Open financial ecosystems, data and analytics, as well as sustainability are the top three most impactful trends shaking up the Swiss wealth management industry. These trends are forcing traditional players to rethink themselves and innovate in order to maintain their competitiveness over the long term, says a new report by Switzerland stock exchange operator SIX and the Lucerne University of Applied Sciences and Arts (HSLU).

In a whitepaper titled Future of Wealth Management: Harvesting the Power of Data and Technology, the two organizations explore ongoing changes in the Swiss wealth management landscape, and delve into their potential implications for the future of the industry.

Open financial ecosystems boost interconnectedness of the industry

The first trend outlined in the study is open financial ecosystems. These ecosystems allow for 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 may improve, complement or even disrupt existing wealth management processes and activities through greater cost efficiency or better customer services, the report warns.

The traditional wealth management value chain would then be broken up into different segments with specialized offerings, and more granular. On one hand, this would mean increased competition, but on the other, incumbents would be given new opportunities, including new channels of distribution to tap into, as well as greater access to resources from specialists and other third-parties.

In Switzerland, though open financial ecosystems are not yet widely established, industry-driven initiatives have emerged to promote usage and set standards, the report notes.

SIX’s open finance platform bLink, for example, sets clear and uniform rules for the connection between participants. The operator also takes responsibility for the security of the system. And the OpenWealth Association initiative was founded in February 2021 to promote open financial ecosystems in wealth management. The organization strives to create an open API standard for the global wealth management community.

Against this backdrop, incumbents need to embrace open financial ecosystems or take the risk of being squeezed out by new market entrants and losing customers, the report says.

Transitioning to data-driven services

Technological advances and the digital transformation wave that’s been sweeping across business and society are leading to an ever-increasing amount of data being generated. This has led to the rise of data-driven business models and growing use of data analytics in many industries, including wealth management.

In wealth management, artificial intelligence (AI)-driven analytics allow firms to better understand their customers and personalize 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.

Rising usage of data will further be propelled by the adoption of open financial ecosystems which simplify the interaction between different market participants, the report says.

Moving forward, the Swiss wealth management industry will need to consider data, its analysis as well as the exchange of data with third-party providers as a key driver for value creation. Embracing data-driven models will ensure wealth management firms that they offer services that are as tailored and as efficient as possible to their customers, it says.

Growing importance of sustainability

Sustainability has become a hot topic in the financial landscape, driven by rising awareness and demand coming from investors, publicly availability of environmental, social and governance (ESG) data, and an evolving regulatory landscape.

In Switzerland, demand for sustainable investment has risen sharply over the past years. According to the Swiss Sustainable Investment Market Study, total sustainable investments in Switzerland surged from CHF 390 billion in 2017 to CHF 1,520 billion in 2020.

Development of sustainable investments in Switzerland, Source: Swiss Sustainable Finance, June 2021

In response to this, financial product providers are launching new sustainable funds at a fast pace. The IFZ Sustainable Investments Study 2021 recorded 512 new sustainable funds being opened to the general public from 2020 to 2021 alone.

Number of sustainable funds available to the public as of June 30, Source: IFZ Sustainable Investments Study 2021

Subsequently, this is leading to an increase in the need for ESG data, driving with it the emergence of an industry made of third-party providers that focus on collecting and providing ESG data and ESG ratings. In Switzerland, for example, Inrate is an independent sustainability rating agency which provides ESG ratings in a wide range of areas including countries, real estate or impact on a global level.

These developments are coming on the back of a changing regulatory landscape where regulators are progressively introducing sustainability-related rules.

In 2021, the Swiss Financial Market Supervisory Authority (FINMA) specified disclosure requirements of climate-related financial risks for the largest financial institutions. The entities concerned had to comply with the requirements starting in 2022.

In parallel, the Federal Department of Finance has been working on a consultation draft that would set parameters for mandatory climate reporting by large Swiss firms, public companies, banks and insurance companies. The draft is due to be completed by summer 2022.

As demand for sustainable investing continues to rise, sustainability will play a critical role in the investment process in the future. It will ultimately become one of the pillars of the investment process, alongside customer risk aversion, return expectations and liquidity constraints, the report says.

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