10 December 2020

Asset manager vs. investment advisor (analysis in a nutshell)

  • Articles
  • Legal
  • Blockchain / Digital Assets

Since the Financial Institutions Act and the Financial Services Act entered into force on 1 January 2020, certain financial market players are now subject to a licensing or registration requirement.

Since the Financial Institutions Act (hereinafter ""FinIA"") and the Financial Services Act (hereinafter ""FinSA"") entered into force on 1 January 2020, certain financial market players are now subject to a licensing or registration requirement. These include asset managers, who now require a FINMA licence to carry out their activities, but also investment and client advisors, who must now register in a register of advisors and (like asset managers) join an ombudsman's office. In practice, it is not always clear when a player in the financial market sector is considered an investment advisor and which activities even qualify as asset management requiring a license.


What activities in the financial market sector are considered financial services?

In principle, everyone who professionally invests and manages assets for the account of third parties must obtain a licence from FINMA. The authorisation requirement is regulated in FinIA (see our magazine article ""Authorisations and Licences according to FinIA - an overview""). This includes asset managers of individual client assets as well as managers of collective investment schemes.

If an activity does not trigger a FINMA subordination or authorisation requirement, but falls under the definition of financial services according to FinSA, a possible obligation to register in the register of advisors as well as the connection to an ombudsman's office must be examined. This is accompanied by other obligations that are defined in FinSA.


Investment advice vs. asset management

Whether a sole investment advice or nevertheless administration of an estate is present, decides itself in the long run on the basis of the question whether the financial service provider appears only as advisor or makes however for his customer also investment decisions and receives a power of attorney, in order to have custody over the assets of his customers. The demarcation is not always clear and often raises questions in practice.

An asset manager is deemed to be someone who, on the basis of an order, can dispose of the client's assets within the meaning of Art. 3 lit. c fig. 1-3 FinSA on a professional basis in the name and for the account of the client. A characteristic feature of asset management is that the person entrusted with the mandate independently provides the (comprehensive) care and management of the assets entrusted to him within the framework of an investment strategy agreed in advance. Investment decisions are usually made independently by the manager. For this purpose, the asset manager is granted a power of attorney to invest the assets in the name and for the account of his clients.

Investment advice, on the other hand, generally comprises (only) the provision of advice and recommendations with regard to an investment decision relating to financial instruments within the meaning of Art. 3 lit. c fig. 4 in conjunction with Art. 3 lit. a FinSA. The investment advisor therefore supports the client with his expertise, although the client generally makes the investments himself. Unlike asset management, investment advice does not involve third-party management. The investor decides and determines the investment strategy himself. In practice, however, the interpretation of the term ""recommendation"" is not always clear. One speaks of investment advice only if the advice includes a recommendation tailored to personal needs. Following similar regulations in the EU area, on the other hand, there would be no investment advice if only general expectations about the development of financial instruments were communicated or if an approved financial institution were recommended.

An investment advisor who also holds their assets in the name and on behalf of their clients and makes individual investments falls into the category of asset managers (provided the activity is carried out on a professional basis). However, investment advisors who invest for their clients in other assets that do not constitute financial instruments within the meaning of FinSA, may be required to join a self-regulating organisation (""SRO"") if they are exercising this activity on a professional basis.

In general, the transition from investment advisory activities, which are largely licence-free, to asset management activities is fluid, and FINMA is taking action against attempts to circumvent the licensing requirements, particularly in the area of managing collective investment schemes. A detailed analysis of each individual case is therefore recommended.


Who requires FINMA approval?

Anyone who, on the basis of an order, can dispose of clients' assets commercially in their name and for their account requires a FINMA asset management licence. The licensed activity for asset managers consists in the management of individual portfolios.

To obtain a permit, a number of personal, financial and organizational requirements must be met. These include a domicile in Switzerland, an appropriate organization and sufficient financial guarantees. In addition, the persons responsible for the supervision and management of the company must guarantee the proper conduct of business, have a good reputation and possess the necessary professional qualifications. Asset managers also have to join an ombudsman's office, but due to prudential supervision they do not have to be entered in the client advisor register.

The classic investment advisor, who only gives personal recommendations but does not make any investments himself, is subject to the regulatory rules of conduct defined in the FinSA, but does not require a license. It is not supervised by FINMA, an AO or SRO. However, investment advisors are considered client advisors within the meaning of the FinSA, which means that they must meet certain minimum requirements under the new law. These include specialist knowledge, knowledge of the rules of conduct, entry in an advisor register and affiliation with an ombudsman's office. Only the client advisors themselves are obliged to register, not their employers.


Who must be registered in the register of consultants?

With the coming into force of the Financial Services Act FinSA, the category of customer advisors has been created. According to the FinSA, client advisors of Swiss financial service providers who do not themselves require a FINMA licence, as well as client advisors of foreign financial service providers, must now be entered in a register of advisors. Asset managers subject to prudential supervision are therefore not required to be entered in the register of advisors for the activity of asset management, whereas unsupervised investment advisors are.

Anyone who only and exclusively engages in execution-only business, i.e. the sole execution and transmission of investment transactions, may, if necessary, even waive entry in the register of advisors. However, this is subject to the condition that the investment decisions are made by the client, that the financial service provider has not recommended the investments to the client in any way and that no power of attorney in the sense of asset management exists. A business model based solely on the execution-only business is therefore likely to be rare and probably only found in the online sector.

The deadline for registration is December 2020. Therefore, provided that the activity does not trigger a subordination or licensing requirement on the part of FINMA, but falls within the definition of financial services under the FinSA , there may still be an obligation to register.

So far, FINMA has approved two registries, the one of the Bern Stock Exchange BX Swiss (www.regservices.ch) and of the Association Romande des Intermediaires (ARIF; www.arif.ch).


Do asset managers and investment or client advisors have to join an ombudsman's office?

Financial service providers who offer financial services to retail clients must join an ombudsman's office so that customers have the opportunity to assert legal claims in the course of a mediation process which are based, among other things, on possible violations of the financial service provider's rules of conduct. This applies equally to asset managers and investment or client advisors. This obligation does not apply to financial service providers who provide their services exclusively to institutional and professional clients or to financial institutions which do not provide any financial services at all.


What are the duties of asset managers and investment advisors?

Furthermore, FinSA rules of conduct apply to the activity of the asset managers as well as the investment advisors, provided that their activity includes financial instruments in the sense of FinSA. The rules of conduct of FinSA provide for information duties and documentation obligations, require that only products and services that are appropriate and suitable for the customer are offered and provided to the customer and that conflicts of interest are disclosed and resolved. Depending on the type of client - private clients, professional clients and institutional clients - these requirements apply in a differentiated manner. The highest level of protection applies to private clients. However, the rules of conduct imposed on the investment advisor should not be underestimated. These duties of conduct also apply (additionally) if an asset manager also offers investment advice.

Our team will be happy to assist you in all matters and will actively support you in clarifying open questions in connection with FinIA and FinSA, in complying with the associated requirements, in clarifying and obtaining the necessary permits and in all other questions that may arise for asset managers and investment advisors.