger amount available and would like to invest this capital once?

Frequently asked questions (FAQ)

What happens in case of death?

Within the scope of the legal possibilities, you can determine a beneficiary yourself. In the event of inheritance, the capital is then paid out to the beneficiary.

How can I dissolve Pillar 3b?

In the free Pillar 3b pension plan, you can freely dispose of your money; there are no legal requirements regarding availability. The relevant contractual conditions are decisive. However, you should take into account the different tax conditions in order to decide whether a payout before retirement makes sense.

What must be stated in the tax return with regard to the free pension 3b?

Since Pillar 3b assets count as assets, free retirement savings 3b must be reported on the tax return.

Are there advantages to Pillar 3b compared to a free investment?

Endowment life insurance and single-premium policies that are periodically funded are tax-exempt, provided certain requirements are met. And pension payments from Pillar 3b are taxed at only 40 percent.

In the case of retirement accounts, the higher interest rate could have a noticeable effect in the future, provided that interest rates are expected to rise further.

Reading Time: 7 minutes

There is talk of huge transformations at the banks; as a customer, you are reaping the benefits of digital banking, which is becoming increasingly customer-friendly. But what is the actual status today and what percentage of the Swiss population already uses digital banking? Equally exciting: what is the situation in other countries?

Anyone involved in digital banking will also ask themselves: does this mean switching from analog to digital or can I, as a customer, benefit from innovative possibilities that were previously closed to me?

This article is intended to give you an overview.

The most important facts at a glance

• Digital banking is a collective term for the electronic provision of banking services. For this purpose, it is possible for customers to carry out their banking transactions online on a PC or via smartphone.
• Switzerland is one of the leading countries in terms of digital banking.
• By using digital banking services, customers can carry out their banking transactions anywhere at any time, easily and quickly.
• For banks, digital banking has the advantage that they can offer their customers new services and at the same time make their internal processes more efficient.

Digital banking: what does it mean?

Digital banking refers to conducting all financial transactions over the Internet. You’re probably sitting at a computer, laptop, tablet or smartphone as you read this post. The device allows you to use digital banking to pay your bills, analyze stock prices, check your spending, and more.

As a customer, you conduct your banking transactions in digital banking on the Internet. This manifests itself for you in particular through the use of the following tools:

• Online banking on your PC
• Banking app on your smartphone
• Digital credit card (on the smartphone)
• AI-based financial advice
• digital investment advice
• Trading apps for stock market trading – anytime, anywhere
• Payment of bills without tedious manual recording (using the smartphone’s scanner)

Digital banking – driving the transformations at banks

Digital banking offers banks the opportunity to counter increased competitive pressure. Digitalization is therefore one of the primary drivers of transformation in the banking sector. This goes well beyond pure rationalization effects. Interfaces, for example, enable networking and the exchange of data that would have been inconceivable years ago.

For example, there are now real estate financiers who handle the entire credit process digitally. The end customer, advisor, bank, appraiser and clerk are networked in this way in a complete digital process. The entire process is therefore more cost-effective, faster and transparent at all times. And Switzerland’s banking regulator, for example, is also currently working on digital solutions to automate the risk analysis of banks.

Fintechs and neobanks with new business models

Technology allows financial service providers, so-called fintechs, to offer customers new business models. Together with the newly emerged neobanks, they are a banking revolution. They have finally evolved through digitization and offer a business model that is completely paperless.

The digital “smartphone banks” are the innovative banks of our time and they are putting traditional banks under pressure. These digital banks and fintechs differ from traditional banking houses in many ways. All processes are geared to the digital age and customers can easily obtain everything they offer via their smartphone.

One step ahead of the future – where does digital banking stand today and tomorrow?

In recent years, the behavior of bank customers has changed, and the Covid pandemic has further accelerated this trend. More and more people prefer digital solutions, such as online banking or mobile apps, instead of using traditional bank contact points. Similarly, the number of virtual customer conversations has increased significantly in recent years.

