Adapting to change in an evolving business environment: Trends and implications for Swiss Investment Managers
Introduction: Industry forces driving change
I. Building external and internal pressures
The Swiss investment management industry has faced several significant challenges in recent years.
- Macroeconomic pressures: Against a background of pressures on margins, high inflation, rising interest rates, and geopolitical instability, recent years have been some of the few since the late 1990s in which the bond and equity markets were bearish at the same time.
- Shifting client expectations: Besides a challenging economic environment, the level of professionalisation (and correspondingly expectations) among clients has increased, leading to higher scrutiny of asset managers’ performance and processes.1
- Increasing regulations: Increased regulation as a consequence of emerging investment solutions and technologies are putting further pressure on costs.2
We observe that Swiss asset managers are taking measures to improve their Target Operating Model (TOM) to address the above challenges. Offering more attractive investment solutions, having an operating model that allows for scalability, and controlling the cost base have become critical areas of focus.
II. Re-shifting focus
The challenging operating environment is leading many Swiss asset managers to reconsider their priorities and explore new opportunities. The most important actions that we observe are:
- Generating alpha: Product differentiation through a shift towards alternative investments and sustainable/responsible investment solutions. Asset managers are focusing on previously unexplored investment solutions with an aim to generate alpha.
- Operational efficiency: Digitalization through the adoption of modern technologies and ecosystems leveraging economies of scale. Operational efficiency and effectiveness have become crucial for asset managers to remain competitive.
- Regulatory resilience: Ensuring regulatory compliance through improvements in governance and the compliance framework. To control costs that are driven by increasing regulations, asset managers are focusing on efficiency in addressing compliance and accountability standards.
Asset managers are clearly responding to mentioned internal and external pressures, the implications of which we will discuss next.
Main trends and implications
(i). Generating alpha through product differentiation
Focus on sustainability: As the industry shifts towards theme-driven portfolio construction, ESG is a prominent theme. Client expectations are pushing asset managers to offer more sustainable and ethical products, and in response asset managers must review their investment strategies, enhance research capabilities through talent acquisition and data integration, and strengthen risk management and regulatory compliance frameworks.
Move towards alternatives: Compared to traditional liquid investments, alternative investments (e.g. private equity, private debt, real estate, infrastructure) have shown greater resilience, with AUMs increasing in recent years.3 As interest grows in alternatives, asset managers are expanding their offerings to include these investment products for diversification.4 Focusing on the impact on operations, these asset classes are managed, invested in, maintained, and reported on differently from other asset classes. To manage them asset managers need to to develop specialised expertise and adjust their investment strategies and operating models.
Figure 1: Swiss Asset Managers adapting to global rise of alternatives
(ii). Creating operational efficiency through technology adoption and ecosystems
Faced with pressures on margins, asset managers are investing in technology in order to improve efficiency. Without the right technologies, processes, and controls, asset managers will fall short of client expectations and internal efficiency goals. We observe that, compared to their lagging peers, technology front-runners enjoy 25% greater client tenure, five times the organic growth, and 12% more multiproduct use amongst clients.5
Third party vendor tech solutions can help break down siloes across functions, providing end-to-end operational transparency via offered ecosystems. Adoption of these comprehensive solutions, in combination with disruptive technologies are essential for asset managers to stay competitive. Another driver in the industry is the move towards a more integrated technological landscape through the implementation of platform solutions offering front-to-back capabilities and synergies.
Capital-intensive investments in technological architectures, data analytics capabilities, cyber security, and governance are crucial for asset managers to keep up with industry trends. Especially the latter is often wrongly treated as an afterthought.
Figure 2: Governance measures are not keeping pace with digital transformation efforts
(iii). Regulatory resilience through governance structures and compliance frameworks
Regulators are taking notice of the product- and technology-driven trends in the asset management industry and are actively developing more stringent regulations.2 The growing extent of regulations is putting extra pressure on asset managers’ costs structures. To manage this adequately, asset managers must review their compliance processes and their risk management frameworks, with a focus on efficiency gains, whilst remaining effective. Many firms are therefore establishing governance structures and controls to manage risks in a more regulated industry landscape.
Conclusion: The operating model at the forefront
In response to the challenges they face, Swiss asset managers must adapt swiftly to maintain their competitive edge. Product differentiation through an increased focus on sustainability and alternative investments, digitalization, the move towards ecosystems, and governance improvements are reshaping operating models across the industry.
To future-proof their businesses in this challenging landscape, asset managers are increasingly revising and adapting their operating models. A Target Operating Model (TOM) diagnostic can help identify the issues most impacted by emerging trends and regulations, where the asset manager may be lagging behind the competition. The diagnostic covers the as-is assessment, identification of pain points, depicts a clear image of the target state and highlights areas for improvement to ensure long-term organisational resilience and longevity. Feel free to reach out to us to discuss the possibilities with respect to your TOM.
Figure 3: The Asset Management Target Operating Model (TOM)
References
1: As an example, we observe that 75% of asset owners are looking for more service customisation from asset managers. Additionally, 76% of asset owners stated that client experience is a key contributing factor to asset manager terminations. Source: Casey Quirk, Deloitte’s global AM Strategy Consulting Practice, “Distribution 2.0.”
2: Examples of introduced regulations are the European Union’s Digital Operational Resilience Act (DORA) and Cyber Resilience Act, and the SEC’s adoption of more stringent cybersecurity regulations. In addition to cybersecurity regulations, other regulatory examples are the introduction of FinSA and FinIA, the revision of CISA, and the Climate Risk Reporting regulations by FINMA. Additionally, European regulations such as SFDR and the upcoming EU AI Acts (entry-into-force 2024) pose more regulatory burdens on asset managers.
3: As depicted in Figure 1, Private Capital and Hedge Funds have experienced double-digit compounded annual growth rates (CAGR).
4: In the Swiss Asset Management industry this is observed through acquisitions of alternatives-focused Asset Managers, and product and initiative launches such as UBS AM’s Embrace Alternatives initiative, and the Vontobel’s launch of its private market offering in September 2023.
5: Source: Casey Quirk, Deloitte’s global AM Strategy Consulting Practice, “Technology for the C-Suite”
Authors
- Daniel Hirs, Partner
- Ueli Preisig, Director, Investment Management Sector Lead Switzerland
- Felix Gieske, Senior Manager
- Michiel Simonis, Manager
