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Baer Market

Their calling card -- client secrecy -- is under grave threat, and big global banks want to eat their brunch. Yet somehow Julius Baer and other Swiss private banks are thriving again.

In late 2002, Raymond Baer, chairman of Julius Baer Holding, Switzerland's largest independent private bank, made a pilgrimage to Buddhist monasteries and holy sites in India and Bhutan. It was an appropriate time for meditation and spiritual retreat. Back home in Switzerland the bear market was wreaking havoc with private banks' balance sheets, international pressure was mounting on them to abandon traditional customer secrecy, global institutions were aggressively courting their superrich clients, and they were undergoing deep staff cuts, including at Julius Baer. Predictions were rife that Swiss private banking was in a free fall from which it would never recover. "We were in the midst of great pain and uncertainty," recalls Baer, 44, the fourth generation of his family to run the 114-year-old bank.

That was then. Today the stock markets are climbing. Switzerland believes it has gone a long way toward mollifying the European Union on the secrecy issue by offering to tax the Swiss accounts of EU citizens and to turn over most of the revenue to their governments, while keeping the rest. The Swiss also believe that they have gone faster and further than others in meeting demands from Washington that the international financial system clamp down on money laundering by terrorists and drug traffickers. Even competition from global banks seems less fearsome. Nowadays private banks have taken to portraying themselves as nimble middlemen, charging their wealthy clients fees for advising them on a broad range of investment vehicles offered by heavyweights like Deutsche Bank and HSBC Holdings. "We are agile enough to offer anybody's products to our clients," contends Baer (see box, page 96).

The sense of crisis may be over for Swiss private banking. But is the confluence of a bull market, belt-tightening and a newfound agility enough to ensure long-term prosperity? Or are these secretive banks, renowned for service and client hand-holding (see box, page 98), experiencing only a temporary upturn?

Skeptics contend that the banks' strong suit -- strict privacy for clients -- is losing its credibility as a marketing tool as the EU and the U.S. demand greater openness for tax and antiterrorism reasons. Swiss banks' reputation for secrecy was also eroded when American auditors were allowed to comb through their books in search of lost accounts belonging to Holocaust victims. "Privacy remains a leading factor for selecting a Swiss private bank," notes Catherine Tillotson, a director at Scorpio Partnership, a London-based wealth management consulting firm. "Whether Switzerland will be bereft of a business model without it is the question."

Executives at global banks sound almost derisive about the ability of Swiss private banks to generate the kind of returns demanded by a new generation of wealthy clients. "Swiss private banks may know their clients, but they don't know the markets," says Debra Treyz, the London-based head of J.P. Morgan Private Bank's operations in Europe, the Middle East and Africa.

Moreover, most Swiss private banks don't have the resources to follow capital as it moves from offshore to onshore accounts. Global Swiss banks like UBS and Credit Suisse have established multiple private banking offices abroad to retain foreign clients who decide to repatriate their money. But among independent private banks, only a handful, including Julius Baer and Vontobel Holding, can afford a few foreign private banking offices of their own.

"Marginal penetration of onshore private banking . . . will lead to a major decline" in the number of Swiss private banks, predicted Moody's Investors Service in a November 2002 report. In the year since that report, the number of Swiss private banks has fallen from 369 to 357. Moody's analysts say the contraction will continue.

Yet Swiss private banks are upbeat. And to ensure that their turnaround is more than just a joyride on a macroeconomic roller coaster that happens to be climbing now, they are pursuing a number of strategies.

* The banks are calculating that by making tax concessions and adopting "know your customer" guidelines intended to do away with blind accounts, they will be able to persuade foreign governments that there's no need for them to disclose clients' identities.

* To cut costs, smaller private banks are pushing for mergers with peers or joint ventures with global banks. For example, two of the most prominent Geneva-based private banks, Lombard Odier & Cie and Darier Hentsch & Cie, merged in 2002. In that same year Bank Sarasin & Co., based in Basel, sold 28 percent of its stock to the Netherlands' Rabobank.