During the Corona pandemic, many people have been forced to conduct monetary transactions online or via mobile banking. What was initially unfamiliar and sometimes viewed with skepticism has now caught on with a high proportion of the population. After the crisis, many people would like to completely avoid going to the bank branch and continue to rely on the new digital way of banking.

New providers are appealing to more and more customers with their banking solutions

Furthermore, the Swiss financial market is changing. Through easy-to-use mobile solutions, fintechs and neobanks have managed to capture market share. In doing so, they have shown that design and intuitive operation are at least as important for the choice of a financial service as its functionality.

Digital banking among Swiss within Europe more advanced than average – with room for improvement

The increased acceptance of new market players is triggered by a heightened interest in digital content among the Swiss population. The Swiss are using the Internet more and more, and this trend is reflected. According to the Federal Statistical Office, the number of people who are online at least once a week has now developed to a current 91 percent.

• According to evaluations by Statista for the period between 2014 and 2021, around 77 percent of the Swiss population used online banking options in 2021. This share was only around 54 percent in 2014.
• This puts the Swiss above the European average in terms of both the proportion and the pace of development. In the same period, this developed from 42 percent to 58 percent of the population accessing their payment transactions and other banking products via digital channels.

A look outside Switzerland already shows the additional potential

Even though the use of digital banking services in Switzerland is already comparatively high today. In comparison, however, examples of a higher usage rate for digital banking can still be found.

According to a study by payment service provider Unzer, the following countries are ahead:

1. Denmark (95 percent)
2. Finland (93 percent)
3. Netherlands (91 percent)
4. Sweden (84 percent)
5. Estonia (80 percent)
6. Latvia (80 percent)

The future of digital banking: How financial services providers are improving customer experiences.

Consumers are increasingly accustomed to doing everything digitally – including their banking. Digital banking has a number of benefits for both banks and customers. By leveraging technology, banks can reduce costs and increase efficiency. Customers can access their accounts anytime, anywhere and benefit from offerings such as online banking and mobile banking.

Key benefits from the bank customer’s perspective

• View accounts and conduct transactions anytime, anywhere
• Always have an up-to-date overview of account balances as well as income and expenses
• Real-time notifications of transactions
• Use of new digital offerings (such as digital investment advice)
• Conduct payment transactions conveniently from a smartphone, PC or tablet
• Security features such as two-factor authentication
• Hardly any cash required (security against theft)
• Low-cost account management
• no time-consuming handling of paper documents

Banks that operate digital banking efficiently also generate significant benefits

• cost reduction through the use of technology
• Reduction of error sources with manual processing
• increase in efficiency
• reduced dependence on branches and employees
• expanded business models through new technologies
• networking with other service providers through interfaces
• Offer customers a personalized experience
• Offer customers a variety of incentives to use digital banking services
• Leverage cross-selling approaches through digitally generated data

Neobanking apps: typical functions

A smartphone bank enables its customers to do their banking easily and conveniently from home or on the go. At the same time, the app is intuitive and easy to use, so that even newcomers can quickly find their way around it. Among other things, the app can be used to manage debit card or credit card functions or view past payments.

Many banks offer an app that makes it possible to stay up to date at all times. For example, it’s easy and straightforward to pay your bills. However, as is so often the case, there are differences between the individual providers.

Functions that can typically be used in the apps of neobanks:

• Overview of account balance and account movements even on the go.
• Push notifications when cards are used
• Sending money to third parties (provided the recipients use the same smartphone app)
• Display of card information (for online purchases)
• Approval of online purchases
• Overview, deposits and withdrawals with digital asset management
• Trading functions also available for mobile use

Digital banking: these are the functionalities you should look out for

Switzerland places second in terms of the overall digital maturity of banks, according to a survey by Deloitte. This is a very impressive achievement among 38 other countries, and Switzerland is considered a market that offers comprehensive functionalities. Swiss banks are global leaders, mainly due to the wide range of functions they offer along the customer journey. And this is not only true for the classic direct banks, all the big banks have also evolved both for companies and for their private customers.

