Independent Wealth Management in Luxembourg · EAM (External Asset Manager) or IAM (Independent...

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Independent Wealth Management in Luxembourg Perspective on a sector at crossroadsJune 2018

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ContentForeword 03

Key figures 04

Executive summary 05

EAMs: A strategic sector for the Luxembourg wealth management and banking industries

06

EAM landscape overview 10

Impact of MiFID II 14

Evolution of operating models 17

Digital adoption 18

Depositary bank perspective 20

Luxembourg as an EAM hub 22

EAM sector outlook and future models 23

Independent Wealth Management in Luxembourg

02

GlossaryCSSF: Commission de Surveillance du Secteur Financer PSF: Professionel du Secteur Financier Investment Firm: A PSF which, pursuant to Part I, Chapter 2, Section 2, Sub-section 1 of the law of 5 April 1993 on the financial sector, falls within the following categories:

• Article 24. Investment advisers

• Article 24-1. Brokers in financial instruments

• Article 24-2. Commission agents

• Article 24-3. Private portfolio managers

• Article 24-4. Professionals acting for their own account

• Article 24-5. Market makers

• Article 24-6. Underwriters of financial instruments

• Article 24-7. Distributors of units/shares in UCIs

• Article 24-8. Financial intermediation firms

• Article 24-9. Investment firms operating an MTF in Luxembourg

• Article 24-10. Investment firms operating an OTF in Luxembourg

EAM (External Asset Manager) or IAM (Independent Asset Manager): For the purpose of this study, an EAM or IAM is a PSF with the Investment Firm designation which, pursuant to Part I, Chapter 2, Section 2, Sub-section 1 of the law of 5 April 1993 on the financial sector falls within the following categories:

• Article 24. Investment advisers

• Article 24-1. Brokers in financial instruments

• Article 24-2. Commission agents

• Article 24-3. Private portfolio managers


03

ForewordDear reader,

Deloitte and the Association Luxembourgeoise des Professionnels du Patrimoine (“ALPP”) are pleased to present you the results of our recent study, providing a perspective on the Luxembourg external asset manager (EAM) sector and underlying trends. In this publication, we look at the evolution and growth of Luxembourg EAMs and financial performance as well as the key business and regulatory shifts impacting the sector.

As independent players in the Luxembourgwealth management landscape, EAMsare very diverse and the sector is morecomplex than the traditional privatebanking industry in several aspects. EAMs typically take a differentiated approach to client relationship management, and a more independent approach to wealth management. In this context, this paper aims to shed light on how the EAM sector has fared in the face of ongoing changes in the wealth management industry, such as the emergence of new technology, regulatory changes and the introduction of tax transparency.

Beyond this, we look at the contribution of the EAM sector to the Luxembourg economy, in terms of both direct financial contribution and employment, as well as its indirect contribution to the depositary banking sector, stressing how strategic EAMs are for the Luxembourg financial sector.

Some of the trends highlighted in this study are clear challenges for the sector, such as the changes taking place in the wake of MiFID II. The odds are high that conditions for the EAM sector will remain challenging in 2018 and beyond. Nevertheless, we also highlight the success factors that in our view will allow EAMs to thrive in the future.

There are a number of important acknowledgements to make in relation to this study. We would like to thank the CSSF and ABBL for providing underlying EAM sector data. We would also like to thank the individual asset managers and banking institutions who have contributed expertise and insight in support of the study.

We hope that you enjoy reading this paper and that you will gain useful insights from it.

