Concerns about new tax-raising powers once a Scottish parliament is established will, executives claim, add to the reasons why clients hesitate before placing their assets with Scottish fund managers. This fear will aggravate problems that have prompted the competitive fund and insurance community in Scotland to unite to find solutions.
"There is a crisis of confidence,'' said Jim Gilchrist, deputy chief executive of Scottish Life. "Perception is very important in this business. This, combined with the uncertainty of the devolution issue creates a problem.''
After several years of growth amid a surging fund industry in the UK and worldwide, the Scottish fund business has suddenly become the victim of a spate of separate incidents that have led it to re-examine its role in UK and European financial services.
Ivory & Sime, one of the last fund managers to remain among the grey, Georgian town houses of Edinburgh's renowned Charlotte Square, effectively put itself up for sale last month when it hired mergers advisers DLJ Phoenix to look for "strategic options". The company has suffered from several high-profile departures in the last year and the loss of the pounds 460m BAA pension fund account in March.
In two separate moves, General Accident moved its fund business to London from Perth, and Scottish Amicable's pounds 15bn fund business is transferring almost entirely to London following the company's acquisition by Prudential earlier this year.
In all, about pounds 24bn of funds have crossed the border in the last year, leaving the Scottish fund industry with about pounds 170bn in assets under management in cities such as Edinburgh, Glasgow, Aberdeen and Dundee.
Institutional equity assets in Edinburgh fell 4 per cent last year to pounds 83bn, placing Scotland's largest financial centre behind Frankfurt in funds under management and just ahead of a fast-rising Stockholm, according to Technimetrics, a US fund researcher.
London remains Europe's largest fund centre with pounds 767bn in assets under management, more than the next four cities of Zurich, Paris, Geneva and Frankfurt combined.
Executives acknowledge they must do better, but claim that Scotland's financial industry - its second biggest after tourism - is more a casualty of global consolidation in the fund industry than any specific problems endemic to Scotland.
"If there is a pattern, it's that UK-wide, and maybe even worldwide, medium-sized asset managers are suffering a bit of a squeeze," said Colin McLean, managing director of Scottish Value Management. "Scotland has disproportionately more of these groups than other areas."
Another reason, Mr McLean speculated, is that the historic tendency of the "canny" Scottish fund managers to be conservative in their investments has left many of them behind the rest of the pack in terms of investment in soaring markets such as the US. This may have damaged relationships with some clients, although the latest performance figures show the Scottish funds regaining ground this year.
Other problems remain, however. Some executives say Scottish insurance companies and fund managers have been slow in courting new business in the last few years, focusing instead on defending their current market shares and pushing existing international clients into investing more with them.
As much as the Scottish managers compete with each other, they are also fighting firms in London, Frankfurt or Paris.
Either way, firms have mostly failed to work together to solve collective problems, executives claim.
"The truth is that while the world sees us as a community, that's not how people here always see it,'' said Grant Baird, head of Scottish Financial Enterprise, the trade organisation for promoting Scottish financial business.
Earlier this summer, Mr Baird called two meetings of Edinburgh's most senior fund managers and bankers to discuss how to work together more effectively to compete with aggressive London fund companies such as Mercury Asset Management or Schroders Investment Management.
Despite the negative publicity, however, several Scottish fund companies are doing just fine. Baillie Gifford, for instance, with almost pounds 14bn under management, has had no problems and continues to expand its assets.
Edinburgh Fund Managers, with about pounds 7.5bn in assets under management, has been mentioned as a possible takeover candidate, although it has grown since acquiring Dunedin Fund Managers last year.
Aberdeen Asset Management tripled its assets to more than pounds 11bn with the purchase of Prolific Financial Management from Scottish Provident in July.
Standard Life, with pounds 45bn under management, and Scottish Widows, with pounds 23bn, are the largest asset managers in Scotland. But even they pale in comparison with the likes of Mercury Asset Management, with pounds 90bn under management and Schroders, with pounds 104bn.
At the other end of the spectrum, a thriving industry in niche players is developing as executives leave some of the mid-market companies to start their own firms.
Scottish Value Management, Castle International, and Glasgow Investment Managers have all been successful in raising assets under management, although at a much smaller level. Scottish Value Management, for example, with only 13 people, now manages pounds 520m in assets, up from pounds 420m at the beginning of the year and pounds 320m at the beginning of last year.
"I'm extremely encouraged by the sort of new, sapling fund management companies," said Mary Campbell, a director at Noble & Company, an Edinburgh merchant banker. "It seems that when we have a couple of takeovers, everybody sounds the death knell."
For all the talk of takeovers, however, there have been few compared to the consolidation in, for example, London or the US. Executives do expect more, but not at the rate that some sceptics may be predicting.
The entrance of foreign owners could cause another batch of problems, however, and further blur the line between Scotland and London. Scottish Equitable is already owned by Dutch insurer Aegon, and Scottish Mutual is owned by Abbey National.
Merrill Lynch is currently scouting around Edinburgh for an office to set up a private banking office. ABN Amro Holdings, the Dutch banking company, is thought to be lurking in search of a fund manager and may have approached Ivory & Sime.
Mr Gilchrist points out that the constant interest in Scottish fund management companies, and in the managers themselves, proves things really aren't as bad as some claim.
"There's no reason why there shouldn't be confidence," he said. "The reality is that the fund managers are constantly being headhunted. The big problem is that the major institutions have stopped aggressively seeking new investment business."
As the setting up of a new parliament in Edinburgh becomes the major challenge for Scotland over the next few years, some of the heat may be taken off the fund industry.
Mr Baird of Scottish Financial Enterprise believes the industry will continue to evolve and thrive just as the rest of the fund industry in the UK and Europe will develop as the regions move towards monetary union in 1999.
Scotland may never catch up with London in terms of funds under management, but most executives in Edinburgh will say that doesn't matter. They don't want to be like London.
"At the end of the day, we're going to keep going on what's always kept us going," Mr Baird said. "Kind of like Hong Kong, not some big fund base like Frankfurt or New York. We're going to have to live by our wits."