Throughout its history, the role of private banking has always been to serve high net worth clients. The exponential development, at the global level, of the segment of the “super-wealthy” or “ultra-rich” has therefore drawn the attention of all the private banks on the planet, which are remunerated on the financial products sold, as well as on advice given to clients.
To join the ultra high net worth individuals club, one must have assets of at least $30m. While this sum may seem staggering to the general public, it is nonetheless a reality in the bank accounts of a growing number of wealthy people. Thus, since 1995, the world population of UHNWI has tripled, with collective total wealth of 31,000 billion dollars.
UHNWI in Luxembourg
While the increase is notable, the distribution of this ultra-rich population around the world is quite unbalanced. According to the World Ultra Wealth Report 2019 published by Wealth-X, the United States is still the largest pool of UHNWI in the world. However, it is in China that this population has developed the most in recent years: between 2018 and 2023, it is expected to increase by 62%, from 3,480,000 to 5,647,000. UHNWI density is also highest in Hong Kong. There are 1,364 UHNWI per million adults, a figure much higher than that of the countries or cities which follow in the ranking, namely Switzerland, Singapore, Monaco and... Luxembourg.
The logo of Banque international à Luxembourg is seen on a mobile phone, March 2019. Photo credit: Piotr Swat/Shutterstock.com
One can understand why Luxembourg’s private banks have made this population one of the prime targets of their activity. “Each year, various studies carried out demonstrate it: the ultra-rich are more and more numerous, here as in other regions of the world. Most banks are therefore seeking to develop their offer to better serve this category of people,” says Raoul Stefanetti, head of private banking at Banque internationale à Luxembourg. “In our own clientele, we see that small accounts have been replaced by larger portfolios. At the end of the day, we may have a few fewer clients, but more assets under management.”
A complex segment
It is an understatement to say that the banks are bending over backwards to attract UHNWIs. All over the world, financial institutions are reconfiguring their organisations to better capture their attention, to better serve them.
Thus, the Swiss banking giant UBS recently announced the split of some of its activities into three separate entities. This decision, which could lead to the elimination of 500 positions, has a stated objective: to focus on the ultra-rich clientele, which offers the greatest potential for growth in the coming years.
Pictet Wealth Management, another Swiss bank based in Luxembourg, has not come to this extreme conclusion. But it can already count on a clientele mainly made up of UHNWI.
“In 2018, 63% of all assets under management at Pictet Wealth Management were brought in by clients worth more than $100m and 19% of these assets came from UHNWI with between €120m and €160m in wealth. Two-thirds of our funds are devoted to this segment,” says Christophe Deltomme, head of wealth management at Pictet Wealth Management Luxembourg. “This significant volume allows us to develop a diversified offer, especially aimed at UHNWI clients, particularly in private equity, hedge funds, etc.”
The UHNWI segment, while constituting an important source of income for private banks, is also particularly complex. It requires special expertise, dedicated to this audience.
“This is indeed a very demanding category of customers,” says Deltomme. “This is very positive because it pushes us to constantly improve ourselves. UHNWIs, like some institutional clients, often have specific skills for managing their assets. When they call on a private banker, it is very often to mandate them as the conductor of a symphony, who manages a set of issues and can provide real added value, beyond just operational management.”
“The richer they are, the more this clientele has varied needs,” adds Stefanetti. “These profiles are looking for more than a wealth manager: they want to be able to count on a true partner, capable of having a broad vision and skills.”
Skills, but not only
It is therefore obvious that the first tool available to private banks to target the ultra-rich are the skills they have internally. “BIL has existed since 1856 and has therefore acquired significant expertise in relation to this clientele. We are particularly competent in the field of cross-border deals. However, knowledge of the legal and fiscal environment in different countries is a real asset in the eyes of UHNWIs, who often invest internationally and have assets spread over several countries,” states Stefanetti.
Pictet can also rely on its long experience in the sector. But the institution also points to other essential elements in order to stand out among this particularly demanding clientele.
“The flexibility, availability and know-how of our teams are obviously fundamental criteria if we want to convince the very wealthy,” says Deltomme. “But we also find that our UHNWI clients are sensitive to the values of a centuries-old group like ours, including its independence, stability and strength. This is particularly the case for young entrepreneurs who have made their own fortune, and there are quite a few of them served by our institution.”
