External Asset Managers aren’t going anywhere

Article published in L’Agefi, September 3, 2018, by Laurent Pellet

The new Financial Institutions Act (FinIA), which is in the process of being passed by the Swiss parliament, recognises External Asset Managers (EAMs) as a genuine profession. What impact will this regulation have on the bank’s activities in this area?

The new regulations, FinSA and FinIA, will probably come into effect in 2020 and give the profession legal recognition, although it is already subject to the AMLA (the Anti-Money Laundering Act) and a code of conduct. Therefore, this is a major paradigm shift for EAMs and it will bring in new requirements for own funds, reporting and public liability insurance, as well as new organisation, training and governance requirements. The new constraints will drive many companies to raise their level of professionalism and rethink their business models. Some have already begun to do this so that they meet the new requirements.

What are the advantages?

The big advantage of this new regulation is that it encourages better processes to ensure a higher standard of professionalism. The majority of EAMs success will inevitably involve a revision of their business models and a clear definition of their internal expertise. They will either build on certain internal skills or use external service providers (outsourcing) for specific skills as opposed to reinventing them in-house.

Has the sector already started to see an increase in mergers, as stiffer requirements push smaller players to regroup?

I would not really bring consolidation into it. The financial crisis and the appearance of new regulations like MidFID II have had an impact on EAMs operating in Europe. All these new regulations. In Switzerland, the latest mergers in EAM circles have tended to involve firms of a certain scale, with 500 million or a billion under management, sometimes even more. These have been groupings aimed at ensuring a degree of sustainability, for instance between ageing players and younger ones, to provide some impetus to the new firm. Other instances of mergers include companies that are focused on a single market and want to access new international clients, concentrate on a particular region and thus diversify their growth strategies.

However, there has not been any real consolidation in the EAM world, largely because contrary to expectations the sector has been taking a wait-and-see attitude. The fall in the number of companies has been more due to age. For example, players who have reached a stage where their firms are no longer sustainable. This especially applies to microfirms which have closed down without being consolidated.

Nowadays, new asset management companies are set up as a team. The managers understand that it is unrealistic to leave a bank to go and set up a small firm. Either they leave as a team, or they join an existing firm.
 

What about you, what is your preferred profile for an asset manager?

One of Lombard Odier strengths lies in its personalised services for professional clients, especially their EAM activity. Highlighting firms, which are in the process of rethinking their business models to ensure they survive under the new regulations, is key. And these are precisely the firms we want to work with.

It is often a question of minimum amounts?

There are no minimum thresholds as such; each bank sets its own criteria, but we tend to prefer companies with a solid business model and a true growth strategy. Apart from the issues of a firm’s minimum amount and scale, we want to work with well-organised companies that have a clear business model, because we are keen to build solid, long-term partnerships.

How has business been this year in your department?

Our activity with EAMs was up significantly and, more importantly, is absolutely in line with the development strategy for the Lombard Odier Group. This is a strategic market, which represents extremely attractive clientele. And we are continually developing our product and service offering to meet the needs of EAMs, who in turn have to be highly innovative with their end-clients.

What are the preferred products and services?

Beyond the first basic pillar, i.e. custodian bank services with a team dedicated to EAMs, we have to offer their clients excellence in all our services.

EAMs also have to meet client demands, who are often young and sophisticated, for a range of new products. In particular, expertise in private equity, given the growing demand for this asset class, as well as impact investing and sustainable or socially responsible investment. These are expectations, by the way, which are absolutely the same as those of our own private clients. Our philanthropy offering, which is central for Lombard Odier clients, also meets a need which is entirely unaddressed by EAMs.
 

Does that imply specific reporting instruments?

Yes. Developments are also affecting reporting; it is becoming increasingly personalised or personalisable by asset managers for their own clients. This is happening due to the evolutions of IT systems, which we can offer them, in the digital era. Our service quality also benefits from our genuine expertise in private equity and other asset classes.

Growth in private banking has often been supported by Lombard loans in recent years. Can external asset managers offer this type of service too?

The Lombard Odier offering includes Lombard loans that EAMs can use for their clients. Clients who need Lombard financing, in other words financing based on pledging their portfolio held with the bank, can be given credit lines depending on their needs, and of course in line with our own internal risk criteria. We do not offer direct mortgages on property, but we assist our clients in their mortgage needs through our partnership with MoneyPark.

What are the challenges in terms of compliance?

In Switzerland, thanks to FinIA and FinSA, our relationships are already entered into with companies duly regulated in their country of origin. Under the Swiss self-regulatory regime today, we have to verify that companies belong to a self-regulatory organisation (SRO) and follow a code of conduct. Abroad we also have to check that the company has the right type of licence, depending on the particular rules. The new regulations will actually simplify the process rather than make it more complex, because they provide for a supervisory body in place of the SROs, each of which has its own code of conduct. And even if there are several supervisory bodies, they will all be overseen by FINMA, the regulatory authority.

What does a bank have to do to provide these sorts of services profitably and efficiently?

It requires a dedicated department with professionals who have mostly been dealing with EAMs for over ten years and fully understand the business, and a cutting edge digital offering that is constantly evolving. That’s where custodian banks like Lombard Odier provide added value.

In which other countries is Lombard Odier developing its services for external asset managers?

We have put in place dedicated teams in Luxembourg for European asset managers and teams that can handle bookings in London (that is almost exclusively for external managers licensed by the FSA) and in Singapore, with local companies as well as European and Swiss ones. Not to mention a team in the Bahamas.