SIX White Paper: The Future of Wealth Management

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The Background

Wealth management is one of the most important business areas in the Swiss financial industry, with trillions of Swiss francs in private assets managed by resident banks. However, the industry is facing a number of challenges related to technology and handling data. Combined with digital transformation, dynamic client needs and regulatory frameworks, and new competitors, the future shape of the Swiss wealth management business is uncertain.

The whitepaper "Future of Wealth Management: Harvesting the Power of Data and Technology", a joint project of SIX and the Lucerne University of Applied Sciences and Arts (HSLU), answers the question of how the industry should position itself to ensure its future competitiveness. This three part study serves the industry by exploring ongoing changes and identifying potential implications for the future of wealth management.

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Facts & Figures

240 240

banks and many other participants such as family offices form the Swiss financial center and independent asset managers

CHF 3.7 trillion CHF 3.7 trillion

of private assets managed at Swiss banks as of 2019

46% 46%

of total assets (CHF 7.9 trillion) managed at banks in Switzerland for private, corporate and institutional clients

Part 1: Current State of Swiss Wealth Management

This part provides an overview of the current state of Swiss wealth management with descriptions of the size of the industry and the current business model, value chain, challenges, and pain points.

Switzerland is the leading global center for cross-border wealth, with 62% of CHF 3.7 trillion in private assets originating from foreign clients in 2019. Key challenges facing the Swiss wealth management industry today include: a discrepancy between the strategic relevance of asset and client relationship management and inadequate competencies in these areas, insufficient IT skills, lacking data quantity and quality, data graveyards, and simultaneously decreasing profitability, customer access, increasing labor costs and regulatory requirements.

Part 2: Key Developments in Swiss Wealth Management

The second part highlights current global trends and value drivers relevant to wealth management going forward, whereby special attention is devoted to data- and technology drivers such as open financial ecosystems, data & analytics, and sustainability.

There is a variety of social, technological, economic, and political macro trends that we expect to decisively shape the operating model and wealth management value chain (see picture hereafter).

These macro trends can be categorized into three main drivers:

Open financial ecosystems: These facilitate interaction and exchange between industry players, enabling new business models.
Increased generation of value through data and data analysis: The sophisticated use of data can allow for efficiently tailored wealth management solutions to specific customer needs.
Sustainability: Demand in this area will increase as it joins customer risk aversion, return expectations, and liquidity constraints as pillars of the investment process

The Area of Taxation Represents Another Area of Constant Change

The introduction of a transparent global tax reporting mechanism via Automatic Exchange of Information and tax cost disclosure requirements under investor protection guidelines have had a profound impact on the taxation of financial products used in Swiss and international wealth management. For manufacturers and distributors, the Common Reporting Standard (CRS) and product disclosure requirement impose a blueprint for disclosing direct and indirect tax costs associated with products. The identification of potentially tax-harmful products has therefore become an obligation for financial advisors that needs to be considered in investment advisory. Whilst there is a cost associated in aligning product suitability with tax suitability requirements, the discrepancies between international market regulation (MiFID II) and national fiscal regulation allows wealth management firms to offer value-add services governed by a customer-centric approach. Tax suitability therefore offers new opportunities for wealth management firms to talk about the taxation of financial products offered unrelated to the topic of tax evasion.

Part 3: Implications for Swiss Wealth Management

Based on the current status of Swiss wealth management, four main data- and technology-driven implications for the industry can be derived. These are:

1. Increasing Importance of Data & Analytics

Data and data analytics will be key to competitive wealth management in the future, as it allows for new business models and new ways to generate added value. Specifically, consideration of external, (non-)financial information enables holistic wealth management services unique to customers’ situations. Availability of high-quality data and implementation of a robust infrastructure, which most wealth management providers are missing - is crucial, as is data security and having the corresponding IT skills.

2. Open Financial Ecosystems for Operations

The exchange of data and services within and outside the wealth management industry will increasingly segment the traditionally holistic value chain with specialized offerings, potentially reducing labor costs by obtaining resources and skills externally. Open financial ecosystems could help source methodological and conceptual services for the industry, such as AI or techniques for data-driven client segmentation, recommender systems, or potential analysis. The future success of ecosystem-oriented Swiss wealth management depends on using the best competencies in the field of IT interfaces.

3. Sustainability as the New Normal

Client and regulatory requirements will drive demand for sustainability, necessitating ESG criteria in the investment process. Availability of high-quality ESG data a major challenge for the industry. Most ESG data is self-reported by companies, there is insufficient comparability between ESG data providers, and it can be difficult to meaningfully link ESG data to sustainable development goals. Evolving regulatory requirements for companies and innovative technology-based approaches by FinTech companies are drivers for reliable ESG data.

4. Regulation as a Driver of Innovation

Although regulatory pressures on wealth management will remain high, particularly in the area of data and its use, alongside sustainability, the relevant regulations provide an opportunity for further business model innovation in the industry. Therefore, data specialists and third-party vendors will play a critical role as the industry evolves.

Summary

Swiss wealth management is under pressure to change, prompting the industry to adapt its business model and value chain. In particular, the industry must proactively embrace developments toward data-driven value creation via open financial ecosystems and internalize the increasing importance of sustainability. If this succeeds, Switzerland can continue to operate as one of the leading locations for wealth management.