Benjamin Collette Partner - Strategy, Clients & Industries, FSI Leader Deloitte

Jean FuchsChairman of the ALPP (Luxembourg Association of Wealth Managers)

Raphaël Charlier Partner - PSF Industry Leader Deloitte

94External Asset

Managers (EAMs)

2,181EAM employeesin Luxembourg

€29.2bnEAM Assets under

Management (AuM)

Nearly

€600m in EAM revenues

€0.4bnAuM per EAM witha Private PortfolioManager license

(Art 24-3)

Key figures

Sources: CSSF, Deloitte analysis


04


05

94External Asset

Managers (EAMs)

2,181EAM employeesin Luxembourg

€29.2bnEAM Assets under

Management (AuM)

Nearly

€600m in EAM revenues

€0.4bnAuM per EAM witha Private PortfolioManager license

(Art 24-3)

Executive summary

• EAMs account for 94 firms in Luxembourg operating a variety of business models including traditional “third-party fund-based” wealth management, portfolio management, family office services and platform services

• The EAM sector is strategic for the Luxembourg financial sector, in particular for its wealth management and banking industries

– EAMs bring a significant direct contribution to the Luxembourg financial sector

• Nearly €30 billion in AuM (~8 percent of traditional private banking AuM)

• Direct revenue of nearly €600 million (one-third of traditional private banking revenue)

• Direct employment in Luxembourg of over 2,000 FTEs (one-third of private banking employment)

– EAMs also contribute indirectly to the Luxembourg banking sector

• €40 billion in assets booked by EAMs at Luxembourg banks, of which €14 billion from Luxembourg-based EAMs

• Occupying close to 200 FTEs positions across Luxembourg banks

• Creating an attractive recurring revenue stream, supporting fixed cost absorption for banks

• Providing a source of market intelligence due to proximity to clients, helping banks keep wealth management infrastructure in line with customer needs

• In recent years, EAMs have grown faster than the market average but have also been affected by known challenges in the wealth management

Volume mix1

18.422.0

24.5

201520142013

8%

AuM FTERevenues

92%

27%

73%

Private BanksEAMs

24%

76%

sector – The EAM AuM growth rate over the past six years (13 percent CAGR1 2010-2016) has exceeded the growth of the overall private banking industry (5 percent CAGR 2010-2016)

– Profitability has been broadly stable in the past couple of years with a cost-to-income ratio of around 75 percent, but nevertheless remains below historical levels

• MiFID II has brought about significant additional change and challenges to the EAM sector and financial performance could be affected further from 2018 onward – Alignment of pricing models to MiFID II is expected to have a negative impact on revenue for firms previously relying on transactional retrocessions and/or trailer fees, potentially amounting up to 40-50 percent of pre-MiFID II revenue

– In parallel, there is ongoing change in terms of business models with increasing focus on discretionary portfolio management vs advisory,

and the development of own funds offerings in order to minimize the operational burden and secure revenue flow

– There is increasing operational and compliance complexity for most EAMs, posing a challenge and driving up costs, in particular for smaller firms with limited resources and regulatory budgets

• Future success for EAMs is likely to revolve around a combination of traditional relationship and wealth management expertise with fund management and asset management expertise, underpinned with digital capabilities

• In this context, the Luxembourg proposition continues to offer distinctive benefits for EAMs, in particular for international players seeking a reliable home base from which to access the European HNWI2 market efficiently and with the support of a high-quality service infrastructure

1. Compound Annual Growth Rate 2. High Net Worth Individuals

Sources: ABBL, CSSF, Deloitte analysis1. Based on latest available figures


06

EAMs: A strategic sector for the Luxembourg wealth management and banking industries

Article 24. Investment advisers

There are currently 94 entities operating and offering their services under these licenses and employing over 2,000 employees in Luxembourg. While some movement is observed in the number of EAMs and Investment Firms altogether, the trend in the past five years has remained quite stable. Today, EAMs holding the private portfolio manager license (Article 24-3) represent 80 percent of total Investment Firms, and they collectively managed €29.2 billion of assets in 2017 for clients in Luxembourg, Belgium, France, Germany, and other international locations, of which €14.2 billion were deposited in Luxembourg-based banks.

External asset managers (EAMs) in Luxembourg are regulated entities supervised by the Commission de Surveillance du Secteur Financier (CSSF). They operate under the status of Professionel du Secteur Financier (PSF) as Investment Firms under articles 24, 24-1, 24-2 and 24-3 of the law of 5 April 1993 on the financial sector. EAMs holding the 24-3 license are fully entitled to benefit from licenses 24, 24-1 and 24-2.

