During these years, Luxembourg private banking has, of course, gone through a large number of transformations, all headed towards enhancing the professionalization of the sector. This has, de facto, compelled the sector to raise the bar even higher in terms of product offerings, professional skills and competences, and customer experience.   
 

In light of the significant development of the sector and the various transformations that have taken place, the Luxembourg Bankers’ Association (ABBL) and KPMG Luxembourg have initiated a study assessing the development of the private banking industry in Luxembourg and the performance of Luxembourg-based private banks.

This research provides an analysis of 40 private banks on data ranging from assets and liabilities distribution, income and cost structure, FTE allocation, service offering, operating model and sourcing to regulatory key performance indicators (KPIs).

Jean-Pascal Nepper, Partner, Head of Banking & Insurance at KPMG Luxembourg explains: “Over the years what is expected from the private banker and more generally the private banking sector has tremendously evolved – new needs, new products and positioning as well as new talents. While the sector is known as a traditional bulwark against frivolous trends, I was happy to see bankers being open to new trends and innovation to better serve their existing and new clients. There is in Luxembourg a real breath of fresh air that will certainly sustain the competitiveness of the market to put the country even further at the center of the private banking world map”.  

Pierre Etienne, Chairman of the ABBL Private Banking Cluster remarks: “With the majority of private banks part of our Private Banking Cluster, we have a unique access to current data and trends. The ABBL conducts regular surveys with members, and by monitoring this data closely and sharing the results with our members, they are in the best position to take decisions on future strategies and issues.”

A consolidating private banking sector in Luxembourg

The net number of private banks in Luxembourg — taking into account mergers, wind-downs and new entrants — decreased by 18% between 2015 and 2020. While the total figure has been stable over the past two years, it is likely that this downward trend will continue in the future.

The decrease can be explained by a number of factors, all aligned and associated with the necessity for private banks to have a larger critical mass in terms of assets under management (AuM) and a leaner operating model allowing for a more balanced cost-income ratio and, hence, a sounder financial performance.

More than a decade of AuM growth and an accelerating trend

As a result of 12 consecutive years of growth, the Luxembourg private banking AuM reached a total of EUR508 billion at the end of 2020 — more than double their 2008 level. Luxembourg private banks have been accelerating their transformation processes and have heavily restructured their go-to-market capabilities, including upskilling and/or engaging more highly skilled front office staff with an enhanced sales mindset in order to reach a different, wealthier category of (U)HNWIs.

In addition, as a result of Brexit, Luxembourg emerged as one of the favored locations of UK-based private banks. This concentration of the best private banks in Luxembourg gives a real credibility to the financial center: the best attracts the best and clients feel all the more secure.

The Luxembourg private banks put to the test

A new skills-led approach needed

Luxembourg attracts an active, mobile and demanding international clientele. To satisfy these clients, private bankers need to display a wide range of skills that goes beyond the mere provision of investment advice.

Aside from this, private banks must also attract the right talent. As the search for top talent becomes increasingly competitive and job seekers have much more control, employers have no choice but to stand out from the competition. Today’s workers are looking for more from their jobs: they are looking for a way to make a mark on society.

A shift in the investment service offering

The industry has been shifting towards a fee-based model, where private banks charge clients directly for investment advice. This trend hasn’t yet showed its full potential, as a large proportion of 2020 AuM still remained in cash or execution-only services

Furthermore, integrating private equity investments into private banks’ offering has become essential to meet clients’ changing needs and expectations. Private equity investments represent a unique opportunity for private bankers to further enhance the added value they offer their customers. Customers’ demands have also changed over the last few years, with sustainable and ethical investments, and investments focused on very specific sectors or startup companies, increasingly being requested.
 

Importance of digitalization and ESG on the rise

Banking professionals have put sustainable finance at the top of their agendas and are now moving from defining their environmental, social and governance (ESG) ambitions to the operational process. Since the 10 March 2021 entry into force of SFDR Level 1 — the first step in the rollout of the Sustainable Finance Disclosure Regulation (SFDR) — there’s an increasing demand from customers for sustainable and responsible financial products.

Overall, the main challenges will lie in dealing with the flow of non-financial information and having to implement a strong ESG data management system, along with the related governance. There will be a need to understand clients’ demands and to translate them into concrete investment decisions.

Last but not least, faced with an unprecedented crisis over the past 18 months, private banks have been compelled to accelerate some of their digital projects that were quietly waiting in their drawers. However, as we all know, private banking remains an activity very much centered on people and relationship management.

Although digital can undoubtedly help, human interactions will remain more important than ever to maintain a customer experience of high quality, thereby ensuring strong client loyalty and advocacy in the long run.