Open financial ecosystems, data and analytics, and sustainability are the three most significant trends disrupting the Swiss wealth management industry. These trends are forcing traditional players to rethink and innovate in order to maintain their long-term competitiveness, according to a new report from Swiss exchange operator SIX and the Lucerne University of Applied Sciences and Arts (HSLU).
In a white paper titled Future of Wealth Management: Harvesting the Power of Data and Technology, the two organizations explore the ongoing changes in the Swiss wealth management landscape and consider their potential implications for the future of the industry. .
Open financial ecosystems strengthen the interdependence of the sector
The first trend highlighted in the study is that of open financial ecosystems. These ecosystems enable the exchange of data and services within and outside the wealth management industry.
Ultimately, this could lead to the entry of new, highly specialized market players, whose products and services could enhance, complement or even disrupt existing wealth management processes and activities through greater profitability or better customer services, warns the report.
The traditional wealth management value chain would then be split into different segments with specialized and more granular offerings. On the one hand, this would mean increased competition, but on the other, incumbents would have new opportunities, including new distribution channels to tap into, as well as better access to specialist and other third-party resources.
In Switzerland, although open financial ecosystems are not yet widely established, industry-driven initiatives have emerged to promote use and set standards, the report notes.
The open financial platform bLink from SIX, for example, establishes clear and uniform rules for the connection between participants. The operator also assumes responsibility for system security. And the OpenWealth Association initiative was founded in February 2021 to promote open financial ecosystems in wealth management. The organization is working to create an open API standard for the global wealth management community.
Against this backdrop, incumbents must embrace open financial ecosystems or risk being squeezed out by new market entrants and losing customers, the report says.
Transition to data-driven services
Advances in technology and the wave of digital transformation sweeping through businesses and society are resulting in an ever-increasing amount of data being generated. This has led to the rise of data-driven business models and the growing use of data analytics in many industries, including wealth management.
In wealth management, analytics based on artificial intelligence (AI) enable companies to better understand their customers and customize their products and services accordingly. In asset management, data can be used to generate optimized product or investment strategies by applying modern concepts of quantitative finance.
The growing use of data will be further propelled by the adoption of open financial ecosystems that simplify the interaction between different market players, the report says.
In the future, the Swiss wealth management industry will have to consider data, its analysis as well as the exchange of data with third-party providers as a key driver of value creation. Adopting data-driven models will ensure that wealth management firms deliver services that are as responsive and efficient as possible to their clients, the report says.
Growing importance of sustainability
Sustainability has become a hot topic in the financial landscape, due to growing investor awareness and demand, the public availability of environmental, social and governance (ESG) data, and an evolving regulatory landscape.
In Switzerland, the demand for sustainable investments has risen sharply in recent years. According to the Swiss Sustainable Investment Market Study, total sustainable investments in Switzerland increased from CHF 390 billion in 2017 to CHF 1,520 billion in 2020.
In response to this, financial product providers are launching new sustainable funds at a rapid pace. The 2021 IFZ Sustainable Investing Study recorded 512 new sustainable funds open to the general public from 2020 to 2021 alone.
Subsequently, this leads to an increase in the need for ESG data, bringing with it the emergence of an industry comprised of third-party vendors that focus on collecting and providing ESG data and ESG ratings. In Switzerland, for example, Inrate is an independent sustainability rating agency that provides ESG ratings in a wide range of areas, including country, real estate or global impact.
These developments are part of an evolving regulatory landscape, where regulators are gradually introducing rules related to sustainability.
In 2021, the Swiss Financial Market Supervisory Authority (FINMA) defined the disclosure requirements for climate-related financial risks for the largest financial institutions. The entities concerned had to comply with the requirements from 2022.
At the same time, the Federal Department of Finance has been working on a consultation project that would set the parameters for mandatory climate reporting for large Swiss companies, public companies, banks and insurance companies. The project is expected to be completed by summer 2022.
As the demand for sustainable investing continues to grow, sustainability will play a vital role in the investment process going forward. It will eventually become one of the pillars of the investment process, alongside client risk aversion, return expectations and liquidity constraints, the report says.