The rise of open finance promises to transform Luxembourg’s asset management industry, creating both significant opportunities and pressing challenges. According to a report by Luxembourg for Finance (LFF) and PwC, the shift from open banking to open finance is poised to bring greater transparency, efficiency, and personalisation. But as Luxembourg’s financial ecosystem adjusts to this revolution, asset managers must navigate a range of hurdles to stay competitive.
The report highlights that open finance will enable a new model of wealth management, where clients gain a complete, real-time view of their investments across different asset managers. This holistic approach will allow wealth managers to offer more integrated, personalised advice and optimised asset allocation. Clients, whether institutional or retail, will expect seamless services, with real-time data empowering them to make informed decisions about their portfolios.
“Open finance is dissolving the traditional boundaries between financial sectors. So, this is a call to action for the entire industry.”
Thom Theobald, CEO LFF
While this presents a clear opportunity for asset managers to provide enhanced services, it also raises the bar for transparency. Clients will be able to easily compare fees, performance, and products across managers, putting pressure on firms to demonstrate clear value.
“Open finance is dissolving the traditional boundaries between financial sectors. So, this is a call to action for the entire industry,“ said LFF CEO Thom Theobald. “While it might be a challenge, open finance represents one of the largest competitive advantages for Europe’s financial industry: by enabling unprecedented access to financial products and tailored advice, we can help mobilise and channel the vast amount of money sitting idle into the European real economy.”
Competition to intensify, consolidation likely
The open finance landscape is expected to drive consolidation within the asset management industry. The report warns that firms unable to adapt to the demands of increased transparency and personalised services will struggle to survive. As open finance expands, smaller asset managers, in particular, may find it difficult to compete with larger firms that have the resources to integrate new technologies and offer customised services at scale.
“Open finance is no longer optional, it’s a must have.”
Francois Mousel, managing director of PwC Luxembourg
PwC said that a range of EU policy decisions in recent years has enabled the development of a coherent open finance ecosystem. “The era of open finance presents an opportunity for technological innovation, made possible by crucial regulatory frameworks established by the EU,” said Francois Mousel, managing director of PwC Luxembourg.
No longer optional
“Decision-makers are already waking up to the new reality: open finance is no longer optional, it’s a must have,” said Mousel. ”We must collaborate to facilitate this revolution, creating a more integrated, efficient, and customer-centric financial ecosystem that will drive economic progress and technological advancement across Europe in the face of stiff competition from the US and Asia.”
The extinction rate of asset managers is expected to double as the industry consolidates, LFF and PwC said. In this increasingly competitive market, the ability to differentiate services will be critical. Those who fail to embrace the new open finance paradigm risk being edged out by larger players or nimble FinTech firms offering innovative solutions.
‘Funds for one’
One of the key promises of open finance is hyper-personalisation. With greater access to client data, wealth managers can develop bespoke investment products, including Separately Managed Accounts (SMAs) and direct indexing strategies. These services, once reserved for ultra-high-net-worth clients, could become available to a broader segment of the market, thanks to advances in data sharing and automation.
Separately Managed Accounts (SMAs) have traditionally been the preserve of institutional investors and HNWIs. “With the advent of open finance and new technologies, it is becoming increasingly feasible to offer SMAs more broadly, even to retail investors. We are poised to see an increase in both the prominence and scope of SMAs as open finance facilitates the development of SMAs for retail clients. These ‘funds for one’ will be highly bespoke, tailored for individual investors, and will encompass a wide array of fractionalised assets,” the report said.
Read more: Open Finance; Genesis of a Revolution
This surge in personalisation comes with a challenge: meeting client expectations for tailored advice while maintaining operational efficiency. Wealth managers will need to invest in advanced analytics and artificial intelligence (AI) to deliver customised solutions at scale. Those who fail to do so, the report concluded, may find themselves losing clients to more tech-savvy competitors who can offer the same level of personalisation at lower fees.
Rising cost of compliance and technology
For wealth managers, the transition to open finance is not without significant costs. The need to upgrade legacy systems, ensure compliance with new data-sharing regulations, and adopt cutting-edge technologies like APIs and AI will place a financial burden on firms. Larger players may have the resources to absorb these costs, but smaller firms could struggle to keep up, exacerbating the pressure towards consolidation.
Moreover, the need for Know Your Customer (KYC) and Anti-Money Laundering (AML) compliance remains a key concern. While open finance promises to streamline these processes, the cost of maintaining robust data governance frameworks will be a critical challenge, especially as data security becomes an even more prominent issue in a more interconnected ecosystem.
Pressure on fees: Clients demand more for less
As open finance leads to greater transparency, fee pressure is expected to increase. Clients, armed with more information about performance and cost, will demand better value from their wealth managers. The report predicts that total expense ratios (TERs) in both active and passive funds will decline further by 2027 as asset managers face growing competition and fee compression.
The challenge for wealth managers will be to balance this demand for lower fees with the need to invest in technology and compliance, LFF and PwC said. Firms that can maintain a clear value proposition, backed by data-driven, personalised services, will be best positioned to retain and attract clients in this evolving landscape, the report concludes.
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