External asset managers (EAM) are a well-established part of the Swiss wealth management community, going as far back as the early 1980s. They are essentially private wealth management companies providing bespoke asset management services. They are usually small, tight-knit organisations that work by being hyper-agile and flexible – able to propose the best-of-breed solutions for clients and offer a more strategic, independent viewpoint, leveraging the offerings of various partners and banks.

But given their size, the challenge for EAMs today is to grow and scale their businesses. They are victim to margin pressures and regulatory costs just like bigger wealth managers, and must think hard about making their model work. For many, that will mean outsourcing non-core competencies to third-parties who will help them automate and become more efficient in process and cost, thus, buying them the ability to scale, bring in more clients, and remain competitive.

Regulation has been a key issue. In particular, Fidleg, Switzerland’s Financial Services Act. As of the 1st of January 2023, only external asset managers licensed by Finma, the Swiss Financial market Regulatory Authority, will be permitted in Switzerland.

Fidleg increases investor protection by bringing Switzerland’s regulatory regime into line with the EU’s MIFID/MIFID II directive. Fidleg also incorporates parts of the EU’s Packaged Retail and Insurance-based Investment Products (PRIIPs) and Prospectus Directive Regulation.

Portfolio managers must comply with new regulatory requirements, including information duties, client classification, checks on the suitability and appropriateness of investments, and responsibilities concerning conflicts of interest.

In Switzerland, adopting Fidleg will take time and effort, and add to the cost burdens already challenging the EAM model.

Simon Minder, founder of M76 – Family Office Consulting, comments: “In simple terms, this takes away from margins at a time when wealth managers cannot put fees up. In Switzerland, we also have to contend with high labour costs, making us less competitive on the world stage. Thus, EAMs need to optimise their offering by streamlining their operating model and looking to automate and improve processes. This usually leads to cost savings and an improvement in the process landscape and is typically achieved as part of a company’s digital transformation.”

But what does this mean in practice?
The reality is that EAMs will find they need to make back-office processes and tools like KYC, onboarding, account opening, documentation, and all the checks and balances required by Fidleg, as automated as possible. They also need alerts and early warning systems so that if a portfolio is crossing a regulatory line or in danger of doing so, action can be taken sooner, not later.

Indeed, this is where technology comes into play and is of central importance. All activities that can be automated should be, ideally. This means EAMs can pay more attention to their customers and concerns and, above all, ensure that the performance meets the client’s expectations.

Dimitri Petruschenko, Co-Founder and Managing Partner at EAM.Technology, comments: “Technology is becoming increasingly important as a competence for wealth and asset managers. This tendency is reflected more and more in the choice of leaders heading larger wealth managers and banks. Bringing additional experience and understanding in technology, operations, and innovation at the executive and board level is an important prerequisite for creating a culture that will be able to evolve in this fast-changing market, where FinTechs and global BigTechs are on the rise at increasing speed.”

But more than just having the technology is the ability to go out and find it and recognise that doing everything in-house is no longer a sensible option. The importance of building the right ecosystem has been bourne out time and time again. It is a time-consuming and expensive process, and many have now realised that it is not their core competency and, thus, is better off outsourced to an expert rather than attempting to build in-house.

Petruschenko points to a cultural change driven by necessity. “Even five years ago, the level of outsourcing was simply not up for debate. People were wary of the Cloud, yet today, it has become one of the strategic measures for most financial institutions. Taking products or required resources as a service has become more widely accepted, and the benefits are well identified and understood. EAMs need to focus on their core competencies. Still, at the same time, they face the challenge of building up competences in technology and process efficiency to remain sustainable in the future.”

“Knowing very well that private banking is a trust and ‘people business’, we observe companies that master the new paradigm to remain strategically and operationally sustainable. They will possess traditional values and principles while at the same time being open to new possibilities. These companies invest in digital transformation,” says Petruschenko.

Another driver to having the right technology in place is the war for talent. Experienced former bankers are attracted by the rewards and the independence of working for themselves – but they are unlikely to stick around if the tech stack is insufficient for them to build and scale. “The means to attract and retain talent is fundamental to the success of the EAM. The expectations of today’s and tomorrow's employees are rising. They are looking for a good employer with good conditions, as well as working models and digital support for everyday work, regardless of location,” says Petruschenko.

In terms of those likely to benefit most from creating an ecosystem of third parties, both Minder and Petruschenko point to mid-sized firms. Minder comments: “I do not expect a wave of consolidation, but mid-sized players will be the ones who will struggle most. These companies have often tried to expand their value chain in recent years. This means that they offer additional services (e.g., family office services) to generate additional revenue with existing clients. With regulation, this is now partly taking revenge, and the new business areas are not always as scalable as the traditional business and often also cause considerable costs. Pricing has often played a subordinate role. This oversight is becoming a painful experience for many companies. It would now be important to question the strategy again. At best, it would make more sense to specialise. For this, these companies should reconsider the composition of their board of directors, and also, of executive management. New perspectives are needed to guarantee long-term success.”

Petruschenko adds: “The mid-sized EAMs are the ones that might find managing their operation more difficult now and in the near term. They are still too small to have a formal, professional operation framework like larger entities. At the same time, they are already too big to ignore the increasing complexity of their organisation. They are probably the ones to benefit most from outsourcing.” He says that a growing trend is getting technology and operations expertise as a service, just as external compliance has already become an established service for most EAMs.

Ultimately EAMs are there to provide a service and add value for their clients. But they can only do that if they have the right tools. Technology provides those tools and creates the means to grow and scale the business. EAMs of all sizes must adopt an outward-looking focus to bring in the right tech mix to fuel scale and growth if they want to thrive.

This article is from The Wealth Mosaic’s Swiss WealthTech Landscape Report 2022. Access the full report here.