„The New Era for Portfolio Managers“

In December, PwC published a report on the asset manager industry in Switzerland. A lovely, slick, well presented report with beautiful graphics.

A work of art.

The content however is largely nonsense. It does however state some key facts. The numbers. Which are really bad news.

We go directly to the summary of the report on the PwC homepage to save time. To address PwCs summary messages and statements vs. the reality.

„this is a catalyst for change requiring market players to evolve and adjust to a new era“

– Nonsense.

– This is artificial regulator forced additional burden, does not add much value, does not actually do anything substantial to protect investors, rather are expressly designed and intended to put market participants out of business.

This is the industry consensus. A consensus which no industry participants are willing to state publically with their names attached due to fear of the market regulator. The fear is justified.

„Compared with 2020, the first wave of impact of the regulation led to an overall decline of 26% in the number of portfolio managers to 1’578 as of October 2023“

– Fact. The new laws have decimated the industry. Reducing it in size by at least a quarter. In a time period where other financial centers have grown substantially in this market sector.

Misrepresentation: The decline is greater than in the report. The report lists 2’078 as the „estimated“ number pre Fidleg. With 1’578 post Fidleg for a decline of around 25%.

– Previous, more realistic estimates using the reasonably reliable numbers from the SROs, STEP, the Swiss Bankers Association, and others, put the total number of IAMs at around 2’500. This puts the real decline, the real value destruction in the market at around 36% of industry participants. A more realistic figure.

– This is the first major misrepresentation in the report.

There is no mention of the Swiss Competition Commission (Weko) report of 2014 to Finma detailing the destruction the new laws would cause if implemented. This report was ignored by Finma at the time and subsequently suppressed.

Publication of this report was blocked. Either the authors are unaware of this report, meaning they did not do their research properly, or they choose not to mention it. If the second, the authors purposely omit contextually highly important information.

„but also welcomed new entrants“

– Utter nonsense. New entrants have been minimal. The reception of those courageous enough to try from the regulator has been hostile.

– There is no mention of the very large number of people put off or prevented from entering due to the very high barriers to entry and the anti-competitive nature of the laws as detailed in the 2014 Weko report.

– 44 new entrants, on a figure of 1’578 is 2,7% growth. A more realistic number is taking the original 2’500 AMs, 44 new entrants on that number is a growth of 1.76%. Taking natural attrition and normal merger activity, derived growth looks negative.

– In an industry where other centers are seeing annual growth rates of 3 to 5% overall, after natural attrition rates and mergers. This is a disastrous result. PwC ignores this.

„over 40 newly founded portfolio managers companies embarked on the entrepreneurial journey“

– Misrepresentation at best. Sufficient distortion of facts to be considered lying.

– Who were these 40? Where do they come from? No mention.

– How many others were deterred by contact with Finma? How many stopped due to the CHF 100’000 capital requirement? Plus the 25% fixed cost covering requirement? Plus the nonsense licensing procedure?

– How many decided not to attempt it due to the time, effort and cost involved in dealing with the regulator?

„(latest statistics available) comes to as much as CHF 177bn (the regulator has, however, not disclosed the total industry AuM)“

– Misprepresentation.

– The regulator does not, according to industry experts, know the AuM.

– It is a fact that the Swiss market regulator does not know the total AuM of the market, nor can they categorise the AuM because they have failed to put proper disclosure infrastructure into place.

Result of failure: Finma is not capable of producing basic numbers.

„Estimated market segmentation by AuM size bucket and number of PMs as of October 2023“

– Misrepresentation.

– The largest AMs are bank owned AMs. Which are minimally affected or not at all by the changes.

„Key will be to have both the adequate setup and processes to comply with regulatory requirements and operational platform scalability to grow in order to address the increasing compliance costs.“

– Nonsense. Consultant double speak to say that it is now very expensive to be active in this market.

„In 2023, there were 11 publicly announced M&A transactions. However, the actual volume of transactions could be higher, as most small cap deals are not disclosed publicly.

In the next two to three years (2026-27), we expect a moderate consolidation in the range of 10-25% in the number of portfolio managers.“

– Misrepresentation: 11 out of 2’500 = 0.44% of the market decided to merge. It is negligible. 46 out of 2’500 = 1.84%. Also negligible.

– This number of mergers in a market of this size is remarkably low. It is more consistent with a market paralysed by fear and uncertainty.

– 10 to 25% is not a „moderate consolidation“. It is substantial and should be a big red flag. This is 150 to 200 businesses which are assumed to be merging, which appears highly unrealistic.

Who really believes this sector is going to this many mergers? Really? More likely this appears to be 150 to 200 businesses exiting. Exiting a market which is actually growing globally.