Article 24-2. Commission agents

Article 24-1. Brokers in financial instruments

Article 24-3. Private portfolio managers

96 12

108

93 14

10794 6

100

Number of other Investment Firms

Number of Investment Firms under Articles 24, 24-1, 24-2 and 24-3

2016

2017

Current1

Total number of Investment Firms


1. As per CSSF list of supervised entities at time of publication

Stable trend in number of EAMs, with overall number of Investment Firms decreasing


07

Despite a stable trend in the number of EAMs, the sector has experienced steady growth in total assets under management (+12 percent CAGR 2013-2017), reaching an average of €0.4 billion AuM per EAM holding a Private Portfolio Manager license (Article 24-3) in 2017. In addition, EAMs generated nearly €600 million in total revenue in 2017, experiencing steady growth since 2015 and clearly showing signs of recovery. The difference in growth rate between AuM and revenue has caused the Return on Assets ration (RoA) to decrease slighty in 2017. 18.4

22.024.5

26.329.2

+12% +11%

2016201520142013 2017

Assets under management2, €bn

CAGR CAGR

EAM Assets under Management evolution shows steady growth

Sources: CSSF, Deloitte analysis2. EAMs holding the Private Portfolio Manager license (Article 24-3)


08

Despite the downward trend in expenses, the cost-to-income ratio, expressed as operating expenses over total revenue, is now well above pre-crisis levels at 73 percent compared to 51 percent in 2008, but below the Luxembourg private banking ratio, estimated to be at approximately 80 percent today. The increase in ratio can be explained by both the cost and revenue pressures that unfolded after the financial crisis, including increased regulatory requirements and associated operational and technological investments. Going forward, these requirements are expected to drive up costs further for many players, highlighting more than ever the importance of scale and efficiency.

We also note that staff costs represent over half of total operating expenses and that most EAMs continue to rely on manual work and processes while digitization levels remain low. The sector employed 2,440 people in 2017 compared to 2,423 in 2016, which translates into an increase from an average of 25.2 employees per EAM to 26.2. Despite the net increase, the number of people working in Luxembourg has actually decreased to 2,181 in 2017 from 2,229 in 2016, while the number of employees working outside of the country has gone up by 65 employees. This is due, in part, to EAMs locating certain middle and back support activities outside of Luxembourg.

Finally, we note that net profits after tax have recovered from the 2008 slump at €77 million, experiencing a slight increase in the past three years to reach €106 million in 2017 (compared to €155 million in 2007). In addition, net profit after tax margins have improved slightly from 16 percent in 2016 to 18 percent in 2017, but nevertheless remain below the overall Luxembourg wealth management sector margins (at around 22 percent in 2015).

Slight increase in employment stimulated by growth in employees located abroad

Staff expenses represent over half of operating expenses

Operating expenses breakdown

46%54%

45%55%

2016

2017

Staff expenses

Other operating expenses

2,229 194

2,181 259

2016

2017

Employees outside Luxembourg

Employees in Luxembourg

Number of employees

Financial performance of the EAM sector

585 593

+1%

2016 2017

Revenues, €mm

Return on assets

2.2% 2.0%

454 433

-4%

2016 2017

Operating expenses, €mm

Cost-to-income

78% 73%

93 106

+15%

2016 2017

Net results, €mm

Net profit margin

16% 18%



09

The financial performance of the EAM sector has improved in recent years in spite of general commercial challenges in the wealth management space. The wave of regulatory changes has also been a challenge for many firms. First and foremost, the ban on inducements under MiFID II has upset the economic model of many EAMs and our survey of Luxembourg market players suggests that potential revenue losses for those most heavily affected by MiFID II could amount to up to 40-50 percent of revenue. In light of this, we expect 2018 to be an acid-test year for the industry, which could bring about more challenges in terms of financial performance.

