In Conversation with Pictet: Succession without DNA
Interview published in Caijing magazine, August 2022
Researcher: Zhao Shasha
Editor: Guo Nan
With its unique partnership model, commitment to a long-term perspective and a focus on wealth and asset management, Pictet has maintained 200 years of growth despite wars, political upheavals and economic crises, and remains one of the longest standing family businesses.
When talking about century-old family business, one would probably think of Kikkoman of Japan, the German automobile maker BMW, French fashion house Hermes... But in financial industry, there is also an enduring atypical family business – Pictet.
Founded in 1805, Pictet is one of the family businesses with the longest history in the world, it is a member of The Hénokiens, an association whose membership is based on company longevity with a minimum period of existence of 200 years.
Since 1950s, Pictet has been expanding its clientele from HNWIs to institutional investors like pension funds. Since 1980s, it has enlarged its business footprint from Europe and US to Asia, setting foot in Tokyo, Singapore, Hong Kong, Shanghai and more.
After 217 years, Pictet is now the third largest wealth and asset management firm in Switzerland (by AUM), with 30 offices and over 5,000 employees worldwide. As of the end of March 2022, Pictet’s assets under management and custody reached US$726 billion.
Recently, Caijing magazine had an exclusive interview with François Pictet, Partner of Pictet Group, and Professor Hao Gao, Director of NIFR Global Family Business Research Centre of Tsinghua University, about the Pictet story.
According to François Pictet, the core values of Pictet are its independence, long-term thinking, partnership, responsibility and entrepreneurial spirit. He identified these as the guiding principles that have steered the firm through market turbulence and to grow sustainably.
In 2018, Hao Gao and his team visited Pictet’s headquarters in Geneva, Switzerland and conducted extensive discussions with senior executives and business leaders of Pictet Group. In his view, Pictet’s unique succession pattern ensures generational transition, circumventing issues of human resources limitations and the sense of entitlement often seen in family businesses.
According to the China Private Banking Development Report (2021) jointly released by China Banking Association and NIFR Global Family Business Research Centre of Tsinghua University, in 2020, the AUM of China’s private banks reached RMB 17.26 trillion, a year-on-year increase of 22.09%, and the number of clients was 1.2534 million, a year-on-year increase of 21.53%.
He also believed that wealth management firms in China can learn from Pictet's core values around long-term thinking and entrepreneurial spirit.
Interview published in Caijing magazine, August 2022
Researcher: Zhao Shasha
Editor: Guo Nan
The following is the original text of the interview
Three factors in building a business that can stand the test of time
Caijing: Are there many financial institutions with over 200 years’ history?
Gao: Very rare. The prestigious Swiss banking industry has undergone massive mergers and acquisitions over the past three or four decades. Numerous smaller boutique private banks have disappeared, with larger financial institutions dominating the industry.
In financial sub-sectors such as investment banking and asset management, the economies of scale enjoyed by large institutions is usually very competitive, and their power to attract capital and talents keeps increasing. However, in the wealth management sector, large institutions are increasingly challenged by conflicts of interest.
This is also why many HNW clients suffered hefty losses during the financial crisis od 2007-2008. Many financial institutions had enough incentive to sell high-profit, high-risk, and highly complex financial products to clients, which general investors did not really understand. In such situations, misallocation of assets, investment horizon and risk could easily arise. Once there is a significant change in external conditions, investors could suffer unexpected hefty losses.
Caijing: From a research perspective, how has Pictet managed to stand the test of time?
Gao: There are three essential elements for any business to pass through generations, and Pictet is no exception.
First is the “hardware”, ie the framework for family succession, including eg shareholding structure, company bylaws, family constitution, and family trusts. Pictet’s partnership structure is unique and is the bedrock for the firm’s stable growth over the long term. At present, Pictet has eight partners, including one senior partner. The partner committee is the top decision-making body of the Group.
The second element is “software”, that is the principles, culture and values. Pictet has its own distinctive values and corporate culture.
The third is “people”, referring to the self-sustaining succession of both internal and external talents. Pictet has adopted a relatively open approach in terms of talent, looking at not only the Pictet family, but also members of the other two founding families as well as talented professionals from outside the families to become partners, effectively avoiding the limitations of sourcing talent from one single family.
Caijing: Since 1805, Pictet has successfully survived two world wars and multiple global financial crises. What are your guiding principles?
François Pictet: For me, one of the most important qualities of Pictet is modesty. Our partnership essentially embodies this value. It acknowledges that one person does not know everything and that making the right decision requires multiple participants. This is very different from having the CEO as the sole decision maker.