But this is only an average view. Since the providers sometimes differ considerably, you should ask the following questions regarding essential functionalities when comparing them:

• Can account opening and account management be done in an end-to-end digital process (paperless)?
• Is the operation intuitive and the design of the website clear?
• Can the menu or interface be personalized (arrangement of personally frequently used tiles)?
• Are all required functions offered (account balance inquiry, transfers, securities orders, deposits and withdrawals for asset management, necessary applications)?
• Is there online data storage for personal documents?
• Are push notifications sent for important transactions?
• Is a multibanking solution offered (checking account balances at other banks)?
• Is online banking support available and at what times?
• Are current share and fund price queries offered?
• How is mobile banking organized (is there an app and what functions are offered there)?
• What information on money and assets is offered (FAQ, videos, editorial articles)?
• Which payment methods are covered (Apple Pay, Google Pay)?
• Can credit cards be managed digitally (payment via smartphone)?
• Can an investor profile be determined online?
• Are there personalized digital investment recommendations?
• Can an account be closed online within the Pillar 3a pension plan?
• Can a vested benefits account be closed online?
• Is biometric authentication possible (fingerprint)?
• What connections are there to third-party providers and software (for example, financial software, accounting for the self-employed)?

Conclusion: Shaping the banking transactions of the future with digital banking

Customers are less emotionally attached to their bank today than they were years ago. The situation in the closed-branch pandemic has reinforced this, as older customers have also become accustomed to digital banking. It is becoming apparent that a significant proportion of bank customers can and do completely do without branches in the meantime.

The bank customers of the future are becoming more self-confident and act independently on different communication channels. In addition, markets are constantly changing, with new services being offered by competitors and fintechs at an increasingly rapid pace. In order for financial service providers to keep pace, complex systems must be deployed. Digital platforms can provide the necessary flexibility and future-proofing for this.

In order to exploit the new market opportunities and retain customers, major efforts and investments are required on the part of banks to digitize processes and create innovative offerings for their clientele.

Continue reading in our journal:

• Create private financial planning
• Private banking: Background and tips
• Explanation of the vested benefits principle
• The 3-pillar principle in Switzerland

Reading Time: 7 minutes

In many industrialized countries, it is a sad truth that people are poor in old age. However, between the countries of the OECD, i.e. highly developed countries, the range of poverty in old age is enormous. In one country, only three percent of the population over the age of 66 falls below the poverty line, while in another, nearly half of the people fall below it. According to the OECD, almost one in five Swiss citizens over the age of 66 is poor. With a reported 19.5 percent, Switzerland ranks tenth among the 38 member states.

A differentiated picture can already be observed in the countries bordering Lake Constance. Statistics for Germany and Austria show that older people there are just as likely to be affected by poverty as the population as a whole. Just under nine percent of the Swiss are considered poor, while among older people this figure is about twice as high.

If you want to avoid poverty in old age in Switzerland, you should find out about the causes in order to avoid the risk. In this way, solutions can be found in good time to avoid poverty after retirement and to avoid having to live on the edge of the subsistence level.

The most important facts at a glance

• On average, individuals in Switzerland had to come up with 2,279 francs per month in 2020 in order not to be considered poor.
• Also considered poor is a household consisting of two adults plus two children under the age of 14 if it has 3,963 francs or less available each month.
• In Switzerland, almost one in five people over the age of 66 is affected by old-age poverty.
• Those who begin to take advantage of the opportunities offered by the third pillar of the Swiss pension system in good time can protect themselves against poverty in old age.

Definition of poverty: When is a person poor?

There is no single definition of poverty, but it can be said that poverty is predominantly a financial matter. People who are poor often have no or very little income and assets. As a result, they often have worse living conditions and life opportunities than people who are not poor.

Accordingly, poverty also means not reaching the minimum standard of living that is acceptable in a country. This standard, however, is of course different in different countries and also depends on the respective society.

So it does not always have to concern material things. Sometimes needs such as education, health or security are also relevant. Poverty often also leads to exclusion from social life and social isolation. First of all, therefore, a distinction must be made between the terms absolute and relative poverty.

