Significant transformations ahead for the asset servicing industry

Asset servicers have long been crucial to Luxembourg's investment fund ecosystem. Amid recent industry consolidation and expectations around cost management, near- and offshoring or the adoption of smart automation have become more frequent. Going forward, asset servicers will have to consider four key trends to stay relevant in the years to come.

Digital transformation and the adoption of artificial intelligence

According to EY's 2022 study,¹ most asset servicers use digital transformation to address issues such as reducing manual tasks rather than elevating service quality or diversifying revenue through value-add services. Niche players and digital leaders have been focusing on building integrated and open platforms which permit a front-to-end collaborative, seamless and transparent workflow experience for asset managers when working with their asset servicers. For asset servicers to provide additional services, e.g., property manager data across all real estate funds of the same asset manager, considerable investment is needed in data platforms and data normalization processes, as artificial intelligence can only unveil its full potential when built on a robust data model.

Changes in the competitive landscape and business models

Luxembourg's attractiveness for private asset fund structures has pulled in new non-EU, mainly United States, asset servicers, who are following their clients. New local market entrants are also emerging. While these players are a welcome addition, two other transformative phenomena stand out. For one, due to the need for scale and specialization, many asset servicers are starting to form alliances with some of their competitors. Thus, managed service models for auxiliary or underperforming services will reshape asset servicers' business models and competition in the near future. The second phenomenon involves larger players diversifying from a service-based model by selling proprietary technology, enabling smaller asset servicers to leverage it.

Asset managers searching for value for money

A few years ago, cost was key for asset managers when selecting asset servicers. Recently, value for money has become more important, with managers willing to pay more for services that best align with their operating models. To streamline operations and reduce costs, many are even reducing the number of their providers. Consequently, asset servicers are compelled not only to improve pricing transparency but also re-evaluate their unique selling propositions.

The retailization of private assets

ELTIF 2.0, one of the most significant recent regulatory achievements, will shape the design and distribution of private asset structures to EU retail investors. However, many asset servicers are yet to take a stance on this. Those servicing retail products, like UCITS, are better equipped to handle ELTIFs than those focused on traditional closed-ended AIFs, with the latter mostly lacking the required banking/MiFID license for depositary service, fully fledged transfer agency services (such as connectivity to retail distribution platforms), and accounting capabilities for a variety of liquid assets that ELTIFs are required to hold if they allow for redemptions. Consequently, asset servicers face strategic decisions: opt out of the ELTIF 2.0 market, form strategic alliances, or invest significantly in developing related capabilities internally.

Asset servicing firm CEOs must carefully consider these trends' individual and collective impact on their business. The Luxembourg asset servicing industry has usually adapted well to significant industry changes, but the power of these trends to disrupt the investment fund ecosystem as we know it should not be underestimated.

¹ Impact of Digital Technologies on Asset Servicers – Luxembourg Industry Benchmark