Europe’s intermediaries and external asset managers fear that they lack growth potential at a time when profit margins are being squeezed, according to a new survey. Jointly conducted by Julius Baer and Deloitte, our research suggests that collaboration is the best route to growth.
Until recently, a fair wind backed intermediaries in Europe, helping revenue growth and leading to a proliferation in the number of small firms. But in a sign of harsher times, the challenges are mounting.
With increasing business complexity and changing client needs, intermediaries were asked about their strategies for the future.
“There’s an acknowledgement that partnering up for the sake of scale, specialisation and outsourcing is critical for the future,” explained Nic Dreckmann, Chief Operating Officer & Head Intermediaries, Julius Baer. “Key will be a convincing offering to serve clients with specialist investment, credit and banking solutions – but not all needs to be and can be done on its own.”
Survey shows a margin squeeze
This future scenario was revealed by a survey of approximately 25 European intermediaries from Switzerland, the UK and Spain, conducted by Julius Baer and Deloitte jointly at the beginning of 2020.
In a series of conversations, intermediaries expressed their challenges. In particular, 43% worried that their businesses lacked growth potential. And 90% of intermediaries said that they plan to build economies of scale, by either growing organically or acquiring additional competencies or assets.
At the same time, nearly 80% are planning steps to reduce their cost bases through streamlining their business functions. They’re looking to do so in a variety of ways – by automating processes, outsourcing activities or cutting the number of custodian banks they work with.
More outsourcing predicted
The increase in regulatory complexity caused by MiFID II across the EU and the new regulatory framework in Switzerland is a game changer. The new regulatory requirements seem so complex, that more than half of our participants are looking to outsource legal and compliance processes.
But a large number of intermediaries is also seeking to outsource tax administration (46% of respondents), portfolio management services (43%) and risk management (31%).
They’re looking to custodian banks as outsourcing partners for portfolio management services (29% of respondents) and back office functions (17%). In a quest to offer better client services, they’re considering outsourcing wealth planning (17%) and tax services (17%) to them.
A need for more specialists
There’s also a pressing need for greater investment expertise. Take sustainable investing, for example. 60% of intermediaries say that their clients want to invest sustainably. Yet the implications of the new EU guidelines on sustainable investments are so challenging that any intermediary offering them would need an in-house expert, which would be a considerable overhead for a small firm.
Similarly, 30% of the intermediaries surveyed provide structured products for yield enhancement or capital protection. But new regulatory requirements mean that firms offering them must have well-defined investment processes, which again is another challenge for a small firm.
“There’s a growing need for more specialised solutions,” notes Dreckmann. “If you’re offering sustainable investments, which many clients want, you need specialists. If you’re doing wealth planning, you need a lawyer specialising in the domicile of the beneficial owner and the asset. You also need more and more expertise when it comes to structured products investments.
“The key message from the survey is that the future will call for more expertise, integrated tools and processes and partnerships. That’s the way to grow; collaboration with trusted expert partners is the future.”
- Intermediaries are facing increasing business complexity and changing client needs, according to a new survey from Julius Baer and Deloitte.
- The result is likely to be more specialisation, integrated solutions and trusted expert partnerships.
- Key will be a broader offering to serve clients with specialist investment, credit and banking solutions.