With ongoing changes in these key financial variables, we expect the minimum break-even size for EAMs to increase significantly. Historically, we have seen players operating at break-even with AuM as low as €100 million. In the future, we expect minimum break-even size to increase to between €250 million and €500 million, and possibly above €500 million for players with third-party fund-focused strategies. Smaller EAM players face an uncertain future and, conversely, larger players who are able to make the necessary investments are expected to gain ground in the coming years, either organically or through acquisitions.

The financial performance of the EAM sector has improved in recent years in spite of general commercial challenges in the wealth management space, but is expected to be impacted by MiFID II going forward.


10

EAM landscape overview

EAMs in Luxembourg operate a variety of business models, in terms of business focus, geographic focus, and wealth management approach, which creates a wide spectrum of value propositions offered by this sector in Luxembourg.

In terms of EAM business approaches, we observe independent wealth managers (i.e., relationship-focused), players with investment management capabilities and fund houses, platform-based wealth managers (i.e., providing a wealth management “platform” for individual portfolio managers) and family offices (mostly multi-family offices).


11

Family officesE.g., multi-family offices

IM focused players and fund houses

E.g., firms focused on investment management capabilities and/or management of own funds

Platform-based wealth managers

E.g., firms providing a wealth management platform for individual wealth managers

Independent Wealth Managers

E.g., relationship-focused managers with typically a focus on third party fund selection

Positioning/activity mix

11



12

Geographic reach is diverse, with many players focusing on Luxembourg and the Greater Region in various combinations, but some extending their reach to other European countries or even other continents, highlighting the mix of national and international EAMs in Luxembourg. Excluding AuM under life insurance, Luxembourg EAM assets deposited in Luxembourg banks only are geographically evenly split between Benelux and France (55 percent), and the rest of the world (45 percent).

Luxembourg EAMs have a diverse geographic footprint serving both Greater Region and international clients

Luxembourg based EAMs manage a large proportion of Greater Region assets deposited in the country, while also serving international clients

Geographic mix (EAM AuM deposited in Luxembourg banks)1

Beneficial owner domicile

Total AuM managed by EAM...

... of which managed by Luxembourg based EAM

LU 4.1 16% 3.2 36%

BE 2.1 8% 1.3 14%

FR 0.9 3% 0.4 4%

Southern Europe2 1.5 6% 0.3 3%

CH 1.8 7% 0.7 8%

Rest of the world 15.7 60% 3.1 34%

Life insurance

Total deposited in Luxembourg banks €39.5 bn €14.2 bn

Total deposited in banks abroad €15.0 bn

Sources: ABBL, Deloitte analysis

1. Figures are rounded up

2. Italy, Spain and Portugal

€bn

13.3

€26.

1 bn

€8.9

bn

€bn

5.3


13

When looking at total assets deposited in Luxembourg-based banks, almost 70 percent of Benelux and French client assets are managed by Luxembourg-based EAMs, while 80 percent of assets from clients domiciled in the rest of the world are managed by EAMs based outside of Luxembourg. While this view is limited to assets deposited in Luxembourg, it shows the potential of Luxembourg as an attractive, stable, and secure depositary location. In terms of relative size, Luxembourg EAM-managed assets represent only one-third of total EAM assets deposited in Luxembourg (€14.2 billion out of €39.5 billion), which again underlines the attractiveness of Luxembourg as a depositary hub for international EAMs.

In terms of service and product mix, we estimate that at least 80 percent of assets are placed in discretionary portfolio mandates, with around 15 percent being under advisory or execution-only agreements. The focus on discretionary management is expected to be amplified by the complexities brought about by MiFID II. In addition, the relevance of life insurance products for international wealth management purposes continues to be reflected in the €13.3 billion in EAM assets deposited in Luxembourg under life insurance policies, of which €5.3 billion are managed by Luxembourg-based EAMs. In this regard, Luxembourg continues to be a key international center for cross-border insurance distribution and related wealth management services.

Finally, we observe a significant upward trend in the use of funds as investment vehicles. This is another consequence of increased regulatory complexity but also a means of managing smaller accounts in a more profitable manner while allowing for portfolio diversification. From the EAM perspective, Luxembourg is well-positioned to exploit such vehicles with a clear offering and standardized pricing structure for fund services. From the client perspective, investment funds may provide additional investor protection, tax benefits, and potentially lower costs.

