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Insights from Julius Baer’s survey

For 30 years, external asset managers (EAMs) have enjoyed steady growth, with few challenges to their way of operating. From its beginnings in Switzerland, where private bankers left the large institutions to run their own businesses, the sector has spread to the rest of Europe, then Asia and, most recently, the Middle East.

Yet now a crossroads has been reached. Rising regulation in the EU, Switzerland and UK is driving up costs. At the same time, a burning question is how will the likings of a younger generation of clients and the pace of technology innovation force EAMs to adapt.

It’s not all gloom, though. As the wealthy get wealthier they have more assets that need to be managed. For those EAMs that adapt skilfully to this new world, there are attractive opportunities for growth. That is likely to require some combination of greater scale, use of technology and a fresh proposition that appeals to young entrepreneurs and inheritors.

“What will happen is that asset management, an EAM’s core service, will become even more of a commodity,” asserts Kristian Bader, President of the Alliance of Swiss Wealth Managers and a senior consultant. “This is the result of new regulation that standardises service delivery and the technology that is needed to implement regulation. So, EAMs have to innovate. How they do it is a strategic decision every EAM must take.”

Growth continues, profitability under pressure

To get a clearer insight into the prospects for EAMs, we surveyed more than 20 of Julius Baer’s relationship managers serving intermediaries across the globe at the end of 2020. What did we discover? That the EAM industry is still growing, but at varying rates depending chiefly on the region of the world – slow in Switzerland and fast in Asia. Further, profits are under pressure in some places, again Switzerland especially. 

Growth in assets under management/advice is set to continue on average at up to 10% per annum globally over the next three years, according to our survey. That average masks a range of growth rates, though, with Switzerland’s the slowest, and the EU’s and developing countries’ the fastest. Profitability is under pressure more broadly as new regulations impose compliance costs, not only in Switzerland where the Financial Services Act is being introduced, but also in the EU due to the myriad of new regulations.

Smaller Swiss EAMs, especially, may find that they’re no longer as profitable. Notably, our survey identified mergers and acquisitions as the main expected route to growth over the next three years. “The cost of compliance has increased dramatically,” notes Pascal Martino, Banking Leader & Human Capital Advisory Leader at Deloitte Luxembourg. “From an industry standpoint we will lose small players and diversity.” 

But the younger markets of Asia, Latin America and the Middle East are still growing fast. A combination of relationship managers joining from banks, rapid organic growth and high local investment returns in some countries is expected to fuel growth in excess of the global average, reaching 20% per annum, according to the survey.

“I think it is just starting in Asia,” says Harry Pang, a director of the Family Office Association of Hong Kong. “If you look at EAMs and family offices with scale, there aren’t that many. In Europe and the US the industry is much bigger. Asia is playing catch up.”

Technology and generation change

Leaving aside the younger markets that are still expanding quickly, what should EAMs in developed markets do to adapt to the new challenges they face – how can they rethink, reset and refresh? As our survey tells us, mergers and acquisitions are expected in the next few years to build the scale needed to spread the costs of regulatory compliance. But, beyond that, where are the new ideas?

Younger clients familiar with new technology-based investment services see less value in traditional investment services. But EAMs can remain relevant by refreshing their offerings across a broader range of products, including sustainable investments, private markets and cryptocurrency, asserted some survey interviewees. What’s more, wealth planning can build a bridge to a family’s next generation.

“EAMs must either innovate regarding their service portfolio or become specialists in certain areas,” asserts Bader from the Alliance of Swiss Wealth Managers. He adds: “One of the main challenges for an EAM is generation change. Not only on the side of the clients but also on the side of the relationship managers. Both aspects of generation change have to be balanced in harmony.”

Fewer, closer bank relationships

A surprising finding from our survey was that the custodian banks serving EAMs cannot escape consolidation. Under pressure to cut costs, EAMs in Switzerland and the EU are looking to reduce the number of custodian banks they work with. As they do so, they will prioritise service quality and commitment to technology.

But the few banking partners that EAMs retain relationships with seem likely to become close partners – whether in providing the evolving range of products and services required, or helping with the technology.

Key takeaways

  • Financial service providers are playing a key role in the allocation of capital to sustainable economic activities.
  • The EU is setting the standards for sustainable finance, while Switzerland is predominantly relying on self-regulation by the financial industry.
  • Both EU regulation and the Swiss self-regulatory guidelines will likely impact Swiss financial service providers. A thorough situation analysis at an early stage is key for keeping track of market standards and client expectations.

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