Absolute poverty

The so-called absolute poverty concept describes poverty as a condition in which one earns less than is necessary for a socially accepted life in the respective country. In Switzerland, absolute poverty is based on the guidelines of the Swiss Conference for Social Welfare (SKOS), which include the monthly costs of living, housing and an additional 100 francs per person per month from the age of 16.

Accordingly, a person is considered poor in Switzerland if he or she has a maximum of 2,279 francs per month at his or her disposal. A family consisting of two adults and two children has a maximum of 3,963 francs at its disposal.

Relative poverty

Poverty is measured in relative terms by looking at the distribution of wealth in the population as a whole. The usual poverty thresholds are 50 or 60 percent of the median income available to people. An at-risk-of-poverty rate indicates the proportion of the total population that is at risk of poverty.

In Switzerland, the Federal Statistical Office classifies the poverty line at 60 percent of the income of Swiss households. The at-risk-of-poverty threshold for a one-person household in 2020 is 30,072 Swiss francs per year. This limit corresponds to 15.4 percent of the population of Switzerland.

Material deprivation

A so-called material deprivation is defined according to a financial shortage in three of nine coordinated categories across Europe:

• being able to incur unexpected expenses of 2,500 francs in one month
• one week’s vacation per year (away from home)
• no arrears
• a meal with fish or meat every two days (alternatively vegetarian meal)
• sufficiently heated apartment
• possibility to use a washing machine
• color TV
• telephone
• car

According to the Federal Statistical Office, this circumstance applies to 4.3 percent of the Swiss. (as of 2020).

Supplementary benefits (EL)

The supplementary benefits (EL) to the AHV and IV (IV) are intended to meet minimum living costs if the pension and income cannot cover them. In this case, one has a legal right to EL. These are part of the social foundation of Switzerland.

There are two categories of supplementary benefits paid by the cantons:

• annual benefits with monthly payment
• payment of sickness and disability costs

Information is provided by the responsible cantonal EL offices. These are usually the cantonal compensation offices or their municipal branches.

Poverty in Switzerland: who is affected?

• 8.5 percent of the Swiss were affected by income poverty in 2020, which corresponds to 722,000 people.
• The current poverty rate has thus not changed significantly compared to the previous year (8.7 percent). It was 9.3 percent in Switzerland in 2007 and fell to 5.9 percent in 2013, but it had already risen again to 6.7 percent in 2014.

The most recent survey by the FSO shows that the general standard of living in Switzerland is very high from then on. However, these data predate the impact of the Covid 19 pandemic.

At-risk-of-poverty rate in Europe-wide comparison

With the at-risk-of-poverty rate used internationally, poverty in Switzerland can be compared with other countries. As of 2020, this amounts to:

• 20.0 percent in Italy
• 16.6 percent in the EU (average)
• 16.1 percent in Germany
• 15.5 percent in Switzerland
• 13.8 percent in France
• 13.9 percent in Austria

Who is disproportionately affected by poverty in Switzerland?

The risk of poverty depends in particular on the family situation as well as education. This is shown by the poverty rates of the Federal Statistical Office for 2020:

Family Situation:

• Single-parent households (26.8 percent)
• couples with three or more children (24.4 percent)
• People under 65 living alone without children (16.3 percent)
• Couples with two children (11.8 percent)
• Couples under age 65 with no children (6.6 percent)

Education:

• Persons with a compulsory school education (27.6 percent)
• Persons with a tertiary education (8.2 percent).

The special case of old-age poverty

Retired persons are a special group very exposed to the risk of poverty (21.5 percent), especially as persons living alone (28.4 percent). After ending active employment, people in Switzerland rely particularly heavily on their assets to finance their living expenses.

Major causes of old-age poverty

Statistics on current old-age poverty in Switzerland reveal some striking causes of poverty in old age.

Education

The main causes of rising old-age poverty include a lack of education and the fact that more and more people are living in precarious jobs. If people do not have sufficient education, they can only find jobs with low wages. As a result, they do not have enough money to finance their lifestyle even in old age.

Single parent

Women in Switzerland are more at risk of poverty in old age than men. This is mainly due to the living conditions of women, who are more often single parents and subject to lower labor force participation.

