Evolution of private banking

Luxembourg is the leading private banking centre in the Eurozone with a client base of over €300 billion of assets under management. In a business friendly and stable environment, private bankers have acquired a long track-record of serving international clients with complex business and family profiles spanning multiple jurisdictions and continents. Luc Rodesch, Head of the Private Banking Group Luxembourg, took time out of his busy schedule to discuss what has driven the recent evolution in private banking and where the future lies in this increasingly complex, transparent and fast changing world.
 
In the 1970s, Luxembourg became a private banking centre for middle income professionals from neighbouring countries but in recent years there has been a shift in the Grand Duchy’s private banking business model. One third of clients are now high-net-worth individuals, who are internationally mobile and not resident in Europe. Moreover, their share is continuing to grow.
« We observe a shift in assets from the affluent client segment to the ultra-high-net-worth segment. Since the financial crisis, these clients have become very concerned about the protection of their capital, so the stability of the financial centre and of the different banking institutions is key. International clients are especially looking for stability from a political, economic and social point of view but are also seeking stability in terms of legal, regulatory and tax frameworks and in these areas, Luxembourg is definitely best in class, » explains Luc Rodesch.
 
Cross border expertise
 
Clients with assets over €5 million represented 63% of total assets under management in Luxembourg private banking in 2014. In contrast, the number of clients with assets of less than €500,000 continues to decrease.
« The reason we are attracting high-net-worth individuals is not only because of our cross-border expertise but because we invest in building a long-term relationship based on mutual trust. This trust is reinforced by a strong and stable institutional framework, notably in the area of regulation. Luxembourg is well-known for the high degree of professionalism and rigour exhibited by its regulator and this is a very important aspect for the client in terms of investor protection. »
 
New opportunities
 
Wealth managers have developed their value propositions, and the banks have invested heavily in technology, training, and IT infrastructure. These investments also aim at ensuring the sector can react quickly and efficiently to regulatory changes and switch smoothly to the automatic exchange of information which became effective in January 2015.
« Tax transparency is a big opportunity for private banking in Luxembourg because each and every client has to be fully compliant not only with the Luxembourg laws, but also with the relevant national and international legislation. Mastering the legal and tax system is relatively straightforward as long as a client operates in a single country, but if for professional or private reasons, a client is operating simultaneously in different countries, it quickly becomes highly complex, especially if the systems are changing over time. »
Despite all the « harmonisation » efforts in Europe, the European Union (EU) is a grouping of 28 very different countries in terms of their respective legal, regulatory and tax frameworks, which still makes it difficult to operate cross-border.
« This is where Luxembourg has developed a unique multi-jurisdictional know-how. We have developed the capacity to handle different legal systems and combine constraints of different countries, » points out Rodesch.
 
Diversifying services
 
Luxembourg’s « cross-border » expertise provides private bankers with a unique selling proposition that they can offer to an international clientele that is increasingly sophisticated and demanding. Private bankers can offer an extensive array of wealth management options, as a comprehensive range of services.
« The needs of our clients are changing over time and this means that our advisors have to be proactive in terms of advisory solutions and more mobile because many of our clients expect their advisors to meet them in their country of residence. »
 
Staying one step ahead
 
In addition, Luxembourg’s « first mover » strategy in implementing financial regulation also enables the sector to stay one step ahead of the competition. The banks are constantly exploring new business opportunities, for instance by being a « first mover » in targeting the Family Office niche or by positioning themselves as providers of sophisticated services to international clients with complex profiles.
« The service offering provided by Luxembourg private banks continually evolves. We have new Swiss banks opening branches and subsidiaries in Luxembourg, as well as new Chinese banks. The offering is very complete and stretches beyond asset management and investment solutions. Let me mention for example our legal options, which encompasses the different solutions that help our clients to optimise the ownership but also the transfer of ownership of different assets. In Luxembourg, we have also developed synergies between the private banking industry and the investment fund industry, so we have the possibility of setting up investment funds for families or private clients in the field of private equity, real estate or socially responsible investments. Other areas where Luxembourg has positioned itself as a centre of excellence is philanthropy, notably through the creation of the « Fondation de Luxembourg », an umbrella foundation hosting different private charity projects for private clients. Luxembourg was also one of the first countries worldwide to introduce a law to regulate family office activity. »
 
Innovation through technology
 
Standing out from the crowd requires relentless innovation and strong leadership. Luc Rodesch believes that the strategy of investment in training and improving efficiency through technology will ensure that private banking remains at the heart of the Luxembourg Financial centre.
« Increased complexity leads to increased costs and the cost management challenge is addressed through investing in technology. Moreover, recruiting and training competent managers is also essential to meet the changing needs of clients together with the Luxembourg school of Finance, we have developed a Master programme in Wealth Management and intend to introduce a mandatory certification for all client-facing advisors. Luxembourg has a unique mix of different competitive advantages that one does not find in any other financial centre, so that we enter 2015 feeling more confident than ever and fully-prepared to continue to attract new clients from all over the world».
 
Communiqué par Luxembourg for Finance// Source photo: Luxembourg for Finance