In a narrow sense, partnership is only a legal shareholding structure, but in a broad sense, it is a relationship we hope to establish with clients, employees, investee companies and various stakeholders. Employees and clients are the foundation of the company's development. Only when our employees do things well, can we win the trust of our clients, after which they would willingly entrust their wealth to us.
The partnership model is based on our long term perspective, which is also one of our core values. Our employees don't get fired just because of a slight drop in performance in a quarter, so they trust the company and stick to our values, putting the interests of our clients first to build long-term relationships with them. At the same time, they themselves also embody these values and behaviors.
Of course, our values also include independent thinking, responsibility, and entrepreneurship, which are also very crucial as well.
Caijing: As an atypical family business, has this constrained your development in the past?
François Pictet: We have always been emphasizing internal organic growth, not episodic acquisition expansion, because acquisition may bring corporate culture mismatch. Corporate culture is a key element in providing quality service and good performance. Our employees are well aware of the advantages of working at Pictet and they recognize its values. Therefore, we have been expanding through organic growth to ensure the continuity of our corporate culture.
Currently Pictet is the third largest bank in Switzerland in terms of AUM. By the end of March 2022, the assets under management and custody of Pictet reached US$726 billion, sufficient to ensure our profitability and also allows us to set up offices in other new markets.
And since we are not publicly listed, there is no pressure on operating performance from external shareholders, we can allow for some of these ventures to take longer to become profitable. For example, it has taken our Japan business 10 years before it became profitable but today it is one of the most prominent asset management players in Japan.
Generally speaking, for us growth is not an objective per se. We want to see the opportunities. We want to do the right things for our clients and hopefully growth will come from there as well.
No birth rights
Caijing: What are the characteristics of Pictet’s unique partnership model?
Gao: The partnership model is the foundation of Pictet’s development over the long-term. It includes not only the shareholding structure, but also the decision-making process, the appointment and succession of partners.
The first characteristic is the succession Pictet’s partners. Generally, the age group of partners is evenly distributed between the age of 40 and 65. On average, new partners are elected every 5 to 10 years, from candidates around the age of 40. At this time, there are two or three existing partners between the ages of 45 and 55 and one or two between the ages of 55 and 65. Therefore, Pictet has always had a dynamic succession system.
The second is the partners’ long tenure. In its long 217-year history, Pictet has only had 45 partners, each with average tenure of 20 years. The nature of wealth management is to provide clients with stability, security, and predictability, the heads of the firm should not change frequently.
The third is the financial arrangement. Although a partner is an owner in the company and shares in the profits, it is a position that cannot be passed on to their children. The most significant point in this respect is the principle of equality. Each Partner has one vote, without any hierarchical distinctions between majority or minority Partners. Overall, Pictet management style is consensus-oriented. When Partners leave the company, they keep only the assets they have generated for themselves in the course of their career and are bought out at book value by the new Partners.
New partners need to purchase the equity from old partners. Although they are outstanding and wealthy, purchasing the shares of a large financial institution basically will deplete the wealth they have accumulated so far. This forces them to seriously think whether it is worthwhile to commit their personal fortune and work at this firm for 20 years. Thus, new partners are quite wealthy on paper, but their cash flow could be limited. They have a simple and low-key lifestyle and are humble.
Caijing: How does Pictet select partners?
Gao: The Pictet family has always educated its descendants that there are no birth rights. This mitigates the sense of entitlement common among descendants. To become a new partner, family members need to fulfill the same criteria. Yet in many countries including China, there is an entrenched concept of inheritance.
An important criteria for Pictet in selecting partners is to have strong entrepreneurial spirit in leading teams to develop new businesses and create new value. Before becoming partner, the candidate needs to have been in charge of a business at Pictet, to take responsibility, make decisions, galvanize internal and external stakeholders to strive for the same goal.
Another criteria is having common values. Pictet partners have an average tenure of 20 years. They are likely to be working together for the next 20 years or so, and have to have the right cultural fit. Partners are chosen based on the high degree of competence they have demonstrated in their careers and personal accomplishment, as well as based on in-depth interviews and observations of new partners over the long term.
Caijing: At what age shall younger members join the family business if they want to become partners?
François Pictet: At the time of my grandfather and father, they would come quite early into the firm, get to understand it well, and then grew the ranks over time. But now family members often show their expertise and their worth outside of the group first and join the group at a higher level once they have proven in the outside world that they can improve themselves and they can bring expertise that is needed in the Group.
Caijing: Over the years, there have been many talents coming from the Pictet family and it now has nine generations of Pictet Partners. How does the Pictet family cultivate talents?