* Larger private banks are opening branches abroad in an attempt to retain foreign clients who opt to "go onshore" and repatriate their Swiss holdings.

* All private banks are emphasizing traditional strengths, such as personal service and confidentiality.

Most of these strategies have been embraced at Julius Baer under Raymond Baer, who took over leadership of the bank in May from his uncle, Thomas Baer. Educated as a lawyer, Raymond Baer got his first formal taste of the financial world during a three-year stint at Salomon Brothers in the 1980s, initially in New York as part of the interest-swap group and then in London as a specialist in hedge fund products. Baer has kept close ties with the friends he made in New York. Although not a Buddhist himself, Baer joins several of them on biennial visits to Buddhist sites in Asia.

"I really enjoyed being on Salomon's big trading floor -- it was the heyday of John Gutfreund and John Meriwether," recalls Baer. It was a lot more exciting, in fact, than being back in Zurich. So when his uncle approached him in 1988 about taking a job in the family business, he hesitated. "But he let me know that it was time to join the bank, if I ever wanted to move up there," recalls Baer.

Julius Baer headquarters was as musty as he remembered it. The corridors in the five-story building are still so labyrinthine that executives sometimes find it quicker to reach an office by exiting the front door and walking around the corner to the back entrance. The bank nevertheless has a choice location on the Bahnhofstrasse, the heart of the financial and retail district, where locals and foreigners dart in and out of banks, furriers, jewelers and boutiques, or linger over creamy pastries and foamy coffees at Sprüngli and other venerable cafés. The sounds on the avenue are pretty much the same as they were before World War II: the rumble of electric trams and the foghorn blasts of ships on nearby Lake Zurich.

But some of the old ways were already changing at the family bank when Raymond Baer joined it. He was assigned to the capital markets team, one of the bank's new operations. The timing was perfect: The big bank cartels, which monopolized syndicated deals, were breaking up. "It meant very good times for us because we could finally create cover warrants and lead-manager issues," says Baer. "So I had a terrific first year in what wasn't a core business at the bank." His early success pretty much cleared Baer's path to the chairmanship of Julius Baer 15 years later. The only other family member in management is his cousin, Michael Baer, now head of private banking. But there will be no shortage of family members for future executive slots: The next generation numbers 45.

Raymond Baer's ascension came at a nadir for Swiss private banking. Publicly listed on the Zurich Stock Exchange and 54 percent-owned by the Baer family and their trusted confidants, Julius Baer had been battered along with the rest of the Swiss private banking industry. The 18 months beginning in January 2002 were among the worst since the bank's founding in 1890. Assets under management fell from Sf126.5 billion ($75.6 billion) in 2001 to Sf106.5 billion in 2002, while net profits declined from Sf224.9 million to Sf182.7 million. In the first half of 2003, net profits plummeted to only Sf16 million, compared with Sf64.4 million in the first half of 2002.

Julius Baer reduced its roster of 2,500 employees by almost 20 percent. Selling the unprofitable institutional brokerage unit last July for an undisclosed sum to Lightyear Capital, a New York­based private equity firm, chopped 300 off Julius Baer's head count in one stroke. The firm also slashed bonuses and cut many salaries.

The bank now says it's digging its way out of the avalanche. Assets under management rose in the third quarter of 2003 to Sf115.4 billion and were expected to climb higher -- along with net profits -- by the end of the year. The bank's share price rebounded from a low of Sf245 at the beginning of 2003 to a high of Sf440 toward the end of the year. Its market cap is now roughly Sf4.4 billion. "We've announced to our staff that the big job cuts are over," says Baer.