Reading tip: Financial Advice for Women

Single households

Single-person households are the most common form of living in Switzerland, accounting for 36.4 percent of private households (as of 2020). According to the Federal Statistical Office (FSO), this trend will continue to increase in the future. The FSO cites declining birth rates and increased life expectancy as the main reasons for the rise in smaller households.

As a result, more and more people will have to support themselves alone. This also increases the risk of poverty in old age in Switzerland.

Lack of old-age provision

The poverty statistics of the FSO make the relevance of the use of second and third pillar pension options very clear. While the poverty rate of pensioners who draw their main income from pillar one is over 20 percent, the rate already drops by more than half if the main income comes from pillar two. You can achieve a similar effect with priority income from assets.

Please also read our:

• insider tips on pillar 3a
• insider tips on pillar 3b

Corporate bankruptcies

A study by credit insurer Allianz Trade says that an increasing number of insolvencies can be expected worldwide and also in Switzerland in the future. Creditreform, the credit information agency, also expects a similar development after the end of the Corona measures. Some countries, including Switzerland, have already seen an increase in insolvency figures.

Strokes of fate such as loss of job or illness

Strokes of fate such as the loss of a job or serious illness can lead to people being poor in old age. In this context, the current low unemployment rate of around two percent is a positive sign. Switzerland has also looked excellent in an international comparison for decades.

Serious illnesses can also lead to people being poor in old age. Many older people have chronic health problems. These health problems can cause them to lose their jobs and slip into poverty in old age.

Money in old age – preventing poverty

Within the social insurances of Switzerland, the first pillar with the old-age and survivors insurance (AHV) serves to secure the existence. Practice shows: The AHV is not sufficient to protect against poverty in old age in Switzerland.

With the occupational pension from pillar two, together with the AHV pension, you secure about 60 percent of your income in old age. Incidentally, half of all retirees have their pension fund assets paid out. This is a particularly flexible way of avoiding “material deprivation” in old age.

The figures clearly show that if you want to effectively prevent the threat of poverty in old age, you need to take personal responsibility. This means taking advantage of the opportunities offered by pillar three with state support.

Help and social counseling – when poverty is already acute

People affected by old-age poverty can find a number of services in Switzerland where they can get help.

Key points of contact are:

• Pro Senectute (largest organization for old-age issues in Switzerland).
• Swiss Red Cross
• Cancer League
• Pro Infirmis (national umbrella organization in Switzerland for people with physical and mental impairments)
• Caritas Switzerland
• Church congregations

Conclusion: Building up retirement provisions in good time and according to plan

The earlier you start saving for your individual retirement, the easier it will be. After all, you will have the time factor on your side.

Thanks to the returns on the capital market, the second and third pillars can finance higher pension payments with lower contributions than the first pillar. However, the two funded pension systems are subject to greater fluctuations than the first pillar. The first pillar therefore makes a significant contribution to security, and you can generate an adequate return with third-pillar financial products.

Individual retirement planning with third-pillar financial products

Demographic trends, rising wages and longer life expectancy are leading to a shift in the ratio between pay-as-you-go and funded pension systems. For the 3-pillar principle, this means that the importance of private pension provision in the third pillar is increasing. In Switzerland, this is the most effective protection against poverty in old age.

However, due to the low level of interest rates, classic interest investments are no longer able to compensate for inflation. This has led investors to look for high-yield investments that have an acceptable level of risk. Fintechs in particular offer a wide range of such solutions.

The development of the market has ensured that today you can call on professional help with your retirement planning. Digitalization has made competent wealth planning accessible to broad sections of the population.

Reading Time: 7 minutes

Many people dream of living a self-determined life in old age and securing their future financially. Saving with the third pillar can be the right way to achieve this.

The tax-privileged pillar 3a serves as private provision for retirement. For this reason, restrictive regulations have been put in place with regard to Pillar 3a payments and, in particular, early withdrawals. Thus, the early withdrawal is only possible in a few exceptions and under strict conditions.

In this article, we explain the different situations in which an early withdrawal from the 3rd pillar is possible. We also discuss taxation in various cases so that you know what to look out for.