If skills are essential to meet the varied demands of UHNWIs, it is also because more and more of them are interested in alternative products, which require broader knowledge. “It’s great to want to invest in other areas, but you still have to have the expertise to do so, also taking into account the client’s risk appetite,” says Deltomme. “For UHNWIs, it is in implementing these diversified strategies that the importance of using a private bank becomes clearer.”
Products for UHNWI
Following a trend that is turning out to be global, the ultra-rich are in fact also interested in new forms of investment, in particular unlisted investments such as private equity.
“UHNWIs are certainly well enough placed to know that the returns on traditional investments are lower than what we have experienced in the past,” explains Deltomme. “There is therefore a shift towards more tangible investments, such as real estate or private equity. But that’s not the only trend. The great fortunes of today are part of a new generation who, far more than previous ones, care deeply about the future of the planet. Sustainability is therefore an essential criterion in the choice of their various investments.”
Photo credit: John Schnobrich/Unsplash
Even though it is first and foremost the result of real awareness, this concern for investing in a sustainable manner also meets the imperative of profitability. “Companies that are not concerned with environmental issues, in particular, are finding it increasingly difficult to obtain financing. And this phenomenon should become stronger in the coming years. So these are no longer really investments of the future for investors,” reckons Deltomme.
Stefanetti confirms this attraction of UHNWIs for ESG-oriented investments (environment, social and governance) and the importance, for a bank like BIL, of being able to offer this type of investments. “This is especially the case for a young clientele. And by ‘young’ I mean people under the age of 60,” he says.
Digitisalisation for the customer... and the bank
The most sophisticated portion of private bank customers, the ultra-rich category is particularly demanding. This requirement applies to the skills of the teams to which this clientele calls upon, to the products offered to them, but also to all of their interactions with the bank. Regarding this last point, one can only note the rejuvenation of the UHNWI population and its greater familiarity with digital tools.
“The digital revolution is here, and we cannot afford to ignore it,” comments Deltomme. “Our ultra high net worth customers also expect to be offered tools that make it easier for them to interact with the bank. But, beyond this aspect, we must not lose sight of the fact that digital transformation is also an opportunity for the bank itself. Artificial intelligence makes it possible, for example, to optimise data management or risk management.”
These tools will therefore make it possible to make investment strategies safer, but also to get to know clients better and, therefore, to be able to offer them the best services and products according to their habits. “In addition, a bank that has fully embraced the digital transformation will also always be better perceived by the young talents who could join it. It is therefore also a recruitment issue,” adds Deltomme.
For many banks, however, digitalisation efforts are focused on the customer experience side, with the aim of making the institution more attractive to this highly sought-after clientele.
“We are constantly working to improve the customer journey,” says Stefanetti. “We have therefore taken care, in the first place, to develop an application that works well and a site offering many possibilities to our customers. Recently, we have also been looking, among other things, to digitise the presentation of our various funds. It’s a job that never stops.”
Beyond its interest for clients and bankers themselves, the use of digital tools is also necessary to comply with certain regulations such as Mifid II. “It is clear that the regulator also expects each bank to offer tailored solutions to meet these regulatory requirements. In terms of cybersecurity, digital technologies can also be a valuable asset for banking institutions,” says Deltomme.
The human element
The fact that digital transformation is at work in private banks, as in all industries, is no surprise in itself. A study published by KPMG and ABBL last year made it possible to measure the state of digitisation in this very important sector for the Luxembourg economy.
While almost half of the private banks polled felt well behind their competitors with regard to digitisation, many efforts have already been made by the sector.
Within private banks, it seems that initiatives related to digitisation are mainly focused on improving the efficiency of internal processes (89%). This goal is closely followed by optimising the customer experience (83%) and freeing up customer service schedules (28%). This saved time should, logically, allow sales teams to be closer to customers, to strengthen a relationship in which trust is essential.
These figures therefore show that the human relationship continues to be of considerable importance within private banking. It also emerged from this same study that only 15% of private banks give their customers the opportunity to use a robo-advisor, i.e., an artificial intelligence capable of delivering financial advice and automatically manage a portfolio of assets. The majority of these institutions believe that clients are above all looking for a lasting relationship with an account manager. And, according to the speakers interviewed for this article, this would also be the case for UHNWIs.
“We would rather speak today of an increase in digital in terms of the support offered by the banker," said Deltomme. “The advice of an account manager and the personalisation of their relationship with each client remains essential for UHNWIs and others who use a private bank.”
