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External Asset Managers in Switzerland: Consolidation gathers Speed
With CHF 400 billion of capital managed by more than 2,500 external asset managers (EAMs), this sector is one of the cornerstones of the Swiss finance industry. It is expected to grow by 0.3% annually over the next three years in terms of assets under management. At the same time, the EAM sector faces major challenges due to a difficult business and regulatory environment. This is illustrated by the Swiss EAM Industry Report 2017, which also provides an insight into anticipated developments in the sector – taking account of changing client needs, the implementation of regulatory requirements, and the opportunities created by new technological solutions. The report is based on a survey of 99 Swiss EAMs.
The Swiss EAM Industry Report 2017 published by Credit Suisse provides an overview of the current situation in the Swiss EAM sector and the current challenges it faces, as well as future developments. In addition, it provides an insight into potential strategic measures that can help pave the way for a successful future.
According to estimates by Credit Suisse, EAMs based in Switzerland currently manage approximately CHF 400 billion of assets. New regulatory requirements and the digitalization process are having a growing influence on the sector and will have a significant impact on the work of EAMs in the future. The implementation of such rules entails considerable costs. The challenges arising from the market environment, including low interest rates and continuous pressure from clients to achieve the expected performance, are further affecting profitability and potential growth. To counter these trends, the EAMs surveyed intend to place a greater emphasis on acquiring new clients and to focus on new client segments and on boosting growth based on existing clients over the next three years.
Increasing Costs and Declining Profitability Are Challenges
Many EAMs are currently confronted with rising costs and declining profitability. Growing pricing pressure is one of the factors eroding the earnings of EAMs. There is evidence of price sensitivity among younger clients in particular but also among international clients, who are often no longer willing to pay an additional premium for a Swiss asset manager.
According to many EAMs, the pressure on margins is largely attributable to stricter regulatory requirements and costs related to growing business complexity. The EAMs surveyed believe regulations will continue to have a major effect on the way they do business in the future. The cost of implementing regulatory developments is expected to increase. Moreover, restrictions on market access and additional requirements may affect the coverage of certain foreign client domiciles. The uncertainty about which regulatory requirements will be introduced in the next three years is one of the main concerns of EAMs. A lack of information about newly introduced regulatory requirements was also cited as a cause for concern. To reduce these uncertainties, some EAMs are already working on the development of regulatory processes (e.g. suitability and appropriateness) and the selection of sourcing options.
Independence and Personal Relationship with Client Advisor Seen As Vital Elements of EAM Business
According to the survey, independence and a personal relationship with the client advisor are two key arguments why clients choose the services of an EAM. They say that the independence of the EAM gives them the opportunity to select from a broad range of products and services from the different custodian banks of an EAM, resulting in greater freedom of choice for the EAM client.
The respondents also explained that many clients believe that the services provided by an EAM enable them to have a more personal relationship with their client advisor. Clients regard the lower turnover rate in terms of client-facing employees as one of the advantages of the EAM relationship. However, EAMs see themselves constantly faced with new developments in the Swiss market, such as an aging client base and the digitalization of what has to date been a very personalized service.
Consolidation Trend in the EAM Industry
EAMs are currently confronted with the consolidation of their industry. According to the survey, they believe the consolidation trend will become established over the next three years. To transform this challenge into an opportunity, most EAMs surveyed regard the acquisition of client books from banks (58%) and strategic alliances with other EAMs (49%) as the most feasible and likely strategic actions. A large proportion of the respondents stated that they are looking at ways to grow their own companies by acquiring (39%) or merging with (32%) another EAM. To date, however, many of the EAMs have expressed little interest in selling their business and, due to regulatory uncertainty, are waiting to see how the market develops.
Strategic Measures for Further Growth
When asked about their main strategic goals for the next three years, most EAMs replied that their primary focus was to further develop their product and service offering as well as strengthening personal client relationships by concentrating their efforts on service excellence.
Addressing the strategic challenges examined in the study is important for all EAMs, regardless of their size, business model, or offering. Most (79%) stated that they will upgrade their offering in the next three years as a result of changing client needs (next generation of clients, increased sensitivity surrounding performance), new regulatory requirements (including FinIA/FinSA/MiFID II), and the pressure to improve EAM profitability.
About the Swiss EAM Industry Report 2017
The Swiss EAM Industry Report 2017 was produced by Credit Suisse and the University of St. Gallen. A comprehensive survey of key areas of the EAM business was carried out as the basis for the report. In total, 99 Swiss-domiciled EAMs participated in the survey. In addition to the survey data, personal interviews were conducted with managing partners of nine selected EAMs from various geographical regions of Switzerland. The EAMs surveyed in this report are primarily large companies managing assets totaling CHF 70 billion (representing around 20% of the overall market in Switzerland). In addition, when selecting respondents the focus was placed on large EAMs with international business activities. However, smaller, regionally focused companies were also taken into account.
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