Gregory Kennedy

An inconvenient truth about the financial industry is that it cannot be trusted; there have been too many scandals to remember. Common solutions, such as rules and regulations, no longer seem to be improving trust, necessitating the exploration of new measures.

Trust

A positive correlation exists between economic growth and trust; people who trust each other are more likely to engage in transactions together. The purpose of rules and regulations is to foster trust among economic participants so that they can transact securely.

On December 22nd, 1972, investment funds in Luxembourg became subject to supervision for the first time. Initially, the rules provided investors with significant protection, but over time, they have only served to increase the fees they pay.

Delegation

Delegation is one area of the industry that has become so complex that it’s almost impossible to see the bigger picture. It’s a cornerstone that has facilitated the industry’s growth while also making it increasingly obscure.

It was June 2014, and I was flying back from Lisbon for an exciting interview at J.P. Morgan Bank Luxembourg. Landing this job would validate that getting a master’s degree was worth it. I was thrilled about being part of our fund industry.

There could be no delays in my travel plans. I was scheduled to land at 13:15, and the interview was set for 14:00. Fortunately, a friend picked me up, giving me enough time to put on my suit and share my excitement about interviewing for a leading bank.

According to research, a typical board director in the Luxembourgish fund industry is a 53-year-old European man with 22 years of work experience (who probably plays golf). Their role is to ensure investors avoid the rough and get to the green safely. 

Failure results in a penalty stroke from the CSSF.

One of my first lessons in finance was that you cannot consistently outperform the market. When it does occur, it is the result of luck rather than skill. You are better off investing in passively managed funds than those actively run by gurus and clairvoyants.

The fund industry is a poster child for digital transformation. The industry is characterised by easy-to-follow processes and a high degree of automation. With just a few clicks, investors and auditors can interact with fund managers seamlessly.

Sounds exciting. The reality though is quite different.

To give me a better life than they had, my parents helped me develop a strong work ethic and invested heavily in my education. Just like them, at the age of 30, I bought a 4-bedroom house suitable for raising a family in. Their investment paid off.

If only this was true.

Education

My parents moved from Ireland to Luxembourg in the 1980s. Even though they did not receive a higher education, they were quickly able to find jobs and subsequently buy a house and raise a family. I wish I could do the same.

In 1908, there were 16,000 Luxembourgish immigrants living in Chicago. They were extremely poor and needed to emigrate to survive. Today, people emigrate to Luxembourg for different reasons. It’s more about thriving rather than surviving.

Without immigration, there would be no fund industry, there is a constant need to attract talent from abroad. Amazingly, only 20% of the local population works in the private sector. Probably even less in the fund industry.

The CSSF has spent the last decade ramping up reporting requirements on fund management companies. In response, the fund industry has invested heavily in automation and now most reports are generated automatically. 

If only this was true!