This isn’t an article about wealth management trends only, but a story inspired by what clients in the industry are living nowadays. Taking into account their anecdotes and questions, and the Wealth Management Forum held in Crystal Park in early November as an invaluable information source, we’ve written down this nice (and we think) enjoyable story.
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The old English man whose father had amassed a fortune over the past decades is overwhelmed. The time to transfer the family art business to his children has come. He knows the XXI century is turbulent. The world isn’t what it used to be. “This new fangled thing they call AI,” he sighs, “what does it have to do with my paintings?”
His younger son is an art curator and a self-proclaimed e-impressionist. “The painter”, as the old English man calls him, has no clue about the business behind art, and how the rarity of the pieces that the genius of Gauguin, Rodin, Sorolla and Degas created, has driven up market prices. Does he know that Pablo Picasso dominates the modern art segment with a 2017 auction total of 446 million dollars? No. He does not.
The Global Art Market turnover has grown by 456% in 20 years. An increasing number of museums around the world (more than 700 opened in 2017), the internet (a fast-diffusion machine that helps increase prices), and both new payment and delivery means and increased transactions fluidity, are driving this growth.
The old English man’s daughter works as a lawyer for a prestigious tax firm in the City. Although she understands the art business, she prefers to deal with real life cases, and avoid the artists’ delirium that she will be forced to learn to be able to join the profitable business her grandfather started and her father made successful. “But you don’t have to”, he told her the last time he tried to convinced her to take over the family business, “your brother can help you out”.
Wealth management and new generations, what’s at stake?
Less than 30% of family businesses are prepared to transfer their wealth to the next generation, the old English man learnt from a colleague the other day. The feeling of not being alone was comforting but it didn’t solve his current challenge: he doesn’t want his 80-year old business to be diluted in the years to come because of the lack of a proper transfer plan and someone in the family committed to take it to the next level. How to reconcile the passion and profitability he wonders every now and then when he thinks of his children and managing art as an asset.
Pushed by the digital whirlwind, blowing in all possible directions, the old English man bought a tablet and now he cannot get rid of it. Financial news, market prices, regulation updates, you name it, he gets valuable information in the blink of an eye or, rather, with the aid of an enter button and its obscure algorithm. He feels “digitalised” and that’s comforting; after all, that’s what wealth management trends are asking for.
While browsing the news on family business issues and assets transmission in which he’s been always interested, he came across these discouraging statistics for wealth managers: 20% of the assets managed by them will be lost at the time of the transmission to spouse. It rises up around 50% when the wealth is transmitted to the children. The old English man put the tablet to sleep and look to the rain behind the fogged window: he wanted his business to survive, no matter what.
Did you know? Last year, billionaires’ assets grew by USD 1.4 trillion to USD 8.9 trillion worldwide– the most substantial annual increase and the greatest wealth ever. There were 332 new billionaires, 199 of which self-made entrepreneurs. (Source: PwC’s Billionaires Insights)
That Brexit morning and the decision the old English man made
Only 15% of family businesses have a transfer plan, the old English man read in a PwC report that cold and grey morning. London didn’t feel any more like the city he enjoyed in his 40s, when the Berlin wall fell down and kept the world breathless. “Isn’t it ironic?”, he said to himself when his mind recalled Brexit. “Physical walls are easier to bring down, because their presence is a provocation; Brexit is an invisible wall we decided to build and its long term aftermath isn’t foreseeable.”
Suddenly, he stood up and quit the coffee shop. “If I wanted to leave London, where could my business and I relocate?” he asked the representative at the private bank managing his assets by cell phone. That noon, during lunchtime, his wealth manager had already thought of a couple of destinations where the bank had European branches. ““Think of this tiny powerful country, it has been rated a consistent AAA over the last years, and it’s becoming the new house for asset managers, life-insurance companies, banks and fintechs after the Brexit vote.” The old English man had a hard time locating Luxembourg on his tablet’s map.
After the lunch, the wealth manager exchanged a couple of emails with the old English man. He added some key trends on the industry, including this one: only 25% of wealth managers go beyond email when it comes to using digital tools (and he was one of them!). Thoughtful but excited, the old English man decided to travel to the continent. Luxembourg City awaited him.
The days before his trip held a surprise, though.
Wealth Management Trend 1:
Wealth management players are diversifying. Although private banks still drive the industry, there are more and more players – life insurance companies, independent asset managers, multi-family offices, among others – that add complexity to the field.
Taking a break, or how things are chained
Fired. All those years, all her knowledge, all the nights she didn’t sleep to meet evil deadlines ended up suddenly when the old man’s daughter met her boss. The tax firm was running into trouble, in fact. Eight of its wealthiest Chinese clients were moving to some European Union country, whichever could offer the best investment vehicles and financial expertise. She knew very well that China, the fastest growing billionaire market worldwide in 2018, was producing two new billionaires not a year, but a week! Without them, and the Brexit uncertainty, she had to leave and some of her team members too.
The old English man and his daughter had a long cup of tea the Wednesday before he traveled to Luxembourg. (Finally he had found the Duchy!). She knew she had to rethink her future, at least for the next couple of years to come. She had been working more than a decade in the tax firm, managing others’ wealth. “Why not to come to the other side of the table and help my father keep and grow the business that her grandfather started,” she wondered while she sipped her cup of earl grey tea.
