FINMA Guidance 03/2026 – Risks associated with the use of products in individual portfolio management

Read the FINMA Guidance 03/2026 

Classification of the changes¹

¹ _{This is a greatly simplified overview, intended to provide a quick initial understanding of the subject matter. Each institution should determine the relevance and the specific need for action on a case-by-case basis.}
² _{For asset managers of collective investment schemes who also offer individual asset management services, the relevance is likewise assessed as high.}

Background

FINMA has recently recorded a sharp rise in the number of cases involving portfolio managers pursuant to Article 17 of the Financial Institutions Act (FinIA) that have been escalated to it due to shortcomings. Analysis of these cases revealed recurring risk patterns and irregularities in the use of foreign funds, structured products – in particular Actively Managed Certificates (AMCs) – and securities issued by issuing or structuring companies. The risks were particularly pronounced in the use of in-house products, regulated or registered products lacking equivalent supervision, and unsupervised structures; the complexity and limited liquidity of the financial instruments used had a notably risk-increasing effect.

Particular attention was paid to cases where the suitability of the investments used had not been adequately assessed, and where insufficient or no account had been taken of clients’ risk capacity and risk appetite. 

FINMA also identified excessive investment in individual products, insufficient information on portfolio performance, non-transparent double charging of fees, remuneration incentives favouring in-house products, a lack of diversification, and shortcomings in initial and ongoing due diligence.

The Guidance is primarily aimed at portfolio managers pursuant to Article 17 FinIA. However, FINMA expressly states that its findings are also relevant to supervised entities in other licence categories, insofar as they offer individual portfolio management services.

Suitability assessment

FINMA reiterates that, in the case of asset management mandates and ongoing advisory relationships, the financial services provider must enquire about the client’s financial situation, investment objectives, and knowledge and experience. Based on the information obtained, a risk profile must be prepared for each client, on the basis of which an investment strategy is to be defined. The financial instruments used must be suitable, taking into account the risk profile and the agreed investment strategy. Particular attention must be paid to this suitability assessment when high-risk, complex or illiquid financial instruments are used in retail clients’ portfolios.

In practice, our experience shows that the gathering of information from clients, the creation of the risk profile and the agreement on the investment strategy are often barely distinguished from one another. The risk profile is the result of analysing the information gathered from clients, in particular their objective risk capacity and subjective risk appetite. Building on this, the investment strategy sets out how this risk profile is to be implemented. In our experience, it is advisable to structure the documentation in such a way that these three steps (information gathering, risk profile, investment strategy) remain clearly distinguishable from one another. This makes it easier to verify retrospectively that the risk profile was indeed derived from the client information and that the investment strategy was determined on the basis of this risk profile. In the case of complex, high-risk or illiquid financial instruments, we consider that, in light of the supervisory circular, there are overall heightened requirements regarding the traceability of the suitability assessment: It should be clear what investment objective the use of the financial instruments serves, how they are consistent with the risk profile and the agreed investment strategy, and what impact they have on risk, return, liquidity, diversification and concentrations within the context of the portfolio.

Product selection and conflicts of interest

In the escalation cases analysed by FINMA, the use of in-house products repeatedly revealed inadequate safeguards to prevent conflicts of interest. FINMA specifically cites non-transparent double charging, remuneration incentives favouring the use of in-house products, a lack of diversification, and the absence of product selection processes based on objective criteria customary within the industry.

Against this background, FINMA states that institutions must take appropriate measures to avoid any associated conflicts of interest when using their own and third-party financial instruments, namely a selection process based on objective criteria customary within the industry. The use of the institution’s own financial instruments must not be favoured by specific remuneration incentives. Conflicts of interest must, as a general rule, be prevented, or measures must be taken to ensure that clients are not disadvantaged as a result. Where conflicts of interest are unavoidable, particularly stringent requirements apply to their management; in particular, unavoidable conflicts of interest must be disclosed. Such disclosure must clearly set out the circumstances giving rise to the conflict of interest, the resulting risks and the measures taken to mitigate those risks.

In our view, the escalation cases described by FINMA in particular demonstrate that a purely generic description of conflicts of interest may not, under certain circumstances, satisfy these requirements – disclosure should be sufficiently specific to enable clients to understand the actual conflict of interest in each individual case. Similarly, the selection process should not merely be described in abstract terms, but should be recognisably applied in the actual investment decision-making process – the shortcomings identified by FINMA specifically concerned institutions where a selection process existed on paper but was not consistently implemented in practice.

Product Due Diligence

FINMA expects an asset manager’s risk management to cover the entirety of its business activities and to be organised in such a way that all material risks can be identified, assessed, controlled and monitored. This also includes taking into account risks that may arise in the context of asset management mandates and that may affect the assets under management and, where applicable, the products under management. This applies in particular to concentration, liquidity, valuation and conflicts of interest risks.

Against this background, FINMA expects a thorough, risk-based initial and ongoing due diligence of the financial instruments used, whereby a lack of financial information on the products, outstanding audit opinions, changes to or terminations of the audit firm, and insufficient information on structure, valuation or liquidity constitute clear risk signals.

The more complex, illiquid or opaque a product is, the more robust the scope of the audit, the basis for decision-making and ongoing monitoring should be.

Outsourcing of control functions

FINMA also makes it clear in the Guidance that, in the case of institutions that outsource activities such as risk management or the compliance function, responsibility for the outsourced activities remains with the institution. The institution must have sufficient resources and expertise at its disposal at all times to monitor the outsourced activities. 

The selection of a service provider requires thorough due diligence, clear arrangements regarding responsibilities and complete access to information. 

The scope of the outsourcing, in particular whether it also covers the risk management of client portfolios and any products under management, should be clearly defined. In cases of escalation, FINMA found that outsourcing frequently led to standardised rather than individual controls, unclear responsibilities and gaps in controls. Specific product and business risks were regularly not taken sufficiently into account. 

Conclusion and outlook

FINMA Guidance 03/2026 makes it clear that the supervisory authority is taking an increasingly critical view of the use of complex, illiquid or institution-specific financial instruments in individual portfolio management. The focus here is not on individual products as such, but on whether financial service providers can ensure that their use is in line with clients’ interests, suitability requirements, appropriate product governance and effective management of conflicts of interest.

For financial services providers offering portfolio management who also use their own products, this necessitates a critical review of existing processes and controls. Institutions should pay particular attention to the documentation of the suitability assessment, the due diligence processes for financial instruments used, the monitoring of concentration and liquidity risks, and the handling of conflicts of interest. Likewise, the effective management and monitoring of outsourced control functions is increasingly coming under the supervisory spotlight.

It is to be expected that the expectations set out in the Guidance will be given greater weight in future audits by supervisory organisations and FINMA. Institutions would be well advised to use this Guidance as an opportunity to proactively review their governance, documentation and control processes and, where necessary, to strengthen them in a targeted manner.