An industry initiative aims to create a Swiss ‘Silicon Valley’ for asset management. But in a roundtable discussing the industry’s future, we start with retrocessions, which have been the focus of much attention in Switzerland’s banking sector.
Tim Blackwell (global head of core investments, Credit Suisse Asset Management)
Nicolas Faller (co-chief executive officer, Union Bancaire Privée Asset Management)
Markus Signer (country head Switzerland and Eastern Europe, Pictet Asset Management)
Régis Martin (deputy chief executive officer, Unigestion)
Joachim Suter (first vice-president, Mirabaud Asset Management)
Funds Europe: Is wealth management in Switzerland moving to a ‘wrap-fee’ model, where a client is charged for advice rather than the fund paying the adviser with a rebate?
Tim Blackwell, Credit Suisse: We have seen clear evidence of this happening. Our own organisation, Credit Suisse, has rolled out a full investment advisory programme this year which reflects the wrap-fee model and I think this is a trend we see more broadly across banks. Within Credit Suisse, the model addresses four different groups of clients whereby the advisory requirements of each type of client have to be considered, along with the solutions, products and services they need, as well as their respective reporting/monitoring requirements.
As asset managers we have adapted our fund architecture to this trend in terms of establishing inducement-free share classes. The overall trend towards transparency and retrocession-free solutions has taken off in Switzerland.
Nicolas Faller, UBP: I agree that probably there is a clear trend, but I think it will take longer than just a few years to play out. We do not see strong pressure from clients about this topic, even though we thought that changes in the Netherlands and the UK, where retrocession-free share classes have been introduced, would push the market towards this.
When dealing with clients from Latin America, Eastern Europe or the Middle East, their benchmark is the market at large. There is absolutely zero pressure for a wrap-fee model at the global level. Clients ask about service levels and returns, not about cash retrocessions.
Régis Martin, Unigestion: The Swiss Federal Supreme Court has not banned retrocessions in Switzerland. However, it does require disclosure of retrocessions to clients and obtaining a waiver of restitution from them. If clients agree to waive the rebate and agree that the bank keeps the retrocession, then it’s fine.
In addition, a new directive on transparency from SFAMA (Swiss Fund & Asset Management Association) authorises the payment of retrocessions as long as there is transparency about the way they are calculated and paid. So I’m less sure there is a trend away from them, unless market forces push banks and asset managers to ban inducements.
Markus Signer, Pictet: Yes, and that’s an important point. One of the drivers for wrap-fee models – which were initiated by UBS and, in part, by Credit Suisse – was the Federal Court’s decision on inducements paid for discretionary management, and there is some concern that this might also be applied to the advisory model. Lawyers would not expect the Federal Court to act differently over the advisory model.
To sell wrap-fee models, UBS and Credit Suisse have invested to add additional services, such as a look-through function and mobile alerts. This increasing quality could be a challenge for those who currently do not offer that kind of service. Perhaps there will develop an advisory-light or an advisory-heavy service offering in the market.
Joachim Suter, Mirabaud: Right now, the trend is going towards the unbundling of services and then quantifying them – and that’s a good thing. As advice is often seen to be for free, providers have increased their fees on other services.
There is no right or wrong way. It’s a balancing act. If the client wants a certain level of service, it should be fully paid for. But today in our industry, clients think that advice is free and this is a challenge. In addition, markets are already quite fragmented. In France, for example, and although we have MiFID in place, there is demand for fund shares with higher fee portions so distributors gain higher retrocessions. Yet in the UK and Netherlands, retrocessions have ended, due to regulatory pressures.
We strongly support the idea that market forces should settle the situation. Disclosure and transparency should drive the market into these areas rather than having a regulatory body telling you what is right and what is wrong.
Faller: The Netherlands and the UK went full speed towards the rebateless model, but the first feedback in the UK about this does not paint a good picture. Seeing as people now have to write a cheque for advice rather than paying for it from the management fee, a lot of people have decided not to take advice and there are now some people in trouble because of this.
I do believe that there would be many people left behind and getting stuck with their investments. I’m not sure that we really are protecting the investor by doing this. At the end of the day, they will pay exactly the same price as if they hadn’t moved to an advisory fee, anyway.
This is a trend, I agree. We can say it’s stupid, but it’s in place now and I don’t think it will go back.
