The industry is going through a number of major changes, some of them due to domestic Swiss regulations that are taking force over the next two years. We delve into some of the themes around the sector.

When about 2,000 external asset managers and trustees registered for licences with Swiss regulator FINMA at the end of June, it demonstrated how big this sector is. And EAMs, while they face challenges of new red tape, have much to look forward to.

Although EAMs aren’t in the public eye as much as the major Swiss banks, they’re a significant force. This publication noted in its 2018 research report that, based on the size of the sector at the time, these organisations collectively oversaw around SFr300 billion ($327 billion) in client money. (A June 2017 report by Credit Suisse, by the way, gave the figure at SFr400 billion, suggesting that there’s a lot of wiggle room in knowing the correct figure, even allowing for the effect of market moves.) Dotted across the Alpine state, they range from Bedrock Group in Geneva, Eduran Wealth Management in Zurich and Helvetic Trust AG, also in Zurich, to name just three (source: investmentoffice.com). 

The sector often draws recruits from large private banks and can deliver the kind of hands-on, detailed service that some bankers think is being squeezed out of the large lenders. (The lack of product-push from banks is also a positive for EAM clients.) At the same time, new Swiss rules on EAMs are pushing up the costs of doing business, suggesting that consolidation, outsourcing and network tie-ups will be important themes in the years ahead.

The scale of Switzerland’s EAM business has become so important that WealthBriefing is holding its inaugural EAM awards event in Zurich on 4 March 2021. This will be a chance for this important industry to wave the flag. Andrew Deane, head of business development at WealthBriefing, who is leading the EAM awards programme, said: “The global EAM sector is an incredibly important part of the wealth management industry and no more so than in Switzerland which is by far the largest and most mature. The aim of the awards is to showcase the importance of EAM’s and the value they offer to HNW clients and families.”

Independence counts
Clients who want advisors who can handle complex problems without being constrained by the rules and pressures of large banks continue to be important drivers of EAMs, Pierre Dupont, a partner at WIZE, part of international IT and consultancy firm Teamwork, told this news service in a call.   

“This is a people business and what you sell is trust. That is why there are so many EAMs in Switzerland,” he said.

Laurent Pellet, global head of external asset managers at Lombard Odier, was effusive about the industry. 

“This is a very important and strategic business line for Lombard Odier,” he said, saying that assets continue to grow.

Lombard Odier has been working in the EAM space for decades, dating back to 1987. These professional clients are treated via a dedicated desk at the Geneva-based firm. 

“We are constantly re-thinking the activities we can provide to EAMs. The world is evolving fast for this kind of segment,” Pellet continued. One issue for the sector is that firms will need to embrace IT tools to become more efficient in the next few years.
 

Regulation
The sector is facing sweeping new domestic Swiss reforms that are, so the legislative framers say, designed to protect clients from mis-selling and guard best interests. In some ways there are echoes of the European Union’s MiFID II regulatory reforms of two years ago. With many Swiss EAMs serving clients in the EU, it was necessary to get in regulatory shape. 

For the first time, investment advisors must enter a client advisor register and affiliate themselves with an ombudsman. These changes come under what is called the Swiss Financial Services Act. EAMs must apply for authorisation by the FINMA, aka Swiss Financial Market Supervisory Authority. To be eligible, an EAM must have appropriately qualified staff, specific business processes and minimum capital of SFr100,000. Existing firms have until the end of 2022 to comply. 

Firms had until 30 June this year to register with FINMA; as of that date, the watchdog said that it had received notifications from 1,934 portfolio managers and 272 trustees who are interested in having a licence. The German-speaking side of the country produced the largest number of notifications (1,208), while the French-speaking part yielded 743, and Italy-speaking Ticino produced 255. Additionally, some 629 portfolio managers and trustees announced their licence application for 2021 and 1,304 for 2022. FINMA said 121 institutions told it that they will not be applying for a licence, either giving up the business or merging with others. (There is no specific known figure for the total number of firms that have decided to call it quits.)

One paradox of the rules is that while they may force some EAMs into merging or shutting down, the registration requirements mean that there is now an accurate log of who these firms are, making it easier for the sector to shout about its interests collectively. 

Regulatory pressures, rising compliance and technology requirements haven’t yet produced a lot of industry M&A, Peter Vangehr, head of intermediaries at VP Bank (Schweitz), AG, in Zurich, said. 

The fact that about 2,000 EAMs registered with the Swiss authorities in June suggests that consolidation hasn’t really cranked into gear, Vangehr said. Vangehr predicts that EAMs will increasingly specialise in certain areas, such as niche investments and cross-border clients. 

This publication has been told that real growth for EAMs is mainly in sustainable investing, private markets, technology, healthcare, and some other areas.

One reason that Vangehr does not think there will be a rush of EAM merger deals is that many firms were founded by ex-bankers who wanted independence and freedom from the politics of a large organisation, so why would they sell and end up where they were before? There are plenty of EAMs who want to buy, on the other hand, he said.

Service providers rub their hands
A variety of technology firms, consultants and banks with mid-, back-office and other support services see plenty of work to come. In the case of WIZE’s Dupont, he noted that this wealth management platform already has about 70 client firms, collectively overseeing $40 billion in AuM. 

“There will be a switch in people to the biggest firms and there will be platforms dedicated to EAMs…..Smaller EAMs will sell, stop business or go to a platform to share technology,” Dupont said. 

Succession services?
As noted in this news service’s 2018 research report, the UK’s Retail Distribution Review – a set of reforms to financial advice - led to a huge shake-out of the sector. Even if the Swiss story is less dramatic, it may be that business owners, sometimes running single-digit teams of people, might decide to retire if succession isn’t going to work. The issue of how or whether EAM owners want to pass on their business is likely to be an important advisory area in the next few months. Julius Baer, for example, issued a report in November last year called Succession Planning For EAMs. 

Whatever happens, the EAM industry is going to be very busy in the next few years.