Wealth Management Trend 2:
The country of origin of wealthy clients is diversifying. Ten years ago, they came mainly from Europe and neighbouring countries. Now, “rest of the world” wealthy clients are joining the band and growing (Middle East, Asia, Americas, etc.)
Not too long ago, she wouldn’t have imagined that unexpected thought. Family business management is anything but easy, and she had promised to herself to stay away from it. Changes to the industry, the political situation and the overall economy were breaking that promise, clearly. She took her father’s tablet from the table, opened the by-default internet browser and typed in: “wealth management in Luxembourg”.
Luxembourg: same sky, different perspective
The Crystal Park building, in the south of the city, stood on a mound surrounded by young trees. If the sky resembles the one in London the old English man thought, would other things be different enough to take the leap and move? Sitting down, waiting for the meeting with the PwC representative to kick off, he started to chat with his daughter using one of the thriving messaging apps that have changed our communication habits. He had arrived early, anyway.
Wealth Management Trend 3:
The new generation of wealthy clients is much younger than before, especially in Asia.
With a very robust political and regulatory environment and a regime that protects investors, the old English man soon realised that his decision to visit Luxembourg was right. Thanks to brochures and information on screens, he also discovered something called “the Next Gens Clubs”. When the PwC representative came in the room, he kindly assaulted him with this question: “Can you help me convince my son, “the painter”, to think of art as a passion but also as a business?
“The Next Gen Clubs help family business young members manage the emotional environment they experience in this type of business, and facilitate communication between generations,” the representative explained. The painter, the old English man’s son, needed a meaningful reason to join his father. “You, are greedy!”, he told him more than once, you want art to become a utility. Such a shame.”
That rough treatment wasn’t uncommon among the new generation who were lucky enough to belong to wealthy families. They more and more wanted something purposeful, a cause to support, a business with positive impact. The ozone was to blamed, or maybe Twitter, or “this devil climate change hype”, the lawyer used to say to the old English man, her father, every time he complained about his son’s behavior.
The market had got covered the old English man’s son’s request some time ago, however. The political push forcing the wealth management industry to adopt ESG rules was in crescendo. In fact, only investment products respecting those standards (or “de minimis rules”) will be marketable in the near future, if authorities go for a strict enforcement. In addition, Luxembourg, the PwC representative explained, wants to bet on that and on increasing transparency in the industry.
Wealth Management Trend 4:
Regulatory and compliance requirements are growing in number, and keeping up with them is becoming a challenge to wealth managers.
Among others, they need to pay special attention to ESG standards, the MiFID Directive, the AML Directive, DAC6, etc.
Regarding the Markets in Financial Instruments Directive (MiFID II), it calls for an appropriate selection of the target market (client profiling), and to ensure that the related distribution strategy is consistent with the selected target (investment strategy).
The Ultimate Beneficial Owner (UBO) register is based on the Fifth Anti-Money Laundering Directive. Luxembourg authorities published the draft bill on 6 December 2017. The deadline to file (after the entry into force of the Bill) is 6 months for existing entities, and 1 month for new entities or entities with changes to the UBO.
The DAC6 Directive aims at strengthening tax transparency and fight and avoid aggressive tax planning. It came into force on 25 June 2018. Reporting is to start in July 2020.
“Honestly,” the old English man said, “my almost 70 years are tired of regulation we invent to be lawfully accountable for potential mistakes”. “I won’t change the world,” he added, “I want my children to be inspired by my father’s dream.”
Rightfully so, nobody but his daughter was more suitable to deal with increasing regulation. Fortunately, life circumstances had pushed her to join him and he hoped she would take over the business in a couple of years from now.
The final push: balancing passion, ethics and AI
In the beginning, neither the fact that it is the second largest investment fund jurisdiction place in the world (after the United States) nor its good living conditions could convince the old English man’s son to start a new life in Luxembourg, far from London’s shining artistic scene. At the end of the day, what city in the world can compete with it?
“Millennials need some other incentives,” the PwC representative told the old English man right before finishing the meeting. On the contrary, “Clarity before joining the family business, setting up expectations, and adding a credible take on ethics will do the job,” he continued.
“That thing called AI, now I know, can support the development of your e-impressionism idea, dear son,” the old English man told “the painter” the night he was back in London, “and I’m pretty sure my new Luxembourg ally is what you need.”
Indeed, his son’s idea was ambitious and a human-robot squad with the right business lens was likely the way to go. He wanted the most relevant painters in history to come back to life via holograms. “They can teach us how they created their masterpieces, and they can also learn more recent techniques from young art students and from technology developments too. Just imagine what awesome creations could be born,” the artist said, excited.
“Let’s do this together,” he encouraged his children the last week of November. “This team can be unbeatable. You, son, have the dreamer’s blood in your veins; you, daughter, have the pragmatism and the analytical skills any business needs to make better decisions; I’ve got the experience and values that I want to share, because they belong to our family.”
“Shall we start?”, he asked, and smiled.
Wealth Management Trend 5:
Wealth management has started to catch up with digital technologies.
For example, Luxembourg banks are currently developing new services to meet the expectations of a younger client generation. Among others, they are investing in digitalization, and working on improving user experience. Similarly, they are talking to the older generation to prepare them for the upcoming intergenerational wealth transfer (from “baby boomers” to the “NextGen”).
What we think
“Maintaining, organising, enhancing and transferring (in other words “managing”) wealth successfully requires vision, strategy and … good advice!”