Shifting client expectations, disruptive technologies, ever-changing regulations, new competitors: despite facing important threats, Luxembourg’s wealth management industry will continue to thrive thanks to its unique ecosystem.
According to the latest Capgemini World Wealth Report, the global HNWIs (High Net Worth Individuals) community is in perfect health, with the latest numbers indicating a broad increase: 7.5% in its population and 8.2% for their assets. In addition to that, the most recent projections indicate that the HNWIs’ wealth will surpass the staggering figure of 100 trillion US dollars by 2025. It might be therefore tempting for an outsider to assume that on the back of all these positive trends, the banks and wealth managers in charge of managing the fortunes of the world’s wealthiest are enjoying constantly increasing revenues and earnings. Unfortunately, we know that this is not the case: low-yield environment, ever-changing regulations, disruptive technologies, new competitors, shifting client expectation and habits are only a few of the threats and pressures the global wealth management industry has been facing in the past few years.
However, when it comes to Luxembourg, there are reasons to believe that its unique ecosystem is well-placed in order to navigate and thrive in this new competitive landscape by simply focusing on the two traditional pillars of wealth management: trust and service.
Trust, as we all know, takes a lifetime to build and seconds to break; Luxembourg has been able through the stability of its social and political system, its strong culture of investor protection and rigorous anti-money laundering policies, its openness to the world and strategic location to build a reputation of solidity and confidence that is not easily replicable or attackable. No matter the age, cultural background, investment objective or size of wealth, trust remains the foundation of every long-term private banking relationship and every single wealth manager should continue to focus on preserving and growing the level of empathy, integrity, and shared values with his clients.
Service, contrary to trust, is a concept that continues to evolve and expand on different axes, the most important ones being investments, regulations and technology.
Starting with the investment service, a consequence of the low-yield environment we live in has been the constant need for financial innovation and rising complexity in order to provide investment solutions able to generate an acceptable return for a contained level of risk; if a few years ago an average investment grade bond portfolio would have been good enough to meet most clients’ return targets, today every wealth manager is required to use advanced portfolio management techniques and alternative assets to achieve that. In this regard, we can highlight how Luxembourg, through RAIFs, SIFs and alternative UCITs is since a few years the European hub for all those alternative investment vehicles that are so precious for the improvement of the risk-adjusted return of client portfolios.
On the regulatory side, the Grand Duchy offers a modern legal and regulatory framework that is continuously updated, inspired by regular consultation between the government, the legislator and the private sector. Moreover, the geographical location and international population makes Luxembourg one of the most open platforms for cross-border activities and international wealth structuring. Let’s not forget how HNWIs are more and more international in their investments and lives, hence the importance of an international hub able to manage their wealth efficiently.
Finally, on the technological side, Robo-Advisory, Fintech, Regtech, Cybersecurity and Artificial Intelligence are only few of the buzzwords and potentially disruptive technologies that we all read and hear about. Luxembourg has recognised very early the importance of these new emerging forces and for this reason, in addition to several other initiatives, has set up the House of Financial Technology (LHoFT), a public-private joint venture that drives technology innovation for Luxembourg’s financial services industry, connecting the domestic and international Fintech community.
Looking at the next five years, there is no doubt that in many aspects the wealth management industry will look different than it does today; however, Luxembourg’s unique combination of solidity, international exposure, flexibility and competencies has emerged as an ecosystem providing the country’s wealth managers with all the tools and sought-after competitive advantages required to attract, serve and retain the current and future generations of international HNWIs.