The most important facts at a glance

• As a rule, withdrawals from pillar 3a are made five years before and a maximum of five years after the normal retirement age.
• There are strictly regulated exceptions for early withdrawal of pension assets.
• Pillar 3a is the tied pension plan for Swiss citizens and is tax-subsidized by the federal government.
• In pillar 3b (free pension plan), the contributions cannot be deducted for tax purposes and the credit balance is taxed as assets. The amount paid out, on the other hand, is tax-free and the timing can be freely chosen.
• For pillar 3a, the maximum amount that can be paid in in 2022 has been set at CHF 6,883. People who do not have a pension fund may pay in up to 20 percent of their earned income, up to a maximum of 34,416 francs.

When can I start drawing Pillar 3a benefits?

Pillar 3a can be drawn five years before reaching the regular AHV retirement age. This is (as of 2022) at age 64 for women and 65 for men.

Pillar 3a capital can also be drawn after retirement. If you continue to work after you have reached the regular retirement age, you can postpone the withdrawal. However, as soon as you stop working or no later than five years after reaching the regular retirement age (69 or 70 years old, respectively), the capital must be withdrawn.

These options for withdrawal during retirement are also referred to as ordinary withdrawal.

Early withdrawal and lump-sum payments from pillar 3a strictly regulated by law

The early withdrawal is only possible under some specific circumstances, which are regulated by law. These strict regulations were enacted because the intent of the tax-advantaged Pillar 3a is to provide for personal retirement.

The following circumstances allow for early withdrawal of Pillar 3a benefits:

Leaving Switzerland

If you leave Switzerland permanently, you can have your retirement capital paid out early. In the case of married couples, the written consent of the spouse is required. Proof of the new permanent residence abroad must be provided.

Self-employment

Self-employed persons who do not belong to a pension fund can have the capital from the 3rd pillar paid out in the first year. However, this is only possible for partnerships and not for legal entities, such as a stock corporation or limited liability company. If you are self-employed, you can pay a higher annual amount into the third pillar to compensate for the lack of a second pillar.

Self-occupied residential property

It is possible for you to obtain additional personal funds for the purchase or construction of a permanently owner-occupied home by making an early withdrawal of saved Pillar 3a funds. An early withdrawal of pension capital is possible every five years. The payout is subject to a reduced tax rate. Taxes may vary depending on the place of residence and the volume of the payout.

Pillar 3a capital can also be used to pay off mortgage loans. With an early withdrawal from Pillar 3a, there is also the option of investing in residential property and financing renovations and value-enhancing investments.

The following applies when you make an early withdrawal of Pillar 3a capital:

• There is both no age limit and no minimum withdrawal for early withdrawals from pillar 3a. Withdrawals that come from Pillar 3a to finance real estate are considered “real equity” (unlike pension fund withdrawals).
• In addition to purchasing residential property, you can also use the early withdrawal to repay a mortgage debt.
• It is only possible to withdraw a partial amount of the Pillar 3a capital up to five years before reaching regular retirement age. After that, you can only draw on the entire amount of the respective pension plan. Therefore, it is worthwhile to maintain different pillar 3a accounts.

Disability

Recipients of a disability pension from the IV who do not have disability coverage can have their money paid out from pillar 3a.

Death

In the event of the death of an insured person, the capital is paid out. The order of persons entitled to the payout is as follows: Spouse, children as well as persons for whom the deceased provided a significant living, parents, siblings as well as other heirs.

Purchase of pension fund

The capital of the 3rd pillar can also be used to buy into a tax-exempt pension fund. The requirements for this are

• there are no contribution gaps
• there is no early withdrawal for home ownership that has not been repaid.

What should I bear in mind when withdrawing from pillar 3a?

Regardless of when you want to withdraw your money from Pillar 3a, you must actively dissolve the Pillar 3a. The bank or insurance company from which you receive the money does not automatically dissolve the pillar for you. Make sure that you contact your bank in time. They will send you the application form. If you do not get in touch, the bank will contact you. Important: You must declare the Pillar 3a withdrawal in your tax return. Income tax is levied separately for the withdrawal at a reduced rate.