The upswing is evident at other private banks as well. Vontobel Holding, also publicly listed and often cited as Julius Baer's main rival, recorded first-half 2003 net income of Sf59.5 million, following a loss of Sf36.9 million in second-half 2002 (although Sf34.5 million of the '03 gain was the result of a nonrecurring pretax earnings item.) And at UBS's private banking operation, assets under management grew by Sf9.4 billion in 2003's third quarter. Although barely above the Sf9.3 billion increase for the same period in 2002, it was nevertheless a quarterly record.

Julius Baer blames its earlier dismal performance largely on unbridled expansion policies. During the bull market of the 1990s, its assets under management multiplied more than fivefold, from Sf26 billion in 1990 to a peak of Sf142 billion in 2000. Tempted by the chimera of becoming a global bank, Julius Baer branched from private banking and asset management into brokerage, trading, even specialized lending -- and swelled its ranks with high-salaried investment bankers and technology mavens from Zurich, London and New York. "We pressed down on the gas pedal and thought we could conquer the world," says Raymond Baer.

But like other private banks, Julius Baer remained very geared toward the capital markets. Profits were largely linked to brokerage commissions on private client trading and to investment banking fees. When markets soured, the bank's fortunes sank faster and further than those of commercial banks, which had offsetting revenue sources, such as lending. Regulatory costs also cut deeply into private banks' profits.

"When the first Swiss law regulating banks was introduced in the early 1930s, my great-grandfather swore that he would no longer be able to run a bank," says Baer. That followed an era when favored clients expected their bankers to find out from the central bank if interest rates were about to change -- and purchase bonds for them if rates were to be lowered. "Back then that wasn't considered insider trading," says Baer. "It was just another reason to have a private banker."

One wonders what great-grandpa would make of the onslaught of post-9/11 regulations covering money laundering and know-your-customer requirements, which have sharply increased banks' reporting costs. Anonymous numbered accounts were abolished in 1990. Since 1998 a law on money laundering has required bankers to report any doubtful transactions to the authorities, and before accepting new accounts they must determine the identity of clients and the origin of their deposits. "There is a detailed list of things to report, depending on what movements you see in client accounts that may look suspicious," says Alexandra Sleator, a London-based banking analyst at Moody's. "The impact is far greater on privately owned banks because they may not have the staff and other resources" that global banks do.

Information technology costs -- many of them linked to reporting requirements -- have helped spur consolidation. When Lombard Odier and Darier Hentsch, two of the oldest Geneva private banks, decided to join ranks in 2002, they cited their desire to create a single IT platform as among the primary reasons for their merger.

In 2003 Deutsche Bank bought Rued, Blass & Cie, a Zurich private bank, and Swiss Life Holding sold its private banking unit, STG Schweizerische Treuhandgesellschaft, to Liechtenstein Global Trust, a private bank in Liechtenstein. "There will be further consolidation," predicts Christoph Ritschard, a Zurich-based private banking analyst at Zürcher Kantonalbank. "Only private banks like Vontobel and Julius Baer are big enough to go it alone."

But are they big enough to compete with global banks in the seemly scramble for accounts of high-net-worth customers? In the lexicon of private banking, these clients are known as HNWIs and are defined as individuals with financial assets of more than $1 million. According to the June 2003 "World Wealth Report" by Merrill Lynch/Cap Gemini Ernst & Young, the globe contains 7.3 million HNWIs collectively worth $27.2 trillion. Of this total, $8.3 trillion is in offshore accounts, with Swiss banks holding about $3 trillion of that.

A May 2003 "European Wealth and Private Banking Report" by IBM Business Consulting Services predicts that onshore capital accounts in Europe will rise 23 percent by 2005, or almost triple the growth rate for offshore capital. Driving this trend are the linked phenomena of diminishing bank secrecy and increasing tax compliance.