Nearly 70% of Benelux and France AuM deposited in Luxembourg banks are managed by Luxembourg EAMs

Half of Luxembourg EAM AuM represent 1/3 of total EAM assets deposited in Luxembourg based banks (in €bn)

25.2 15.014.2International EAM

assets at Luxembourg banks

Luxembourg EAM assets at Luxembourg

banks

Luxembourg EAM assets at international

banks

EAM offering is increasingly focused on DPM and packaged vehicles

32%

Beneficial owner domiciledin Benelux and France

Beneficial owner domiciledin the rest of the world

68% 79% 21%

Luxembourg EAMs Other EAMs

Assets under management mix3


3. Assets deposited in Luxembourg banks only, excluding life insurance

Sources: ABBL, CSSF, Deloitte analysis

Mix Trend

DPM 80-90%

Advisory 5-10%

Execution - only <5%In

vest

men

t ser

vice

s

Inve

stm

ent v

ehic

les

Sources: Deloitte analysis, interviews with industry players

Mix Trend

Life insurance 33%

Investment Funds Up to 20%


14

Impact of MiFID II


15

MiFID II has had and will continue to have a significant impact on the EAM sector. First and foremost, the new directive and regulation has caused pricing structures to be reviewed and business models to evolve. Historically, the revenue model of many EAMs, in particular those focused on distributing third-party funds, relied significantly on trailer fees (commissions paid by fund creators for the distribution of their funds) and transactional retrocessions (rebates discounted from the fees charged by depositary banks to end clients). Today, EAMs can no longer accept such inducements when offering independent advisory or discretionary portfolio management services and must be able to prove “quality enhancements” on the end client side when providing non-independent advisory services.

As a result, retrocessions and trailer fees are being excluded, where applicable, from pricing structures, while management fees are being increased to offset inducements. We also observe that multiple depositary banks in Luxembourg have revised their fee-sharing mechanisms in response to EAM demand, implementing “brokerage fee collection” models to mitigate the cancellation of transactional retrocessions. Under such mechanisms, end clients are charged two distinct transaction fees in a fully transparent manner.

Pricing aside, many players are now reacting to the operational constraints brought about by MiFID II, and most players are shifting their focus further towards discretionary management, sometimes complemented by opportunistic execution-only business. Advisory services tend to be seen as too cumbersome to put in practice by EAMs due to the stringent suitability requirements (e.g., pre-trade suitability report, suitability test, etc.), and only a select few players are still seen as promoting this model.

In addition, players are shifting from a traditional open-architecture wealth management or discretionary management model and developing their own funds in order to minimize operational requirements and secure their revenue stream (through the fund’s management fee). This is seen as a key trend that may already represent up to 20 percent of AuM at some players previously operating under traditional managed accounts.

As a side effect of these changes, business development for EAMs tends to have slowed down in the past year as players have shifted their efforts toward achieving regulatory compliance and have increased thresholds in terms of client size (to between €0.5 million and €1 million in investable assets as a minimum). This may have an impact on the steady growth trend observed to date in total AuM as the inflow of net new assets (NNA) is likely to be reduced in 2018.

In addition, at the end of the year, both EAMs and depositary banks will have to comply with the transparency requirements in relation to post-trade costs and charges. At worst, and if this was not done previously, clients will be receiving an itemized overview of costs for the first time, which could lead to potential backlashes in terms of service pricing and in terms of financial instruments, demanding that investments are made via less costly packaged instruments (e.g., investment funds or structured products).

MiFID II has had and will continue to have a significant impact on the EAM sector.


1616



17

Evolution of operating models

In addition to changes in EAM revenue models, MiFID II and other regulations (AML, KYC, EMIR, etc.) have increased operational requirements for EAMs and most players have spoken openly about the challenges they face in addressing them. Examples of pain points for small structures include KYC, internal audit activities, and MiFID II-related reporting activities. While some players are seen to be late to fully comply with regulatory requirements, many value the proximity to the regulator throughout this transition.