Here are some important points to consider when making a Pillar 3a withdrawal:

• Pay attention to taxation of pillar 3a withdrawals: You must always close a 3a account in full. It is not possible to make partial withdrawals from a pillar 3a account – unless you have several 3a accounts. This must be taken into account when coordinating withdrawals from the various pillars of retirement provision. In addition, married couples will have their withdrawals added together within the same tax period.
• Coordinate withdrawals with the pension fund: The withdrawals you receive from the 3a pillar should be coordinated with possible withdrawals from your pension fund. Capital that you withdraw from the 2nd and 3rd pillars in the same year is added together when calculating the capital payment tax. If you choose a staggered withdrawal, the tax will be lower.
• When a new 3a account is still profitable in the last year of work: If you plan to retire at regular retirement age and receive all or only part of the pension fund assets as a lump sum, you should close your existing 3a account a year earlier. Otherwise, the pension fund capital drawn and the 3a payouts count together for tax calculation purposes. As a result, the lump-sum withdrawals will be subject to a higher tax rate. You can then still open a new 3a account for the last year.
• Late closure of the 3a account: 3a assets must be withdrawn as soon as you reach your regular AHV retirement age. Provided you can prove that you will continue to work, you can continue your pillar 3a for up to five years. During this period, you can continue to make contributions.

Optimize taxes with pillar 3a withdrawals

Tax progression is the keyword when optimizing taxes. In order to keep the progression as low as possible, it is advisable to open several 3a accounts and distribute the retirement assets among them.

Depending on the overall situation, the individual accounts can be closed from the age of 60 (men) or 59 (women) over several years. The respective tax is calculated per year and is based on the account closed in the same period.

As a result of this individual assessment, the progressions at the federal level and, depending on the canton, are lower overall than if you were to close all accounts at the same time. This is a simple way to save several thousand francs in taxes.

Example:

Daniel and Maria, who both live in the city of Zurich, are the example here of the advantage of staggering the payment of several accounts over several tax periods.

• Daniel has his accumulated pension capital totaling 473,506 Swiss francs paid out on his retirement at age 65. This incurs around 51,000 Swiss francs in taxes, which are collected jointly by the federal government, the canton and the municipality.
• Maria has also saved a total amount of 473,506 Swiss francs for her retirement provision. However, this amount is divided between two accounts that she had opened some time ago. Maria has her two accounts paid out in two different years. Each has a balance of CHF 236,753. Due to the different payout dates in two years, her tax burden is reduced to a total of CHF 31,000 – even though she, like Daniel, lives in Zurich.

By staggering the payout of her 3a capital from several accounts, spread over different years, Maria has saved over CHF 20,000 compared to Daniel.

Frequently Asked Questions (FAQ)

When should I deal with Pillar 3a and the payout?

The earlier you start looking at Pillar 3a options, the more efficiently you can design your retirement savings. Because of the possible tax advantages when distributing payouts and in order to coordinate the payout with the pension fund, you should initiate the necessary steps at least one year before withdrawal.

What role does the investment mix play?

The low-interest-rate policy has meant that savers hardly receive any interest on their invested capital. It is true that retirement savings deposited in a 3a account earn better interest than normal savings accounts. But the interest rate granted by the banks is very low overall.

It is worth investing in 3a securities funds. Equity funds in particular yield much higher long-term returns than 3a savings accounts. Switzerland has strict regulations for 3a funds. Diversification is also regulated in this way. Depending on which 3a fund one chooses, the proportion of Swiss or global equities can be increased. Good diversification reduces the risk of losses in certain markets.

Is it possible to deposit and withdraw in the same year?

In the third pillar, there are no lock-in periods as known from paying into the pension fund. Consequently, it is possible to pay into pillar 3a in the same year in which you request a payout, regardless of whether you pay in first and then pay out or vice versa.

Continue reading in our journal:

• Switzerland’s vested benefits principle
• Tips on the vested benefits account
• Pillar 3a comparison