Swiss bankers defend their depositors' right to financial privacy with the same fervor that lawyers defend client privilege and doctors justify patient confidentiality. To preserve the anonymity of its banks' EU clients, Switzerland has agreed to impose a withholding tax on the interest earned on their savings accounts, starting at 15 percent during the first three years and reaching 35 percent thereafter. The accord, which is scheduled to take effect in January 2005, will not apply to stock dividends or capital gains. Three quarters of the withholding taxes will be turned over to the home countries of the EU clients, with the Swiss government pocketing the rest. No international monitoring system will be created. "The agreement will be implemented and enforced by the Swiss authorities," wrote Adriano Daeppen, an official with the Swiss Federal Finance Administration, in an e-mailed response to a reporter's query. A final accord between Switzerland and the EU is expected early this year.

"It's a very steep tax, and it puts Swiss banks at a disadvantage," says Baer. "But it will enable us to protect our clients' financial privacy." Even if an agreement is reached with Brussels, though, Switzerland will still be under pressure from the Organization for Economic Cooperation and Development -- including some of the OECD's EU members, such as the U.K. -- to abandon bank secrecy altogether. The U.S. has not joined Switzerland's more vocal critics and has instead expressed approval of Swiss efforts to balance bank secrecy with requirements to probe money laundering by terrorists and drug traffickers.

Swiss officials assert that enough financial privacy will remain in place to allow local banks to press their advantages over offshore rivals. "If I look at some of our competitors -- say, some islands I don't want to name -- even if they can offer more secrecy, they can't provide our financial know-how and sense of security," says Ulrich Kohli, the Zurich-based chief economist at the Swiss National Bank, the central bank. Kohli assumes that foreign clients of Swiss banks keep only a portion of their wealth in Switzerland, with the rest in onshore investments. "They are not interested in the huge returns they can get elsewhere," he says. "Mostly, they want to know that the money is safe."

Nevertheless, EU countries are finding ways to entice their nationals to repatriate the money in their Swiss accounts. By offering amnesty to people with undeclared offshore accounts and imposing only a 2.5 percent tax on accumulated interest income from these accounts, Italy managed to lure back E78 billion ($83 billion) -- mostly from Switzerland -- in just 12 months through the end of 2002.

The Italian amnesty plan, which has been extended, has caused a decline in client assets of about $700 million at Julius Baer alone and stirred what sounds like moral indignation. "It means that you can repatriate your capital at no penalty and become a good citizen again," says Baer. "I think it's astonishing that this hasn't been challenged in court by honest taxpayers in Italy."

Germany's less effective repatriation effort elicits his disdain rather than his ethical dudgeon. Berlin offers amnesty but taxes the accumulated interest income repatriated at a steep 25 percent. By mid-2003 the plan had drawn only about E5 billion in six months from repatriated accounts; the money came mainly from Switzerland but barely dented Julius Baer's coffers. "In the German case, the individual has to ask what is so attractive financially," says Baer.

Still, Julius Baer and the other big Swiss private banks are opening branches abroad in anticipation of rising numbers of their clients' repatriating capital. UBS has led the way and now has 33 private banking branches in France, Germany, Italy, Spain and the U.K., in addition to more than 100 outlets for commercial and other banking operations throughout the world. "An increasing number of clients prefer to have their assets managed in their country of domicile," says Sabine Woessner, a spokeswoman for the bank. "Accordingly, the distinction between domestic and international business is progressively losing its importance for UBS."

While UBS and Credit Suisse have the deep pockets to follow most of their clients back to their home countries, a bank like Julius Baer has to be more selective. In Italy it has joined with asset manager Credito Valtellinese Group to set up Julius Baer Creval Private Banking. It has opened an office in Dubai, where big American banks are at a growing disadvantage because of Middle East frictions.

Even before following private banking clients abroad, Julius Baer had a strong foreign presence in other financial activities. Julius Baer Securities has operated for more than 40 years in New York City, where it has 240 employees; the bank has long been a global bond manager for U.S. pension funds and has a $2.5 billion international equity fund. "We are becoming a real niche player in the U.S. context, which is unusual for a Swiss private bank," says Baer.