Multiple approaches are being used to address MiFID II-related reporting obligations. Some of the more sophisticated players are investing in their own platforms to handle new reporting requirements, with banking institutions limiting themselves to making data available to EAMs, which they then handle for reporting. However, for the majority of players who lack scale, IT investments are generally lagging behind, and players are dependent on banking partners to produce their own regulatory reporting and end-client reports (e.g., 10 percent loss report).

EAMs typically rely on their depositary-banking network for brokerage, sometimes working with external brokers and in the case of larger, more structured players, having their own trading desk to trade in certain asset classes. Depending on the reporting approach chosen by the EAM as described above, the number of brokers might be restricted. For instance, if transaction reporting is delegated to depositary banks, the latter will not tend to agree to report trades executed with external brokers (RVP/DVP)3.

Finally, there is a growing trend towards the use of third-party portfolio management systems (PMS) by Luxembourg-based EAMs, despite some actors still relying on access to e-banking platforms to manage portfolios. While depositary banks are equipped to send data to EAMs, they are not necessarily ready to capture flows from an EAM PMS. Today, the level of automation of order flows is quite low, with most order instructions sent via e-mail, fax or phone to the banks’ EAM relationship managers or directly to the trading desks, and in addition, bulk orders are still an operational challenge for some EAMs and banks. From a banking perspective, this takes up time from EAM front office activities.

Multiple approaches are being used to address MiFID II-related reporting obligations.

173. Receive Versus Payment/Delivery Versus Payment



18

Digital adoption

While we are starting to see improvements in front-end solutions in the private banking space (on both the end client and relationship management fronts), digital adoption remains very low among EAMs. An important barrier to change on the end client side is the general mindset among EAM players who have had a loyal client base for a number of years and have not yet embraced the need for an improved customer experience. Nevertheless, clients are increasingly exposed to friction-less and digitized experiences (also in the financial space) and this aspect is likely to become a key differentiator in private wealth management, and eventually become standardized as a new generation comes to the fore. On the bright side, we are seeing the emergence of new players in the technology sector (“FinTechs”) in Luxembourg and abroad that are developing solutions for the wealth management sector and also focusing on EAMs.

For now, EAMs are likely to continue relying on depositary banks, which are developing their own tools to serve EAMs and end clients in-house. This creates significant friction in the client experience and fails to address the key paint points in a centralised manner, which include processes like account opening, repapering, and reporting.

Longer term, further professionalization and/or industrialization of investment management practices is expected—robots or AI could substitute human advisers for “basic” asset allocation and portfolio management. Adaptation to these changes could be critical and may further raise the minimum requirements to be in business; nevertheless, commercial skills, empathy and human interaction continue to be seen as paramount, as well as the ability to bring value-added wealth advice.

FinTechs are developing solutions for the wealth management sector and also focusing on EAMs.


1919



20

Depositary bank perspective

In addition to their own direct contribution, EAMs represent a significant part of the private banking infrastructure of Luxembourg’s leading banks. The sector generally represents between 10 and 25 percent of the overall private banking business of banks, and in total, at least 180 banking FTEs in Luxembourg in front office roles (i.e., EAM dedicated relationship managers, sales and business development), middle office roles (i.e., client operations) and management.

In spite of low revenue margins, the EAM business is an attractive source of recurring income for banks, which requires limited commercial activity compared to traditional private banking business development. In addition, AuM growth from EAMs has outpaced the

Relationships between EAMs and banking institutions are relatively stable over time. The first reason for this is the very high switching costs for end clients, including significant repapering and also financial costs. Another reason is that the top league of depositary banks in Luxembourg tend to offer broadly comparable levels of service quality and infrastructure, limiting explicit reasons for EAMs and clients to leave a given provider. In addition, EAMs have historically agreed to maintain multiple banking relationships as a way to maintain bargaining power and protect part of their revenue model.

