Portfolio Risks: Moving Towards Enhanced Client Disclosure

As part of their mandate, External Asset Managers (EAM) must ensure they remain aligned with their client’s investor profile—this is the principle of “Suitability.” However, managing portfolio risks is equally critical. IAMs manage these risks with the primary goal of generating long-term capital gains for their clients.

Nevertheless, FINMA reminds managers in its Circular Fidleg 25/2 (LSFin) that they must protect their clientele by informing them as early as possible of the following specific risks:

• Portfolio Risks: Clearly explain the risks associated with concentration in individual securities or specific issuers.
• Knowledge and Experience: Test the client’s understanding when they are exposed to complex, illiquid, or high-risk products and strategies, unlike traditional mandates where such testing may not be strictly required.
• Retrocessions: Prominently highlight third-party compensation (from banks, funds, or structured products) through visible formatting, such as bold text, larger font sizes, or dedicated sidebars.
• Conflicts of Interest: While charging fees at multiple levels (both for the mandate and the instrument, typically an AMC) remains possible, the impact must be quantifiable and communicated clearly. The alternative—and FINMA’s preferred approach—is to offset these fees by excluding the product from billing, thereby eliminating double compensation.

These now-formalized requirements must be implemented and verified by auditors starting in 2025. Managers practicing diversified and traditional management are already largely compliant. However, those adopting a concentrated (or “conviction-based”) approach, utilizing leverage, or resorting to illiquid assets must update their mandates without delay and provide specific disclosures to the affected clients.

Monitoring Sanctions and Embargoes

In a communication dated August 6, 2025, AOOS informed the IAM community of FINMA’s latest expectations regarding sanctions. Managers should be capable, within 24 hours of consulting publicly available sanction lists, of detecting whether a new and/or existing business relationship is subject to sanctions or embargoes.

The principle of proportionality should allow these obligations to be adapted according to the IAM’s risk profile. Must a firm whose clientele is essentially European or Latin American really conduct an exhaustive global screening? Especially within such short timeframes?

Some actors with high exposure to these risks have already implemented automated processes or rely on daily monitoring through our services. For others, a preliminary strategic review is necessary before acting. In any case, this new requirement marks a further step toward the necessity for IAMs to equip themselves with a CRM/PMS capable of integrating and centralizing numerous regulatory constraints.

Sergio Uldry