Martin: The trend will be challenging in many ways. In the UK, 40% of IFAs closed over the last three years. Asset managers and banks may need to adopt another business model that will increase operational efficiencies in order to deliver advice at a lower cost. Finally, more advisers or non-advised investors may choose passive products because they are cheaper. This is not good news for active asset managers.
There will be no room for everyone in this new game. Smaller asset managers will not be able to provide the services at a cost which is sustainable for them.
Suter: As a consequence of the situation in the UK, affluent or smaller private clients will go directly to fund platforms. Advice is blanked out. In a world with compressed risk awareness, this might work – but if it changes and advice becomes more valuable, I think the pendulum will swing around.
The Swiss market serves middle to high-net-worth individuals and private clients that have around five million Swiss francs. Given the new model, they’re left out in the advice process, and I think that is clearly a strategy for us.
Funds Europe: Is it possible that, though the end of rebates may be an issue limited to Europe, global banks with business in Europe might implement the rebateless model themselves at an international level?
Blackwell: I would say this will not stop at European borders. Transparency is going to be a powerful trend. The industry is so global that it becomes interconnected.
Signer: A question mark for me here is over the affluent retail markets in Asia. Asia adopted Ucits and is now looking at MiFID so that might be a market where the regulation of rebates becomes an issue, but I don’t see that in South America and Eastern Europe.
Faller: I agree and think Asia will move fast on this. Anecdotally, I hear that one large bank there records conversations with potential fund buyers to prove that they gave assent to buy a fund.
A driver for the banks to adopt the rebateless model globally is simply all the work they will have to do in distinguishing whether a client is from the EU or not. The client from the EU would need the rebateless model and so for a bank to have one model would simplify business.
Blackwell: I totally agree. Not only do the banks need to adapt to the regulatory environment here in Switzerland, but given the international client base, we also have to increasingly integrate regulations at the European level and other jurisdictions too. To set up the operational platform broadly enough to cover different client groups and different countries is a challenge for the service model.
Signer: And this adds complexity, so if a bank is providing three client segments with varying offerings, finding where it is particularly successful might then lead to the closure of one of those lines.
Funds Europe: How has the regulatory landscape in Switzerland changed or evolved over the past two years and what does the panel think are the key regulatory actions driving the agenda?
Suter: After transparency and disclosure, which we have discussed, the second main focus is on systemic risks within banks, capital adequacy and what this means for the credit side of things. It is fair to say that in Switzerland we have always been at the forefront of regulation. Just recently, the Swiss National Bank asked two large banks to increase their capital ratios. This is the direction of travel. We want to ensure a stable financial market here in Switzerland – it’s vital to our international offering.
Martin: For asset management, the main change since 2013 was the revision of the Collective Investment Scheme Act (CISA), where three main changes occurred. First, it is now mandatory to be supervised in order to manage investment funds. Secondly, market access for foreign investment funds targeting qualified investors has changed. Funds need to appoint a representative in Switzerland in order to be distributed.
And the third main change is a new definition of funds distribution. Basically, everything is termed as distribution now, which increases complexity in qualifying the end prospect. This was not the case before.
Signer: To put it simply, the main driver for Swiss regulation in asset management is European regulation for asset management. The three changes mentioned are all linked through AIFMD. If you look at the current draft for the new Swiss law on financial services, it’s very close to MiFID. Whatever will be happening in Europe will sooner or later have to be replicated in Switzerland, and there is a debate between banks with very local businesses that question if they need this, while international banks do need to do this in order to maintain and possibly improve market access.
Blackwell: Yes, there is a parallel evolution of regulation. A level playing field is absolutely key for the future of Switzerland as an asset management centre.
While in a first wave of new regulation the focus was on prudential regulation, the second wave of new regulations for products and services is still ongoing and will further evolve. Increased investor protection and management responsibility will require banks to design and implement new processes and controls. Many key regulatory actions driving the agenda in 2015 and 2016 will be tax-related regulatory projects: the introduction of the automatic exchange of information that is related to the repeal of the EU Savings Tax and Financial Withholding Tax as well as Fatca negotiations with the US to switch from Model 2 to Model 1.
Martin: Switzerland aims to be compatible with international regulations in order to have access to other markets – yet we also manage to self-inflict hurdles by adding complexity. There is the danger of becoming less competitive and never regaining market share. And there is a second danger that as we focus all this effort on EU business, we do not focus as much on the rest of the world and end up erecting hurdles for clients abroad.