Julius Baer can also boast of being a niche player in hedge fund operations. It is particularly strong in foreign currency transactions linked to hedge funds. "Maybe we can't compete with the big players in volume of major currency trades," says Stephan Jaeger, Julius Baer's head of foreign exchange trading. "But we do have an edge in certain fields like derivatives and emerging-markets currencies." The claim to special expertise in certain types of hedge fund operations can be made by other Swiss private banks as well. "Some of them have been using hedge funds for 30 years in private client portfolios," says Tillotson, the Scorpio Partnership director. "They are far more advanced than any other providers on the European continent."

But the global banks aren't impressed. "The Swiss private banks are still built a lot around asset management," says J.P. Morgan Private Bank's Treyz. "There is much more to servicing the needs of clients nowadays -- investment banking, mergers and acquisitions, private equity." Global players also assert a distinct advantage over private banks in pursuing tax-efficient strategies. "With all our product offerings -- investments, credit, helping clients transfer wealth from one generation to the next -- we have a lot of experience devising products that allow people to keep more of their money," contends Treyz.

Swiss private bankers counter that high-net-worth individuals are loath to entrust too much of their money to a single large institution. And who better than a small, ostensibly objective bank to advise these HNWIs on the maze of sophisticated investments offered at large banks?

A former UBS executive now working at a private bank recalls that clients were suspicious of his attempts to sell them multiple financial products and services when he worked at the big bank. "I might tell them I was looking out for their best interests," says the executive. "But all they would see on my forehead were the three keys" -- the UBS logo.

One of the more effective means used by private banks to gain or keep the loyalty of ultrawealthy clients is the family office. It extends wealth management services beyond portfolio investments and into real estate, private equity, art collecting, estate planning and taxes. In most cases, family offices at Swiss banks cater to clients whose net worth exceeds Sf100 million. "These clients are asking us to help them select different managers in different asset classes at different banks and then to supervise these managers and provide global custody and reporting services," says Vera Boissier, a family office lawyer at Pictet & Cie, the Geneva-based private bank.

Under the family office arrangement, a private bank collects fees in a variety of ways. Typically, an initial agreement is signed with the client specifying the nature of services to be provided, for a global fee. A year later the agreement is reviewed and services are added or subtracted. Any services not covered by the agreement are subject to additional payments by the client. "Fees depend on the nature of the activities requested of us," says Boissier. "If it's just a consulting relationship, it will be a lump-sum agreement. If it means getting involved in investments, then it is on basis points." She adds that there was no fee-splitting with other financial institutions. Like other private banks, Pictet declines to discuss the fees charged to family office clients.

The family office concept was imported to Europe from the U.S., which has some 3,000 family offices. In Europe there are about 200, the bulk of them run by Swiss banks. "A German adviser might be very good on German investments but probably doesn't have the more international outlook of the Swiss," says Boissier. "That's an important comparative advantage for us."

Julius Baer thinks it has its own comparative advantage. The bank markets its family office business as the outgrowth of the same one that was created solely for the Baer family -- one of Switzerland's richest -- more than a decade ago. "It helps to be able to bring out Baer family members and have them tell a client what services we have been providing them," says Patrick Wild, chief executive officer at Julius Baer Family Office. He lists the following examples of the sort of varied services recently extended to clients: consolidating tax reporting for a German industrialist who shuttles between residences in Germany, Italy, Spain and the U.K.; offering up to a score of clients shares in a London commercial building bought by Julius Baer; finding a specialist broker for a client who wishes to sell his yacht -- one of the largest in the world -- anonymously.

To Raymond Baer, the family office is just an updated, sophisticated version of the personal services that a Swiss private bank like his family's has been providing for generations. "In my grandfather's time you ensured that a client got the right hotel room, the right doctor if he needed one and that if his kids were along, they got invited to dinner with your kids," says Baer. "The services and products have gotten a lot more complex. But the need to be as close as possible to a client is still crucial to our success. And small banks can do that better than big ones."