Gao: One of the most prominent figures in the Pictet family is Charles Pictet de Rochemont, who participated in the Vienna and Paris conferences in 1814-1815 and prepared the declaration of Switzerland's permanent neutrality. The Pictet family has been active in politics, military, science, arts, finance, philanthropy and many other fields. The Pictet family has passed through 20, 21 generations, with the eighth generation having founded Pictet the bank.
Like many Chinese families, the Pictet family attaches great importance to educating their next generation. This refers not only to the ability to study and work, but also the cultivation of virtues and values. The Pictet family’s motto in the early days was “Fais bien et laisse dire”. After Geneva defeated the French army in 17th century, the motto was changed to “Sustine et abstine”.
However, the Pictet family is more open-minded than most Chinese private entrepreneurs in terms of talent cultivation.
First, family members come from three founding families, the Pictet family, the Demole family and the de Saussure family. This is the first aspect of openness, as the multiple founding families help mitigate the uncertainties in succession within a single family, and expands the talent pool for the next generation of leaders. This is very important in the long-term.
Second, Pictet is willing to take on talent outside the founding families, both for the business or for the partnership. This is the second aspect of openness. If leadership is limited to only family members, they could risk having shortage of talent, abilities or resources. On the other hand, being overly open might weaken the family's control.
Becoming a long-term trusted partner
Caijing: In your view, what is the core value proposition of private wealth management?
François Pictet: Large families' wealth holding can be quite complex and often spread across different jurisdictions and with different generations and priorities. What we believe we can offer to these large and wealthy families is our skills in terms of strategic asset allocation, active management. They are also looking for a trusted partner that they can trust to act in their best interest at all times, and over multiple generations.
Caijing: How could Pictet ensure it is aligned with its clients’ interests?
François Pictet: To ensure the interests are aligned, I think this comes back to the element of trust.
First of all, the governance of the Pictet Group is very much tilted towards the long term. Therefore, every decision we make as partner is for the long-term benefit of the organization. Our mission is to pass on the Pictet Group as a better firm to the next generation. And how can the Pictet Group do well? There is only one way is if our clients do well, we will do well. And all our focus is on our client best services and performance. Because that way we ensure that these clients will remain with us for the long term. And therefore, the Group will do well over the long term.
Also, we don't have any other external shareholders. All the shareholders are around the table when we make important decisions. With my name representing the Pictet Group, I could not go for a quick win saying we will try to have short term gain, increase the fees or charge our clients with unreasonable fees so that we have a great year. But then the following year the Group will suffer. And with my name on the door, this has an extra impact on the way we make decisions.
One last point, we have no conflict of interest, because we are a pure player in wealth management. We don't do commercial banking or investment banking, we just do wealth management and therefore we don't have an investment banking arm trying to fill the portfolio of our private clients with investment banking products. We are a pure player and I think this is also something that our clients value.
To give a very concrete example, in private equity. There are a lot of firms that are offering feeder funds to private clients. They will commit to a PE Manager for instance to distribute a few hundred million of their latest fund to their clients and shares the fees. Typically, this is the kind of arrangement that we would never accept because you maybe not making the best decision for your clients or aligned with their interest.
Caijing: Can Pictet's successful experience be replicated to China’s wealth management firms?
Gao: It is very hard to replicate in its entirety, but there is much to learn from Pictet’s core values.
First is long-term thinking. Long-term thinking brings Pictet stability in terms of strategy and business. Contrasting with the typical 5-10 years’ tenure of CEOs in other banks, partners in Pictet has an average over 20 years’ tenure, guaranteeing continuity and consistency of strategy.
In the Harvard case study of China Merchants Bank Private Banking, we have found that a factor for its success is the stability of the leadership team. In the 10 years from 2007 to 2017, the leadership team of the private bank, including branch leaders, general managers, and investment advisory teams, remained highly stable. Basically, there were no major changes during that period. The core personnel remained unchanged, so did the strategic approach and core strategy.
Another Pictet core value is entrepreneurial spirit. One feature of the wealth management industry is the heterogeneity of clients. Each client is different. They come from different industries, regions, have different gender, occupation, risk preferences, liquidity requirements, health conditions and life goals... This requires front-line employees in the wealth management industry to be knowledgeable, innovative, passionate about clients, willing and able to solve all kinds of problems. That's exactly what entrepreneurial spirit is all about. On the other hand, the asset management industry is a highly standardized industry. No matter what background LPs are, they must follow the existing investment products or investment styles of investment managers.
Stephen Schwarzman, the founder of Blackstone, once described Pictet as a start-up company which is over 200 years old, as he saw its enthusiasm and innovation. Entrepreneurship is key to wealth management industry.