The ‘Swiss finish’ is a tendency for Switzerland to add extra requirements, which are not needed and not even requested. The ‘Swiss finish’ is very costly. It was OK to do this when the market was less competitive, but it has become unaffordable.
Blackwell: I would say industry dialogue with the regulator has intensified and there is a closer interaction on these issues to avoid going over the top.
Funds Europe: A few years ago, it was anticipated that London-based asset managers would leave the UK and set up in Switzerland for tax, cost and perhaps lifestyle reasons. Has this happened?
Suter: Today, Switzerland is not cheaper. The Swiss franc has appreciated versus the pound significantly, and when you incoporate social taxes, it is more or less the same.
Looking at the two centres in isolation, Switzerland has always been perceived as the wealth management centre and London as a hub for the asset management industry. In London there are many skilled people because London offers so much. But Switzerland can catch up.
Faller: Asset management is – perhaps even more so than private banking – a people business. Size and brand are important but at the end of the day, you’re successful if you have the right people. The market of talented people is larger in London. Recuriting is easier there than in Zurich.
Even though I love Zurich, I admit it is very difficult to move people here. However, I think where Switzerland could have a strong attraction is for start-ups. There are quite a few examples of very good small firms operating here.
A question, though, is what happens after the UK referendum, if the UK leaves the EU. That could drive a lot of change.
Funds Europe: What are the common shared standards that Swiss asset managers will adopt as part of the Asset Management Switzerland Initiative?
Blackwell: Credit Suisse is a member of the initiative. The key drivers around the project are to ensure that Switzerland can operate on a level playing field in terms of regulation and therefore access to the other markets. The second aspect, as we’ve just referred to, is about attracting talent. We want the Swiss financial centre to become a centre of excellence with a distinct competitive edge in the global asset management industry. The outcome of this objective should be that managers are attracted to move to Switzerland in order to carry out highly specialised asset management activities and thereby further raise the profile of Switzerland in the institutional asset management arena.
Private banking offered by large Swiss banks has a higher profile than asset management. Asset management in relation to UBS and Credit Suisse has been neglected somewhat in the media, but in the last couple of years the positioning of asset management as a separate line of business has become more prominent. I think the relative importance of asset management among the Swiss banks will increase over time.
The third element is to enhance the value chain components that are covered through investment management processes in Switzerland, versus other jurisdictions. The fourth is about more generally raising the reputation of the Swiss asset management industry.
Specifically, what is being looked at now is the creation of an asset management ‘park’, like a tech park or a Silicon Valley, where start-ups and individual entrepreneurs can initiate certain asset management strategies.
Another is to create an asset management summit, a regular global industry forum.
Faller: There has been a radical change over the last 15 years. Back then, a large majority of banks didn’t really see a huge incentive to push hard for asset management for institutional clients, simply because they had a very comfortable margin in private banking. That has changed due to new regulations: margins in private banking are decreasing and costs are increasing. Institutional business is becoming seen as a way to diversify and even to take the lead vis-à-vis asset gathering. Even small private banks that had zero institutional brand are now trying to build an institutional franchise. This is a very strong trend.
In future, Switzerland could very well be a key market for asset management. More institutions aim to have solutions that can limit drawdowns. Achieving this convexity is precisely what we have been doing for private clients for decades and therefore Switzerland has a strong role to play in that trend going forward.
Suter: Yes, 15 or 20 years ago annual results showed a pecking order: private banking, investment banking, retail and, somewhere, asset management. Thirty pages on private banking and half a page on asset management! I think the initiative is clearly aimed at making asset management a brand of its own. We have 200 years of experience and have been through 50 or more crises.
Martin: The Swiss pension fund market is the third-largest in Europe. Swiss asset management is not just about banks. There are a lot of asset management boutiques and larger firms who are able to provide services to pension funds and other institutional investors. Such services are quite often focused on specific asset class investment management.
We feel there is a lot of expertise in Switzerland – though it is not so easy to switch from wealth management to asset management. In asset management, the requests are different than in private banking. For example, there can be 150 pages of an RFP to fill out within two weeks. You have to have the proper mindset and be well organised.
Faller: Pension funds in Switzerland are much more sophisticated in their approach than, for instance, in the UK. Pension funds in the UK, up to very recently, were still locked in with a very old-fashioned asset allocation, predominantly UK bonds, predominantly UK equities, and global equities.
If you look at the pension fund market in Switzerland, they were pioneers in hedge funds back in early 2000. They are pioneers of insurance-linked securities and other alternative solutions. It’s a sophisticated market.