Raymond Baer on 'protecting wealth'

The official address of Julius Baer Holding says it is on the Bahnhofstrasse, Zurich's famed financial artery. But the entrance is actually on a narrow side street, in keeping with the discretion that is a hallmark of Swiss private banks. In the lobby, which is divided into semiprivate alcoves, clients speak a half dozen languages. Many of them descend to the underground vaults, where, after displaying passports and reciting bank account numbers, they are given keys to their safe deposit boxes -- and, should they wish, a small, private room to add to or withdraw from their cash (or jewel) hoard. Several stories above, in an ample corner office overlooking the Bahnhofstrasse and with a stuffed bear -- the bank mascot -- placed at one end of a conference table, Raymond Baer, chairman of Julius Baer Holding, sat recently for a 90-minute interview with Institutional Investor Contributing Editor Jonathan Kandell.

Institutional Investor: How are Swiss private banks and their clients different from the way they were a generation ago?

Baer: Obviously, market segments are much more diversified than they used to be. You can invest in many more market subsegments than ten or 20 years ago. So product sophistication has increased. What hasn't changed is the notion that the principal task of private banks is to protect an individual's wealth rather than to generate superior returns by taking exaggerated risks. Wealth protection is something that was forgotten in the late part of the bull market of the '90s. And today, after two very painful years, both for investors and banks, it is mutually recognized that we again have to structure portfolios to protect clients' wealth.

What has been the impact of post-9/11 regulations?

After 9/11 the Swiss financial market was the first to help the U.S. But you sacrifice a lot by passing new laws, especially in the realm of financial privacy. So we don't want to go any further unless somebody can prove that this is the only way to guarantee that the financing of terror will end.

How have the banks adapted to the "know your customer" regulations?

We understand there are crooks who abuse the system. But these regulations increase the cost of doing business and will eventually push small banks out. You will be left with very large banks that are difficult and complex to monitor, and fewer small banks. And I'm not so sure that the statistical evidence shows that the small players are always the bad guys.

How far has Switzerland gone in satisfying European Union demands on disclosure and tax compliance?

On the issue of tax withholding, we have basically come to an agreement with the EU. But some EU countries are now pressuring us through the OECD [to disclose more information on client accounts], and we have said this isn't acceptable. The OECD has a very anti-Swiss slant, which it showed by putting Switzerland on the blacklist of tax regimes.

Are Swiss banks concerned about tax amnesties in Germany and Italy?

The impact of the Italian tax amnesty was significant. We don't see anywhere near as much capital repatriation in Germany. But the real issue is, How much faith do you have in the future stability of the tax regime of your country? How long will [Italian Prime Minister Silvio] Berlusconi be in office, and how stable a government will follow him? German entrepreneurs complain that tax laws keep changing all the time, making it difficult to run a business.

What mistakes did the private banks, including yours, commit in the past few years?

Our biggest mistake, clearly, was to grow at overly rapid rates. But it made us realize that we are not global players. So we are grateful that this market correction has brought us back to our core strengths as wealth managers and protectors. We have become a smaller company, and it will be the basis of our future success. The larger the global banks get, the better the world will be for us because we are more agile.

How do you differentiate yourself from other Swiss private banks?

We live in a private banking culture and have a large family stake in the bank. But at the same time, we are fully transparent because we are a publicly listed company.

Did you always know you would take over the bank?

It's hard to prove the opposite. But we never talked about it when I was younger. I didn't even know that I would enter the family business.

How is succession determined?

We clearly differentiate between an operational family member -- that is, someone who is involved in the day-to-day business -- and those on the board. To join the operational side of the business, a family member has to have a university degree in a relevant field and a career somewhere else abroad before starting here. Then every year they are evaluated by their superiors.

Can you envision any circumstances under which Julius Baer would be sold?