„Succession planning considerations as founders look ahead to their retirement“

– With very few new entrants. This is not an attractive business under this regulatory framework. So viable businesses are simply shut down. For many, there are no „succession planning considerations“.

„Strategic alliances and partnerships are being concluded to realise synergies“

– This is meaningless nonsense. Pure consulting buzz words. Zero meaning or content.

„The new era for portfolio managers also sets the scene for opportunities within the entire ecosystem of portfolio managers, managers of collective assets, custodian banks and compliance outsourcing companies.“

– Nonsense.

– The strategic intent of the new laws is to put as many small to medium players out of business as possible.

– This is not „setting the scene for opportunities“. It is very bad news for everyone. Except the largest players in the business, who are not directly affected, which PwC acknowledge.

„The portfolio manager industry is thriving and there are exciting times ahead, with the chance for all players in the ecosystem and value chain to seize strategic growth opportunities.

With their entrepreneurial spirit, portfolio managers will continue to be a key driving force of the Swiss economy, further cementing Switzerland’s position internationally as one of the world’s leading centres of wealth management.“

– Completely crazy. How can a professional services firm spout such nonsense? Who is paying PwC for this?

– In 2007: 40% of offshore wealth was managed out of Switzerland.

– In 2022: 20% of offshore wealth managed out of Switzerland. A reduction of half. Coincidentally in the same time period Finma has been in existence.

– Other centers have substantially increased in number and variety of players in the time period.

Switzerland has seen decreases across the board.

– Except Crypto and Fintech.

The report, while detailing the profitability figures, does not mention that the regulator is able to use these figures to reliably estimate approximate profitability in the industry, by IAM. Profitability works more or less on a sliding scale to size.

The regulator can hence work out, for a given cost increase, roughly how many asset managers can be put out of business with each round of cost structure increases.

It’s easy to jack up compliance and other costs to put small to medium players out of business. Approximate percentages can be estimated beforehand, the maths is straightforward. So the process can be done gradually, which we are seeing.

Substantiation: Finma recently announced a massive increase in the „Regulatory Levy“ to asset managers without warning or justification, from a previously announced average ca. CHF 500 per asset manager to now an estimated CHF 3’000.

Transferring the costs from regulator inability to handle the Fidleg implementation to the asset managers. A disgraceful move on the part of the regulator.

The comment from Stefan Baumann, Swisscomply, is a disgrace.

„the regulatory pressure will not prevent any asset and portfolio managers from entering the market“

– This is demonstrably incorrect. Stefan Baumann must know this is wrong. A very large number of asset, fund and portfolio managers have looked at it, started the process, even gone some way, and given up in frustration. And disgust.

– Players, domestic and international, interested in starting asset management operations have looked at it and concluded the cost and problems of dealing with the regulator and the craziness in Switzerland are too much to deal with. Hence, do not even start the process.

– Weko states the opposite in its report: „substantial and for many, insurmountable barriers to entry, in particular for smaller entrants“. I find Weko more trustworthy than Mr. Baumann.

– Mr. Baumann is saying something he should reasonably know, from his management position in a company serving the industry, that is simply wrong. Most people reading this report presumably would believe this statement is false.

– Mr. Baumann fails to mention that his business has grown 20% to 30% or more in a period where the market sector his company is servicing has contracted by 25 to 35%. Something is very wrong when this happens.

There is no statement, no recognition, in the report, of the fact that Finma is so incompetent that it is unable to process license applications of the reduced number of market participants within a reasonable time period.

One third of applications are still outstanding. Despite the work actually already having been done by the Supervisory Organisations. There is no mention of the recent massive Finma supervisory levy from an average of CHF 500 per Asset Manager to over CHF 3’000 per Asset Manager.

This was announced unilaterally by Finma in December without warning or credible justification for the increase.

PwC in the report do not disclose, acknowledge or mention the massive conflict of interest PwC has:

1 PwC is a mandatory of Finma, i.e. PwC is mandated by Finma. Directly and indirectly, Finma awards and pays PwC to carry out mandates in the market. PwC is on the Finma payroll.

2 PwC is one of the largest audit firms in Switzerland. PwC carries out the „Finma audits“, or Fidleg / Finig audits on asset managers, as well as financial audits. And others. The revenue Finma give to PwC is huge.

3 Therefore, PwC is not going to address the role of Finma in any meaningful way. Which is what we see in the report. PwC has zero credibility.

The two authors of this are Christian Bataclan and Bastien Glauser. They are invited to comment below.

The author is a legal and regulatory practioner with over twenty years experience in cross jurisdictional markets and regulation.