Funds Europe: As asset managers in Switzerland, what are the key aspects of your corporate strategy?
Martin: We are very institutionally focused on discretionary asset management and we strive to align our interests with our clients’. Usually we invest alongside clients in the same strategies. We offer mainly customised solutions and we are independent.
We believe that to be independent from any insurance or banking group is good for clients. Even if we are a mid-size company, we have strong financial strength so we can demonstrate that even if you are independent, you can deliver as many services and as robustly as the big players. This is important for us as we compete internationally, meaning our competitors are big European asset managers.
That’s where the difficulty starts, because these firms are large and their cost bases are usually in Europe. Managing from Switzerland can be an issue on the cost side. This means we have to deliver a value-added that some others won’t be able to do. That’s our raison d’être, because we cannot compete with the low-cost providers.
Blackwell: Asset management is a central part of Credit Suisse. It is bank-owned, but we also believe very much in the concept of independence in the sense of setting up highly focused and specialised areas of investment expertise. The asset management business in Credit Suisse is actually a series of investment boutiques that are run on an entrepreneurial basis by different heads with their own P&L, with their own accountability for their investment performance and product development. The model is geared very much to institutional clients, which account for more than 75% of the overall franchise, the remainder being related to private bank clients and third-party distribution.
But this concept of investment boutiques with independent oversight in terms of legal, risk and compliance is something that we’ve established as a model and which is geared towards the demand for more specialisation. Our aim is not to be present in all asset classes. Rather than adopting a supermarket approach, we’ve really narrowed down our focus on more specialised areas, particularly in the alternatives space where we run some leading-edge franchises.
One element to highlight of our strategy is that, given capital constraints faced by banks, some lending businesses and financing businesses are actually migrating to the asset management space. We’ve seen in general about 10 teams move across from the investment banking world to the asset management function over the last two years in Credit Suisse. It’s a series of activities which originally were run within the investment bank which have now migrated to become fiduciary capabilities in the asset management world.
Suter: We have two main areas that we cover in asset management. One is the hedge fund business, which started in 1973 and where we crossed all crises, including 2008, without accidents, gates or side pockets. The other circa 65% of the assets we manage are in the long-only space.
We are an active, focused and specialised asset manager with a dedicated number of offerings for clients. We are a boutique in the sense that we only manage and propose funds where we see that we can add value for our clients. But a boutique approach doesn’t mean to be small. It means to be specialised, and not a fund supermarket, and to only propose excellence. We have a strong institutional background, particularly in the UK, but have been developing our wholesale presence over the last three years.
Core markets for Mirabaud Asset Management are Switzerland, the UK, France, Spain, Ireland, the Middle East and, more recently, Italy. Later on we will grow Latin America, and then at a later stage in Asia.
Passive investment products are flourishing, but I am convinced that there will always be good opportunities for specialised, high-quality active managers and we remain, particularly in areas where active management makes a lot more sense than passive, like emerging markets, small and mid-cap equities, global strategic bonds, convertibles and global equities. There is nothing better than the power of quality and compounding performance!
Faller: We do wealth management for private clients and asset management for institutional clients. We have no investment bank or retail division. We dedicate our resources on managing clients’ assets and wealth. We have a real focus on the institutional side to continue to grow.
What I would say has changed in the world today, compared to pre-crisis, is that whatever you do as an asset manager, you have to do it well. Fifteen years ago, it was enough to have a decent product and brand to catch €30 million here and there. That’s no longer possible. Either you do extremely well, or you get nothing, and so we try to focus on the things we do extremely well.
We had an aggressive growth plan in Europe, and now Asia is very important for us. We are doing extremely well in China, Japan and Korea.
Signer: We provide asset management to private clients and institutional clients and distributors. Fifteen years ago we were 80% private banking and 20% asset management. Today we are at 50/50 in terms of assets and revenues. We would like to keep it that way. We feel very comfortable. Private banking provides stability in earnings, asset management provides scalability and it’s also kind of an escape from the current regulations we now are seeing, particularly on the wealth management side.
Pictet Asset Management has a global ambition and so 75% of revenues come from outside Switzerland. And 90% of revenues come from non-Pictet channels.
My focus is to stay close to clients, take care of the brand and provide stability in margins because basically what we are doing is, we use the revenue generation in Switzerland to feed our ambitions abroad and here the main markets are Europe, Asia, Latin America and the Middle East.
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