In practice, we observe that some EAMs work with over 25 different banks, in Luxembourg and abroad, namely to accommodate client preferences and support commercial negotiations. However, with increasing reliance on banks to fulfil regulatory obligations, there is certainly an increase in complexity in partnering with multiple players and there is a view that some EAMs may choose to rationalize their depositary banking footprint. This could potentially lead to a higher concentration of Luxembourg-based EAM assets in Luxembourg depositary banks. Today, we already observe that 61 percent of Luxembourg and non-Luxembourg based EAM assets are concentrated in five Luxembourg depositary banks. In addition, while over a third of Luxembourg EAM assets are deposited in Luxembourg banks, growth in recent years for some banks has rather been found from new EAM relationships outside of Luxembourg.

overall private banking sector in recent years, increasing the attractiveness of this sector for banks. The lower but recurring revenue margins generated by depositary business with EAMs help banks cover their significant fixed platform costs. Beyond that, EAMs are seen as a source of new capability developments and innovation, often requesting new developments before traditional private banking clients. Nevertheless, given the shift of many EAMs towards fund structures, banks are sometimes exposed to significant revenue risk, which may call into question the profitability of the model in the coming years. This risk could be mitigated partly for banks with third-party fund management solutions that could be offered to EAMs in support of their in-house fund development plans.

Relative evolution of Private Banking and EAM AuM in Luxembourg

Index 100 = 2010

0

100

200

300

2010 2011 2012 2013 2014 2015 2016

AuM PB AuM EAM

CAGR 10 - 16

13.1%

5.0%

Sources: ABBL, CSSF, Deloitte analysis


21

Luxembourg-based banks offering EAM services are collectively harmonizing their offering and becoming more organized, as reflected in the recently founded Luxembourg Banking Association (ABBL) EAM working group. There are also new banking players entering the Luxembourg market with EAM capabilities, strengthening the country’s positioning as an EAM servicing hub. Overall, banking infrastructure is generally seen as good at the top end of the market, but sometimes expensive compared to banks in other European countries.

In addition, banks in Luxembourg have played a key role in raising operational and compliance standards for the EAM sector in the current regulatory context, as they are often first in deploying new compliant business approaches and are able to extend their new standards to the EAM market. Most banks have also developed capabilities to handle transaction reporting, tax reporting, and other operational services for EAM clients, sometimes with the support of third-party solution providers. These new services have, however, already become part of the basic value proposition and have typically not resulted in pricing or value enhancement for banks.

Market share AuM1

Top 5 61% > 3.5 €bn

Top 10 84% > 1.3 €bn

Top 15 99% > 0.8 €bn

Over half of EAM assets deposited in Luxembourg are concentrated in 5 banks

Split of assets deposited in Luxembourg banks, by EAM location, €bn

Over a third of total assets deposited in Luxembourg banks are managed by Luxembourg EAM

Relationships between EAMs and banking institutions tend to be stable overtime but more concentration may be expected.

Total LU EAM UK EAM FR EAM CH EAM Rest of world


1. Minimum assets deposited per bank in league

39.5 14.2

6.4

3.9

2.512.4


22

Luxembourg as an EAM hub

Quality of banking infrastructure and role as an EU gateway are key strong points of Luxembourg for international EAMs

Luxembourg is well-positioned in regards to EAM business, both from the banking and the EAM perspective. In addition to the quality of the banking service infrastructure, EAM players value the cross-border service mind-set and capabilities available in Luxembourg, as well as the flexible open-architecture model and diverse investment product framework. The EAM sector also benefits from the Luxembourg wealth management “toolbox”, which consists of a set of wealth-related products, services, skills, and expertise developed by

a variety of professionals to cater to an international client base. Luxembourg also provides a solid ecosystem to support EAM players including lawyers, auditors, consultants, and advisors specialized in the financial sector, as well as technology providers, often operating as Support PSFs. In addition, proximity with the regulator (the CSSF) is also seen as a key enabler when navigating through the current regulatory challenges, in particular in light of how recent regulation is affecting current and future business for the sector.


