The value of global assets has returned to pre-crisis levels and yet profit margins in private banking and wealth management are under strong pressure across the globe. This is the conclusion of PwC's recent survey entitled "Navigating to tomorrow: serving clients and creating value" canvassing 200 financial institutions in more than 50 countries worldwide, including Luxembourg. The Luxembourg banks that responded to the survey account for more than 40% of all assets held in Luxembourg private banks and represent a broad variety of business models operating in Luxembourg's financial centre. The study points out that the profile and needs of private banking clients are changing fast as they seek more secure and ethical investments in a global environment which offers very uneven growth prospects. Five key points emerge from this study:

Planning for automatic information exchange

Luxembourg banks must prepare for the automatic exchange of information which will become effective in 2015.

"Private banks must accept that compliance and risk management remain a high priority. In order to overcome tax transparency challenges and downward pressure on prices, private banks must not only review their client base and decide which clients have strategic value, but also invest massively in their systems in order to remain profitable, compliant and competitive in terms of service provision. Financial institutions that have already undertaken such measures have seen their cost/revenue ratio reach levels close to the global average, whereas this ratio was lower in the past. Operational efficiency remains a real challenge." says François Génaux, partner and Financial Consulting Leader at PwC Luxembourg.

In order to reach their objectives in terms of service levels and productivity, Luxembourg banks have acknowledged the need to invest in their core systems (e.g. back office, middle office, reporting and mobile solutions). Client relationship managers (CRM) will also need to adapt in order to attract new market segments and High Net Worth Individuals . Such an investment effort will be challenging, especially considering the muted revenue growth prospects in Luxembourg (estimated at 7% in 2014) in comparison to its main competitors (18% in Switzerland and 21% in Hong Kong and Singapore).

Adapting to changing markets and clients

Private banking and wealth management continue to register moderate growth in mature markets (+8% in 2013). This stands in stark contrast to the comparatively high growth in emerging markets such as Hong Kong and Singapore (+16% respectively in 2013). This two-speed global market is now firmly established and is also affecting Luxembourg. However, the country should benefit from a renewal of its client base. Although the share of inherited wealth clients has dropped (from 77% in 2007 to 52% in 2013), that of entrepreneurial clients has increased and is now comparable to that of Switzerland (44% and 48% respectively). Luxembourg's neighbours continue to constitute the main client base for private bankers, who have yet reiterated their ambition to set foot in new markets, notably by opening branches and subsidiaries in Eastern Europe, Russia and Asia.

Some banks have begun recruiting professionals with extensive knowledge of Luxembourg's structuring solutions as well as solid sales skills in the language of their target clients. Most banks, however, have limited their efforts to training their CRM to better respond to their clients' needs. Private banks in Luxembourg must also adapt to a rapidly changing client base, with the emergence of new client profiles and new needs. Indeed, clients from the Y generation who are very keen on technology may have a different outlook to that of their elders. Such generational differences must be fully understood by CRMs in order to ensure long-lasting client relationships. There are also substantial opportunities for growth as regards women, who are increasingly gaining access to top-level positions. CRMs will also be required to adapt their business to an ageing population by offering services such as succession planning and retirement funding.

Training client relationship managers

Recruiting and training competent managers is essential to meet the changing needs of clients. In fact, 56% of the Luxembourg private banks that answered the survey stated that training client relationship managers and retaining the best talents was a challenge. Another key issue highlighted by respondents was ensuring compliance between HR policies and regulatory requirements, especially in terms of financial incentives and bonuses.

Standing out from the crowd and improving efficiency through technology

Online services have become the norm and clients now have numerous ways to access and research banking data. Today, wealth managers must be able to keep in touch with their clients at any time, anywhere and whatever system they may be using. Although only half of the surveyed banks in Luxembourg currently offer their services via tablets and smartphones, 88% of respondents aim to offer such mobile services within the next two years.

Compliance and reputation concerns

In 2013, compliance risk and reputational risk were the foremost concerns expressed by Luxembourg private bankers. Regulatory requirements are indeed becoming more stringent and complex. The related risks and potential impact on banking activities are high and often require the development of a dedicated strategy. Although the cost of compliance is increasing globally, it should remain under control in Luxembourg (+3% on average for 2014) compared to other financial hubs (+10% in Switzerland and +11% in Hong Kong and Singapore).

Moreover, client trust remains an issue despite the banking sector's efforts to recover from the scandals which have tarnished its reputation on a global scale.

"Tax transparency will allow Luxembourg banks to plan for the future and move on. Luxembourg has a lot going for itself, especially in terms of security, political stability and structuring potential. Luxembourg offers unrivalled possibilities as regards the launch of new wealth management solutions, such as the private foundation. These distinctive solutions are tailored to clients with specific cross-border wealth management and succession planning  needs. Such international clients will be able to rely on Luxembourg's financial centre with confidence, as the country abides by all European and international rules regarding information exchange." concludes Rima Adas, partner and Financial Services Leader at PwC Luxembourg.

The publication "Navigating to tomorrow: serving clients and creating value" can be downloaded from PwC Luxembourg's website.