Stefanetti agrees: “When it comes to a particular loan or investment, it is always necessary to get personalised advice, an explanation. A machine can’t do it.”
Where are the rich?
While everything is in place to attract UHNWIs to Luxembourg private banks, it is still necessary to know where to find them. Traditionally, Luxembourg institutions have rather developed a European clientele. But will this be enough in the future?
Hong Kong has one of the highest density of ultra wealth residents in the world. Photo credit: Thom Masat/Unsplash
“The very wealthy often divide their lives between several regions of the world, between different jurisdictions. Luxembourg, in addition to its European clientele, also attracts other large financial bases, particularly from South America,” explains the head of wealth management of Pictet. “However, it is clear to everyone that the strongest growth of this clientele is observed in Asia and that efforts must be made to be present with this new audience. For our part, we have constantly strengthened our presence in Asia, with banks in Hong Kong, where we have been present since 1986, and Singapore, where we set up in 1995. It is important to be physically present on site to provide adequate quality service to our customers.”
North America is certainly still the world’s most ultra-rich territory, followed by Europe and Asia. But the growth of Chinese customers has not escaped the industry’s notice. “When we talked about private banking customers in China in the past, we often talked about Hong Kong. However, today it is cities like Beijing and Shanghai that are seeing their number of UHNWIs increase very strongly,” explains Stefanetti. “We recently opened a representative office in China, in Beijing. Our ambition is obviously to take advantage of the growth of the Chinese market to develop in this geographic sector. In Luxembourg and Switzerland, we have also hired relationship managers who speak Chinese, in order to facilitate contact with this clientele.”
For BIL’s head of private banking, it is not necessary to be a major player at the global level to succeed in this market with strong potential. “A bank like BIL is positioning itself in China as a niche player, which capitalises on its high-end service. We believe that this positioning can appeal to this region of the world.”
Seducing capital
If the private banks established in Luxembourg are trying to appeal to Chinese customers, what could encourage the latter to entrust them with the management of its important assets? “I think Luxembourg enjoys a good image in China,” comments Stefanetti. “This is due in particular to the efforts made by the grand duchy’s government to make the country and its banking sector known there. Luxembourg for Finance has invested heavily in China in particular. As a result, many Chinese banks have made Luxembourg their European hub. This is already a very important achievement.”
On paper, Luxembourg has several strengths: central location in Europe, triple A credit rating, a high level of political stability, clear and solid regulatory framework, regulatory body that favours good collaboration with financial institutions...
“Luxembourg has also managed to bring together in one place an entire ecosystem dedicated to the needs of UHNWIs,” adds Deltomme. Consultants, mancos, tax specialists, art investment specialists... It is rare to find such a concentration of talent in one place, which makes things easier for people who have to call on these different services. And then, multilingualism is also generalised in the country. This is not the case everywhere, and it is a real plus for many UHNWI customers.”
The presence of all these players in the territory therefore causes a multiplier effect, which makes it possible to attract customers and new structures dedicated to them. “Recently, a master’s degree in wealth management was also created at the University of Luxembourg. This adds a new level to this already very complete structure.”
More challenges to overcome
Does this mean that Luxembourg's private bank and the country as a whole have all the cards in hand to benefit from the global growth of the UHNWI population?
The logo of the Swiss financial group Pictet is seen on a Luxembourg office building, January 2019. Photo credit: Kent Johansson/Shutterstock.com
“Luxembourg is already essential for UHNWIs who want to have a foothold in Europe. That said, we can always improve certain things,” in Deltomme’s view. “If I had to highlight one point that we can still work on, it would be access to real estate. Given the habitual lifestyle of this clientele, it is indeed clear that Luxembourg suffers from a deficit in exclusive and exceptional property. If we want to attract more UHNWIs to the country, we should give them access to a more comprehensive offer in this area.”
Praised for its particularly suitable legal framework, the grand duchy could also acquire other tools capable of making the country more attractive. Stefanetti believes: “private trusts would be a valuable addition to the toolbox already in place within Luxembourg structures. This bill, which was presented in 2013 and since abandoned, could, in our opinion, be revived. It would equip Luxembourg with a competitive entity in terms of asset structuring and planning. This tool could in particular be a suitable solution for residents who wish to administer and pass on an estate to their children.” A new arrow, in short, in the quiver of the ultra-rich hunters in Luxembourg.