2323


Certain characteristics differentiate EAMs from their private banking peers. EAMs can afford to offer a higher degree of personalization in the quality of service delivered and also through tailored investor profiles and investment strategies, compared to scalable portfolio models and automated asset allocation strategies, typically being implemented by private banks. Furthermore, EAMs are also able to make use of the cross-border license while benefiting from a higher degree of flexibility compared to banks when it comes to business development. Finally, their status as PSF (“pick and choose” license system) and smaller size allow them to manage their offering in a much more agile manner and to partner with other professionals to offer bespoke services to clients (e.g., planning and structuring, succession, tax advice, etc.).

A continued shift from the private banking sector to the EAM sector can be expected as senior banking staff seek independent wealth management venturing options,

or as consolidation among banks drives senior banking teams to explore alternative routes. New international players, (e.g., Swiss players) are also expected to continue setting up firms in Luxembourg to establish efficient access to the EU market.

On the other hand, sector challenges are such that many firms, in particular the smaller ones, may face significant hurdles leading to potential exits, partnerships, and other consolidation options. Consolidation activity may, however, be limited by risks such as client attrition and key staff

EAM sector outlook and future models

Future EAM success will likely demand development of asset management and digital capabilities.

retention, especially in cases where key managers are approaching the later stages of their career.

In conclusion, to address these challenges, we expect future success factors to include the development of new fund management and asset management capabilities (to secure revenue and improve efficiency to clients) as well as digital capabilities (to improve client experience), in parallel with the preservation of the sector’s strong relationship and wealth management capabilities.

Operational innovation and automation

Digital capabilities

Asset management expertise and own funds

Future model

Contacts

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Deloitte Luxembourg560, rue de NeudorfL-2220 LuxembourgGrand Duchy of Luxembourg

Tel.: +352 451 451www.deloitte.lu

PSF

Raphaël Charlier Partner - PSF Industry Leader +352 451 452 258 [email protected]

Investment Management

Tax

Accounting

Vincent Gouverneur Partner - EMEA Investment Management Leader+352 451 452 451 [email protected]

Eric CentiPartner- IM Tax Leader +352 451 452 [email protected]

Alexandre Prost-Gargoz Partner - Corporate & Accounting +352 451 454 407 [email protected]

Private Wealth Management ServicesBenjamin Collette Partner - Financial Services Industry Leader +352 451 452 809 [email protected]

Pierre-Jean EstageriePartner - Deloitte Private Industry Leader +352 451 454 [email protected]

Advisory & Consulting

Governance, Risk & Compliance

Laurent BerlinerPartner - EMEA FSI Risk Advisory Leader +352 451 452 [email protected]

Eric CollardPartner - Forensic & AML, Restructuring+352 451 454 [email protected]

Xavier ZaegelPartner - Capital Markets/Financial Risk Leader +352 451 452 [email protected]

Jean-Philippe Peters Partner - Risk & Capital [email protected] +352 451 452 276

Strategy & Corporate Finance

Pierre MassetPartner - Corporate Finance Leader +352 451 452 [email protected]

Technology & Enterprise Application

Patrick Laurent Partner - Technology and Innovation Leader +352 451 454 [email protected]

Roland Bastin Partner - Risk Advisory +352 451 452 [email protected]

Stéphane HurtaudPartner - Risk Advisory +352 451 454 [email protected]

Operations & Human CapitalBasil SommerfeldPartner - Operations & Human Capital Leader+352 451 452 [email protected]

Pascal EberPartner - Operations & Human Capital +352 451 452 [email protected]

Regulatory Strategy

Lou Kiesch Partner - Regulatory Consulting Leader +352 451 452 [email protected]

Pascal MartinoPartner - Banking Leader+352 451 452 19 [email protected]

Benjamin Collette Partner - Financial Services Industry Leader + 352 451 452 809 [email protected]

Marie ArguelloSenior Consultant - Strategy, Regulatory & Corporate Finance+352 451 452 [email protected]

Authors

Independent Wealth Management in Luxembourg · EAM (External Asset Manager) or IAM (Independent...

Documents

Transcript of Independent Wealth Management in Luxembourg · EAM (External Asset Manager) or IAM (Independent...