The family controls 54 percent of the bank. We have a shareholder pool agreement until 2032 that requires any member to sell to the family pool. With those parameters, I can't imagine how the company could be sold.

The fine art of pampering clients

Perhaps the most palpable evidence of the lengths to which Swiss banks will go to pamper private banking clients can be found in two Zurich luxury hotels: the Widder, property of Switzerland's biggest bank, UBS, and the nearby Savoy Baur en Ville, 80 percent-owned by No. 2 bank Credit Suisse.

Tilla Theus, creator of the Widder, is that most fortunate of architects. UBS handed her nine medieval and Renaissance town houses and told her to fashion them into a boutique hotel -- without regard for the bottom line or even a timetable. It took Theus a decade to complete the task. Because the proposed hotel was in a neighborhood reserved for residential and small business use, a referendum and 16 petitions to the municipal council were necessary before construction could begin. Then, once permits were granted, Theus insisted on preserving as much as possible of the original ambience of the interconnected town houses, which date back more than half a millennium.

In 1995 the Widder Hotel opened, with a mere 49 rooms. The price tag? "I never asked and was never told," says Theus, one of Switzerland's foremost architect-designers.

Behind UBS's generosity is its Macy's-versus-Gimbel's rivalry with Credit Suisse. In the mid-1970s Credit Suisse renovated the 112-room Savoy into prime lodging for its best private banking clients. The location was the choicest in all Zurich -- on the Bahnhofstrasse at Paradeplatz, facing Credit Suisse and UBS. It was a salvo UBS could not ignore.

The Savoy is in the mold of a traditional five-star hotel, with marble columns, crystal chandeliers, handwoven carpets, cherry wood furniture and walls and drapes in understated yellows, tans and blues. Its bar is a watering hole for bankers. Even UBS executives have occasionally been spied there. But Savoy general manager Manfred Hoerger can ensure virtual seclusion for one of Credit Suisse's more sensitive private banking clients, whether he is a Middle Eastern mogul, the Latin American heir to a textile fortune or the owner of a European machine-tool factory.

"Nothing goes beyond these walls," says Hoerger, who lives with wife Christina at the hotel they have run for more than a quarter-century. "Nobody outside should know who is staying with us, what meetings take place between banker and client and what is said." So before a business meal in a private dining room, security specialists make a show of electronically sweeping the premises for eavesdropping devices. To further encourage uninhibited conversations, says Hoerger, "we use waiters -- people from Asia -- who don't understand the clients' languages." And the hotel avoids gestures like sending Christmas cards to guests, who may come from countries where tax officials are suspicious of citizens who visit Switzerland.

According to the Savoy, 80 percent of lodgers are repeat guests, some of whom first stayed at the hotel with their parents. Many have their bills paid by Credit Suisse. But small private banks also host preferred clients at the hotel, guaranteeing 100 percent occupancy on most weekdays. That means the Savoy doesn't have to cater to tour groups or conventions, nor does it spend a franc on advertising.

The Widder does not try to imitate the Savoy's conventionally classic design or cloak-and-dagger theatrics. Instead, it offers itself as a cultural and aesthetic experience. Each of its rooms is unique. Among the most spectacular is a suite where several paintings dated circa 1615 remain in their original niches. The foundations of the hotel contained the remains of an ancient Roman campsite. The lower walls date back to 1000 A.D. "We constantly came across hidden statues and frescoes," says Theus. Many are visible as guests rise and descend in glass-enclosed elevators. Wherever possible, centuries-old beams and coffered ceilings were restored. Theus then spent years shopping around Europe for period furniture and other antiques to decorate the rooms.

Though the Widder was initially conceived for UBS clients, its guest list also includes actors, pop stars and other glitterati. The UBS link is so understated that the bank's name doesn't appear anywhere on the premises. "No owner but a very big bank could have financed this kind of hotel," says Jan Brucker, the Widder's general manager. "And for a hotelier, there's nothing better than having an owner who tells me to offer only the best."-- J.K.