This Advent message from finews.com is anything but rejoicing. Over the next two years, nearly 800 independent asset managers in Switzerland will disappear. This is a tectonic upheaval for an industry consisting primarily of micro-enterprises with fewer than 10 employees, yet managing around 500 billion Swiss francs ($540 billion) in client assets, greater than Zuercher Kantonalbank or private bank Julius Baer.

The smallest companies are most likely to throw in the towel because they will forego the Finma license required from 2023 onwards, costing up to 40,000 francs. It cannot be ruled out that many external asset managers (EAMs) will revise their business model to avoid the licensing requirement.

Unyielding Supervision

The Swiss Financial Market Supervisory Authority (Finma), a thorn in the side of looser regulation, wants to use the seal of approval to improve EAM's credibility vis-à-vis clients. It confirmed to the «NZZ am Sonntag» recently that by the end of November, it issued only 600 licenses. A further 500 applications are being processed while 350 cases are classified as problematic from Finma's point of view.

Even if the market shrinks to the expected maximum of 1,500 companies by the end of 2024, there will be no further clear-cutting. Instead, market observers expect many independent asset managers will want to prosper on their own, made possible by the organizational fitness program the companies underwent to obtain the Finma license.

Difficult Obstacle Course

In the medium term, a third of the remaining independent asset managers might go out of business. According to forecasters, the further increase in risk and compliance costs, and the administrative effort for recurring compliance audits are too high for EAMs. Moreover, some 100 independent asset managers are shuttering their operations every year due to a certain degree of obsolescence. 

Another obstacle is that most EAMs manage less than a billion francs in client assets, making them far too small a fish in the bigger pond of asset managers. 

Newly Burgeoning Ecosystems

While a painful wave of consolidation may be inevitable, it is, to a  certain extent, also healthy. Mergers promote exchange, by enabling networks and operations to be expanded.

In addition, they usually bring increased attention to custodian banks and other service providers. At best, market consolidation is likely to create functioning EAM ecosystems that, with high profitability and a well-known brand, can increasingly compete on an equal footing with mid-sized private banks.

Attractive Self-Employment

Another bright spot for the industry is many experienced bank advisors are toying with the idea of getting rid of increasingly tight fetters with a bank. As an independent asset manager, advice can be provided without the costly equity capital of a bank, in a less standardized manner, and with fewer legal requirements.

Adrian Weber, CEO of Advea Entrepreneurial Advisory, leans toward the optimistic scenario. He told finews.com the remaining independent asset managers may well coalesce into a significant pillar in the Swiss wealth management business.

Living Up to the Name

To take market share from other players in the financial sector, independent asset managers have to play to the decisive advantage derived from their very name: independent.

This is best measured by whether the firm lives exclusively from the fees of its clientele or whether there is other income from client assets, such as distribution fees for products, finder's fees, or other monetary benefits withheld from the client.

Suspicious Minds

Unlike the optimists, however, the skeptics fear the new regulations will deprive EAM of its freedoms, and the government and state competitors will harass them in the future, with the result leaving them to joust with a bureaucratic monster.

Some custodian banks have exerted pressure on EAMs in connection with the Finma licensing which is causing discord. As reported by finews.com, custodian banks are said to have threatened to terminate their cooperation with EAMs if they cannot quickly submit the required verification confirmation.

Custodian Banks in a Quandary

Should the dispute escalate, it cannot be ruled out that the custodian banks will put themselves to the test and try to snatch away EAM customers and absorb the entire business. The opposite is also conceivable where entrepreneurially driven asset managers go on the counterattack and operate an independent custodian bank themselves with the help of partners, if necessary.

It is unclear who will ultimately emerge as the winner. Whatever form it takes, the intermediary business will remain a central pillar of Swiss banking, which is at least good news for the Swiss financial sector.